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Heineken Buys ₦432bn worth of Shares in NB Plc in 2 months

Heineken Brouwerijen B.V, a substantial shareholders in Nigerian Breweries Plc paid N432 billion worth of shares from shareholders on the Nigerian Stock Exchange in the last two months.

Listed on the NSE main board, Nigerian Breweries has 7,996,902,051 outstanding shares, of which Heineken holds about 40%.

Meanwhile, because of the bag of money dropped on the shares of the Brewer that is currently struggling with demand, share price rose 25.12% in the last 7 trading sessions.

However, that is not the real story as MarketForces Africa gathered that Heineken may have had no choice as foreign investors are unable to repatriate funds.

Recalled that a slew of equity analysts recently hacked the Nigerian Breweries profit estimate for 2020 due to pressure on demand.

This comes as the virus-induced lockdown lower consumers’ purchasing power, with inflation rising to 29-month high and unemployment gone through the roof.

After the slowdown in earnings, Meristem Securities Limited downgraded the brewer’s profit estimate for 2020 by 57%.

Analysts cited disappointing performance scorecard and low expectation on sales recovery in the short to medium term.

Generally, it was noted that the outbreak of coronavirus pandemic has not been favourable for beverage segment as the industry’s revenue dropped amidst rising costs.

Due to weak expectations, analysts said they remained largely negative about prospect in the segment down the year.

Also, WSTC Securities downgraded the stock to HOLD, just like Meristem in what looks like consensus over the brewer’s performance outlook.

“We expect recovery to be slowed even if the economy re-opens”, analysts at WSTC Securities Limited said.

Analysts reiterated that NB Plc.’s first half 2020 results reflected strong demand pressure as customers scale down on demand couple with increase in prices.

The review of the brewer’s unaudited results showed that for the first time in the history of NB Plc, its net margin hits the bottom of the pyramid.

Equity analysts representing various investors group said rising from this position would take aggressive marketing and cutting edge strategy.

Being a partial inelastic consumption, lower purchasing power emanated from low household income, inflation that has been worse by local currency devaluation aggravated the pressure.

Though, Nigerian Breweries is still standing, there is a bleak future for demand for its beers and other ready to drink due to lower purchasing power.

With pressure due from the economy condition, Nigerians are scaling down demand across various consumption lists, though for some, beers could be elastic demand.

Meristem Securities said following a slow start to the year with first quarter revenue declined by 0.09%, NB Plc. reported an even sharper drop in its Q2:2020.

Analysts review stated that the brewer’s revenue somersaulted 21.06% in Q2:2020 standalone relative to Q2:2019.

“The recent downward movement represents the brewer’s worst second quarter performance since Q2:2011”, Meristem stated.

“While we alluded to a likely drop off in sales in our Q1:2020 earnings update, we did not envisage this magnitude of decline given that NB typically records the best performance in Q2”, analysts explained.

At ₦151.81 billion, the brewer’s total revenue for H1:2020 was 10.80% lower than the corresponding period of 2019.

The restriction on various consumption points like Hotels, bar and large social gatherings continue to weigh on the demand for alcoholic beverages.

Meristem agreed that this further worsened by the general tilt towards essential items in the face of shrinking disposable income of consumers.

More so, market feelers suggest that consumers were unreceptive to the price increases imposed by the brewer on certain brands last year.

“Based on the aforementioned, we remain downbeat about performance for the rest of the year.

“In addition, we envisage a poorer third quarter result especially because Q3 is typically the worst quarter for the brewers, as sales are generally weak during the period”, Meristem stated.

Thus, analysts said they have revised initial revenue projection of ₦314.47 billion downward by 13.33%.

“We now expect 2020 revenue to drop by 15.63% year on year to ₦272.54 billion”, analysts at Meristem Securities stated.

Cost Savings Fail to Support Bottom-Line:

Although, production costs fell in line with revenue, cost to sales inched up to 61.04% in H1:2020 as against 57.90% in H1:2019.

This plunged gross margin to 38.96% from 42.10% in the corresponding period as more than 61% of sales were direct cost.

Operating expenses bucked the trend in Q1:2020, as it moderated to ₦20.29 billion in Q2:2020 from ₦26.46 billion in Q2:2019.

This set operating expenses lower by 6.68% to ₦44.43 billion in H1:2020 from ₦47.61 billion in H1:2019.

NB Plc achieved this on the back of a 10.03% drop in marketing and distribution expenses.

However, the moderation in operating expenses was insufficient to support the already weak margins, hence, operating profit fell by 38.49%, with a deterioration in operating margin to 9.91% from 14.37% in H1:2019.

Meristem said in line with its expectation for interest expense, net finance costs went up by 32.59% to ₦6.70 billion as total borrowings which comprised bank overdrafts, commercial papers and other bank loans settled at ₦139.45 billion from ₦55.72 billion in 2019.

As a result of the increase in finance costs and a higher effective tax rate of 33.62% put further strain on earnings.

In the comparable period, the brewer’s effective tax rate had pitched at 31.42%.

Consequently, profit for the year fell significantly by 58.03% to ₦5.59 billion as against ₦13.32 billion in H1:2019.

As expected, this dragged net margin to 3.68% which happened to be the lowest in the brewer’s history, from 7.83% in H1:2019.

Down the line, the decline in net margin led to a slump in return on equity (ROE) to 6.97%, from 14.86% in H1:2019.

“Factoring our expectation of a moderation in topline amid rising cost pressures, particularly finance costs, we have revised our forecast for profit after tax downwards to ₦6.99 billion.

“That translates to a 56.59% year on year decline from ₦16.11 billion in 2019”, Meristem Securities noted.

From its unaudited result, analysts noted that NB increased capital expenditure (CAPEX) spending in H1:2020.

Cash generated from operations pegged at ₦9.49 billion during the period, while total cash balance improved by 797.70% to ₦57.10 billion due to inflows from loans and borrowings.

In addition, Meristem Securities analyst explained that there was ₦14.66 billion increase in capital expenditure as NB invested in plant and equipment during the period to support its growth projection.

“Premised on our adjustment of expected EPS to ₦0.87, from ₦1.60 and new target price earnings of 35.00x, we arrived at a target price of ₦30.45.

“This represents a downside potential of 4.84% when compared to the closing price as at 6th of August, 2020. Hence, we place a HOLD recommendation on the ticker”, analysts stated.

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Brewer Meristem Securities Limited NB Plc NSE Nigerian Breweries Plc


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