International Breweries Plc, Q3 2016 Report – from the west to the world

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INVESTMENT HIGHLIGHT

International Breweries Plc (“The Company” or “IB”) released its Q3 2016 unaudited report for the nine months ended December 31 2015 on January 29 2016. The Company reported a 7.49% rise in revenue to N16.46 billion ($82.30M) from N15.31 billion ($76.56M) YoY, complemented by the 12.60% expansion in the company’s property, plant & equipment line item of the balance sheet, while net income improved by 18.00% to N1.71 billion ($8.55M) from N1.45 billion ($7.24M) YoY. The Company’s ability to grow its revenue base is aided by the associated year end festivities which boosted volume sales. Considering the high competition rate in the larger space of the brewery sector in Nigeria, this growth is impressive

Gross profit advanced stronger by 10.55% to N8.29 billion ($41.46M) from N7.50 billion ($37.50M) YoY. The stronger growth in gross profit as against revenue is adduced to the comparatively slower growth in input cost in the review period. Gross profit margin subsequently strengthened to 50.37% from 48.98% YoY. Marketing, admin & other expenses line item on the other hand expanded by 16.39%, faster than revenue and gross profit growth. Consequently, operating profit growth was a sluggish 3.27% while Operating profit margin settled at 20.95%, down marginally from 21.80% YoY.

Pre-tax profit rose by 7.09% to N2.40 billion ($12.02M) from N2.24 billion ($11.22M) boosted by a 9.94% reduction in finance cost and a 16,764% spike in finance income in the review period. Net income also recorded an 18.00% improvement, aided by slightly above 600 basis point reduction in effective tax rate provision to 28.91% from 35.45% YoY.

The company had short term liquidity pressures as a result of the N3.84 billion ($19.20M) trapped in trade receivables, as well as the N2.95 billion ($14.75M) inventory pile, about 30% of which is finished goods yet to be sold. IB consequently resulted to short term borrowings of about N4.59 billion ($22.98M) to ease its working capital challenges.

In addition, IB also had long term borrowings of N4.86 billion ($24.32M) down from N7.83 billion ($39.15M) in the corresponding third quarter 2015. Debt to equity settled at 72.49% from 72.07% YoY. IB is currently expanding its production capacity and has increased its borrowing to fund its expansion which accounts for the relatively high debt to equity ratio of IB.

On a quarter on quarter analysis of Q3 2016, IB racked up an impressive revenue growth of 28.97% to N6.32 billion ($31.60M) in Q3 2016 compared with a 5.91% contraction between Q1 2016 and Q2 2016. The company also recorded improvements in gross profit (29.03%), operating profit (75.73%), pre-tax profit (268.26%) and net income (253.94%) in the Q3 2016.

The strong Q3 2016 figures were boosted by the associated year end festivities which accounted for a rise in volume sales. IB’s strategy of consolidating its foothold in its local market through aggressive expansion has also paid off significantly despite all the challenges in the wider brewery sector. We expect this momentum to continue. However, we do not expect Q3 2016 sales level to be repeated in the fourth quarter, but we expect sales volume to surpass Q2 levels.

VALUATION ANALYSIS

Based on our analysis, the stock is currently trading at a 31.25% discount to our estimated fair value of N26.25 ($0.13), with a 12 month investment horizon.

Our fair value for the shares of IB was calculated using the Dividend Discount Model comprising our expected dividend estimate for the company and GTI Securities customized tweak to adjust for the risk of investing in the Nigerian consumer goods sector. Our Required Rate of Return (RROR) factors in a risk premium of 12% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.

We have placed a BUY rating on the stock of IB because the stock is undervalued based on our analysis.

FORECASTS

Our FY 2016 revenue estimate for IB is N21.98bn ($109.92ml) representing a 6.44% growth from FY 2015, while our net income estimate for FY 2016 is N2.46bn ($12.33ml) which is a 26.72% increase from FY 2015. This yields a forward EPS of N0.75 ($0.003) and a forward P/E of 26.67x

Our estimates were driven majorly by the fact that the company is a growth company and has managed to retain its market share in its local market. The constrained disposable income has given rise to the demand for cheaper lager brands and IB is taking advantage of this to grow its market share in the south west.

AB-inBev Acquisition of SABMiller Improved technical support for IB

Following the acquisition of SABMiller by AB-inBev in the twilight of 2015 in a deal worth about $106 billion, AB-inBev now controls 25% of the global beer market. As a result of this acquisition IB automatically becomes a subsidiary of the largest brewing company in the world.

Despite the acquisition of SABMiller, we expect IB to continue to run as an independent subsidiary of AB-inBev at least for now. We however expect to see an improvement in operational processes and brewing capacity through technical support from AB-inBev. We expect this to boost IB’s margins going forward and provide an option for cheaper source of funds for IB to prosecute its expansion plans. We expect to see new products introduced and IB competing for a higher market share in Africa’s largest economy where Nigerian Breweries and Guinness currently dominates.

The Beer war shifts to Nigeria, the next frontier

The stage is set for a beer showdown in Africa’s largest economy. The top three global brewers are now fully invested in the Nigerian Economy; it is exciting to see what strategies each of these gladiators come up with to take a ‘’deeper bite of the pie”.Interbrew

INVESTMENT CONCLUSION/OUTLOOK FOR IB

The shares of IB is undervalued with a focus on our FY 2016 estimates. The stock is currently trading at a 31.25% discount to our fair value estimate of N26.25 ($0.13).

The company is in its growth stage and has managed to grow its revenue base in a period when competition as well as weaker disposable income constrained growth for its bigger competitors. We are also optimistic that the comparatively cheaper product offerings opens the company to new markets in a period where consumers are trying to maximize lean resources.

An added incentive is the technical and potential funding support that IB will be exposed to as a result of its affiliation with AB-inBev. This evens out the playing field with the other bigger players and positions the company to be competitive with the more established lager brands. For this company, the potential for growth is immense.

Source: GTI Securities Research

GTI

GTI is a leading Nigerian Investment Banking group with proven expertise in Financial advisory, Securities Dealing (Fixed Income and Equities), Asset management and Deal Origination. We have strong capacity in financial service delivery.

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