Focus of the week: NIGERIA BREWERIES PLC – Price increases mask volume decline

Robust revenue growth in a challenging landscape

Nigerian Breweries navigated a turbulent business landscape in Q4’23, marked by significant shifts in the Nigerian economy. Despite these challenges, the company achieved a commendable 26% y/y growth in revenue, reaching ₦197.8 billion in Q4’23. This growth, in the face of cash shortages, high inflation rates, and overall thinning consumer wallets underscores the impact of the price increases implemented across its catalogue during the period. Ultimately, revenues for FY’23 rose 9% to ₦599.6 billion.

However, this topline growth was hampered by a huge 40% leap y/y in cost of sales to ₦137.8 billion for Q4’23. This was driven by the impact of higher input costs across the board. This sent FY’23 cost of sales soaring by 15% to ₦387 billion. All in, gross profit grew by 2% to ₦60 billion in Q4’23 but stayed flat for FY’23. 

Other cost profiles remain elevated

Despite the company’s commitment to cost-saving measures, operating expenses rose slightly by 3%, totaling ₦44.4 billion in Q4’23. Thus, the company’s operating profit experienced a marginal 2% growth for the quarter, reaching ₦16.7 billion. This did little to salvage the FY results where the operating profit came in 16% lower y/y at ₦41.5 billion.

The company’s profitability was also dragged down by ballooning net finance expenses, driven by huge leaps in FX losses and interest costs. In Q4’23, Nigerian Breweries recorded a total of ₦66.4 billion (Q4’22: ₦14.1 billion) in FX losses and ₦17.5 billion (Q4’22: ₦2.1 billion) in finance expenses. At the end of the year, FX losses rose to ₦153 billion (FY’22:  ₦26.3 billion) while finance costs rose 4.3x y/y to ₦36.4 billion due to elevated borrowings.

In Q4’23, the firm recorded a bottom-line loss of ₦49.1 billion (Q4’22:  ₦1.6 billion loss). This contributed heavily to the FY’23 bottom-line loss of ₦106.3 billion recorded by the firm (FY’22:  ₦13.2 billion profit).

Earnings outlook

Nigerian Breweries’ latest performance reflects its resilience in a challenging economic environment. The strategic acquisition of Distell Wines & Spirits Nigeria demonstrates a localised approach to diversification and premiumisation. Also, the company has further reiterated its commitment to cost-cutting measures and seeking local input alternatives. Finally, the recent 20%+ price increase announced for its catalogue indicates a willingness to trade off volumes to preserve margins alongside growth in 2024.

Thus, we project a FY’24 revenue of ₦671.6 billion (+12% y/y). We also expect an easing in bottom-line loss to ₦78.3 billion (FY’23:  ₦106.3 billion loss).

What shaped the past week?

Equities: The local market witnessed a decline this week, fueled by elevated rates at the fixed income markets. The ASI declined 3.44% w/w, driven by significant declines in INSURANCE (-8.91%) and INDUSTRIAL GOODS (-7.94%). Only the CONSUMER GOODS (+2.01%) and OIL and GAS (+0.01) sectors closed in the green this week. On the weekly gainers’ chart, we had two small-cap counters: JULI (+59.18%) and SUNUASSUR (+17.42%) and one large cap counter: FBNH (+10.71%). A similar trend was seen on the losers’ chart with MORISON (-32.66%), CONHALL (-19.35%), and STERLINGNG (-18.69%).

Fixed Income: While the week opened with buoyant liquidity levels, auction settlements caused significant illiquidity in the market, which persisted till the week’s close. As a result, funding rate remained elevated during the week. On the trading side, due to the auctions held this week, we observed a mix of quiet and bearish sessions across all segments of the fixed income market. At the end of the bond and NTB auctions concluded on Tuesday and Wednesday, about ₦1.5 trillion were allotted in each segment across tenors. In the bonds segment, the 7-year bond, a new issue, attracted a rate of 18.50% while the 10-year bond, a reissue, attracted a rate of 19.00% (prev: 16.00%). Meanwhile, in the NTBs segments, rates closed as follows: 91-DTM at 17.00% (prev: 17.24%), 182-DTM at 17.50% (prev: 18.00%), while the 364-DTM stayed flat at 19.00%.

Currency: At the NAFEM, the Naira closed lower w/w at ₦1,665.50 per dollar.

Domestic Economy:

The National Bureau of Statistics confirmed that Nigeria expanded by 3.46% y/y in Q4’23, which is 28bps above our estimate (Vetiva: 3.18% y/y) and 93bps above Bloomberg Consensus estimate (2.53% y/y). This represents the best quarterly expansion during the year and can be attributed to the recovery in the oil sector. For the record, the oil sector recorded its first positive output growth since March 2020, thus recovering from a 3-year long recession. Overall, this contributed to the full-year real output expansion of 2.74% y/y (2022: 3.10% y/y).                                                                                     

In Q1’24, we envisage oil production sitting above 1.5mb/d. According to the National Upstream Petroleum Regulatory Commission (NUPRC), oil production (including condensates) improved to 1.64mb/d in January. At this pace, the oil sector could record a strong rebound in 2024 and support the ailing non-oil sector. However, key worries over the non-oil sector abound as high fuel prices and elevated FX volatility could pave way for contractions in the manufacturing sector. This weakness could spill over into the trade sector. Telecoms could continue to experience expansions, though could be weaker-than-usual due to regulatory constraints. Financial services could continue to deliver strong double-digit expansions on the back of a strong industry balance sheet. Thus, we expect real GDP to grow by 2.81% y/y in Q1’24 (Q1’23: 2.31% y/y). Due to the passthrough of FX and energy reforms to the non-oil sector, we downgrade our FY’24 growth expectation from 3.2% y/y previously to 2.92% y/y (2023: 2.74% y/y).

Global: Major European stock indexes closed mostly flat on Monday as investors started a week in which they will receive relevant data from the continent such as manufacturing and services reports, and the inflation situation in the Eurozone and Italy. Attention will also be focused on another batch of companies reporting earnings. European stock exchanges closed Tuesday’s trading session mixed as investors digested the latest corporate earnings and this week’s economic data in the region. Economic growth in the United Kingdom and Germany shrank during the final trimester of 2023, with both economies entering a technical recession. Economic data revealed a contraction in the euro zone’s manufacturing sector in February, although the services sector returned to growth.

In the US, markets closed lower on Tuesday after investors continued analyzing the latest earnings reports from Home Depot Inc. and Walmart Inc. Marketers are also awaiting Rivian and Nvidia which will release their performance for the recent quarter on Wednesday. Stock exchanges in New York closed Wednesday’s trading session mostly higher, while Nasdaq moved in the opposite direction as investors shifted their focus from the Federal Reserve January meeting minutes to more corporate earnings expected after the closing bell. United States Federal Open Market Committee (FOMC) January meeting minutes, released on Wednesday, disclosed that most officials expressed concern in case the central bank moved “too quickly” to ease the monetary policy and emphasized the importance of closely monitoring data to ascertain if inflation was on a sustainable path to reach the 2% objective. Major stock indexes in the United States wrapped up trading session on Thursday higher, with the Nasdaq 100 leading the gains after Nvidia Corporation’s upbeat earnings sparked the market rally. In other corporate news, Moderna Inc.’s closing quarter profit surpassed market estimates, pushing the company’s stock to its highest point since January, while social media company Reddit Inc. filed for an IPO.

Stock exchanges across the Asia-Pacific region were mixed at the start of the week as Chinese markets resumed trading following the Spring Festival. The People’s Bank of China (PBoC) decided to hold its one-year medium-term lending facility (MLF) loan rate steady at 2.50% over the weekend, which appeared to somewhat boost investors’ confidence. The Chinese central bank is expected to announce its interest rate decision tomorrow, while Japan will see the latest data on its services and manufacturing sector later this week. Major Asia-Pacific markets traded mixed on Wednesday following the release of Japan’s latest trade balance data, which showed the deficit increased to 1.8 trillion yen in January. Asian markets traded mostly higher on Thursday, with the Japanese benchmark Nikkei 225 continuing its upward momentum after reaching its highest point since 1989. Additionally, investors were evaluating Japan’s latest business activity report for February.

What will shape markets in the coming week?

Equity market:  The market finally recorded positive sentiment, as market appears slightly stable following the rate hikes in the fixed income space. We still anticipate another rocky trading week next week, as market participants look forward to the first MPC meeting for the year.

Fixed Income: At the beginning of the new week, we expect quiet trading sessions as investors look forward to guidance from the MPC meeting.