INTERNATIONAL BREWERIES PLC – Severe volume crash impacts earnings

What shaped the past week?

Global: Asian-Pacific stock markets were mixed throughout the week as investors kept a close eye on key economic data and central bank decisions. Positive manufacturing activity in Japan and strong consumer confidence were balanced by concerns over the US banking sector. The Reserve Bank of Australia raised interest rates by a quarter percentage point, but this led to losses in the country’s leading share market index. The US Federal Reserve also announced a 25-basis point interest rate hike and hinted at potentially ending its rate hikes.

European stock markets experienced a volatile week amid financial sector jitters and economic data releases. On Tuesday, major indexes ended in the red as investors digested concerns over the banking sector and awaited monetary policy decisions from the Federal Reserve and European Central Bank. European stock exchanges closed with gains on Friday after the European Central Bank raised interest rates by 25-basis points, marking the smallest increase since last year. Business activity in the euro area was seen to be improving gradually in April, despite inflation showing signs of cooling.

US stock markets saw mixed results this week as investors analyzed economic data and the latest efforts to resolve banking problems. The Federal Reserve decided to raise interest rates by 0.25 percentage points on Wednesday but expressed uncertainty about future rate hikes. Earnings reports from major companies such as Apple, Pfizer, and Uber were released throughout the week. Regional bank shares recovered from a slump, while nonfarm payrolls came in above analysts’ expectations.

Domestic Economy:  The Senate recently approved the securitization of ₦22.7 trillion Ways and Means advances into a 40-year bond this week. The bond will be issued to the Central Bank (CBN) only at an interest rate of 9% per annum. The Debt Management Office (DMO) also stated that the restructuring will lower debt service costs because the interest rate will be 9% instead of 21.5% p.a. (MPR- 18.5% + 3%).  We should note, however, that the restructuring will increase our debt stock to approximately ₦69 trillion (₦46.2 trillion + ₦22.7 trillion). This means that the debt-to-GDP will rise from 23% to 34%, closer to the 40% debt limit set by the DMO.

Equities: The Nigerian equities market posted gains this week, as the All-Share Index (ASI) increased by 0.12% w/w. The week was characterized by a focus on the Q1’23 earnings reports from listed firms, with investors digesting the quarterly numbers. The market witnessed broad-based gains across all sectors, with the banking sector rebounding by 5.23% w/w, emerging as the top-performing sector. The Oil and Gas sector also recorded gains of 5.08% w/w, driven by the impressive performance of SEPLAT, which returned 5.35% w/w. Additionally, both the Consumer and Industrial Goods sectors closed in the green, returning 0.02% and 0.09% w/w, respectively.

Fixed Income: The Nigerian secondary market suffered bearish sentiments as trading activity remained subdued, with limited liquidity levels dampening buy-side interest in the space. Despite this, the NTB and OMO segments recorded flat yields, indicating investor indecision. However, we anticipate a boost in activity as investors await the next week’s NTB maturity. In contrast, the bonds market witnessed a rise in yields on benchmark tenors by 10bps on average, driven by selling pressure at the short-long ends of the bonds curve. Notably, the 12.50% FGN-JAN-2026 bond yielded 51bps to settle at 12.90%, while the 14.80% FGN-APR-2049 and 12.98% FGN-MAR-2050 papers rose 22bps and 38bps to settle at 15.60% and 15.84%, respectively.

Currency: The Naira appreciated ₦o.31 w/w at the I&E FX Window to close the week at N462.23.

What will shape markets in the coming week?

Equity market: Despite the bearish start to the week, the market recovered in the last 2 sessions due to gains recorded in some large/mid cap counters across the banking and oil & gas space. We expect a mixed start next week, as investors continue to move in and out of their positions.

Fixed Income: We expect investors to remain cautious in the near term, as they keep an eye out for attractive offers in the bonds space; meanwhile, we anticipate a bullish session in the NTB space owing to next week’s expected NTB maturity.

INTERNATIONAL BREWERIES PLC – Severe volume crash impacts earnings  In Q1, International Breweries returned a loss after tax  of  N2.3 billion from a profit figure of 0.7 billion the year before and this was underpinned by a decline in Revenue (-5% y/y to N54.4 billion) as well as elevated input costs. International Breweries, much like its peers in the brewery space, suffered volume challenges in the last few quarters as consumers reduced demand to accommodate their lowered purchasing power. However, we believe that this volume problem may have been worsened by the cash scarcity that prevailed in the first quarter as overall volumes reportedly declined by 20%. That said, we note that stronger pricing may have cushioned the decline in Revenue, especially given the series of pricing increases implemented by brewery players in the last year, at least.

Looking ahead, we expect the volume problem to persist in the next quarters, albeit now driven by heavily limited consumer wallets particularly as the cash scarcity lessens. However, given that the company has only recently started to implement reflective retail prices, we do not expect a roll-back on prices from the firm. As such, we expect the interplay of stable prices and reduced volumes to yield a mild 2% y/y rise in overall revenue for FY’23 to N212.3 billion. On the other hand, the company may still retrace to its low-price strategy to increase their share of throat; in this case, we could see volumes emerge stronger, albeit at the expense of margins.

Putting Q1 margins in perspective, International Breweries’ Cost of Sales climbed by 19% y/y to N44.8 billion, reducing gross profit to N9.6 billion, and gross margin by 17ppts to 18%.

However, operating and other expenses (FX realized and unrealized losses) declined by 18% y/y and 38% y/y to N10.0 billion and N2.6 billion respectively. This dragged the company’s EBITDA margin to -5% from 6% in Q1’22, highlighting the operational loss of  N3.0 billion it suffered in the quarter. Surprisingly, net finance costs outperformed expectation (-38% y/y), driven by a 2.3x increase in finance income to N3.4 billion. Overall, International Breweries’ loss before tax amounted to N4.1 billion, with a N1.8 billion tax credit reducing this figure to N2.3 billion after-tax loss.

The company’s margin position has remained precarious since the merger and the expansion of its Gateway brewery. While moderating Opex is a good look, the company still has to worry about optimizing costs at the gross level or increasing prices to accommodate the higher pricing they face. Of the two, we do not believe that more pricing increments can be made without hurting volumes further. Consequently, we expect margins to remain under pressure in the near term. In summary, our outlook for the firm yields FY’23 negative bottom-line of  N10.1 billion (53% lower than the loss from FY’22) and a one-year target price of N4.76 per share, which is an 8% upside from current market valuation and reiterates our HOLD recommendation.