Renaissance Capital has maintained a hold rating on International Breweries (IB) given its focus on the low-end consumer segment where price elasticity was high.
IB’s top line showed growth in the value beer segment, but Cost of goods sold (CoGS) increased due to its reliance on imports and inability to pass on costs.
“These factors, coupled with an increased debt burden which we attribute to capacity expansion, eroded margins and the bottom line. We have rolled forward our forecasts and maintain our HOLD rating and NGN21/share TP,” Rencap analysts led by Omair Ansari said in a June 10 note.
Between 3Q FY15 and 4Q FY15, IB gross margins declined from 53 percent to 24 percent due to a 60 percent increase in CoGS.
On a YoY basis for 4Q, gross and operating margins declined from 36 percent to 24 percent and from 28 percent to 24 percent, respectively.
Rencap assumes a doubling of excise duties in FY16E to 12 percent and believes IB will pass 0.2x to the consumer, causing volumes to decline by ~3 percent, but maintain top-line growth of ~11 percent.
Operating expenses also increased ~1.5 percent YoY which is attributable to IB’s attempt to expand into Lagos.
Overall this caused the Gross Profit margin to decline by 4 percent to 44 percent, and the EBIT and PAT margins to decline by 5 percent and 3 percent YoY, respectively.
“We estimate that IB would require capacity expansion to maintain strong growth given that its 650k hl installed capacity in 2014 was reaching full utilisation. We assume a 600k hl expansion programme over four years. IB’s debt/equity and net debt/EBITDA have risen from 0.41x and 0.67x in FY14 to 0.80x and 1.47x in FY15. We see these ratios peaking in FY16E,” Rencap said.
PATRICK ATUANYA
