International Breweries: Relatively good Q3; neutral rating maintained – FBN Quest

Neutral rating maintained despite raising earnings forecasts: Following International Breweries’ Q3 2016 (end-Dec) results which surprised positively, we have increased our earnings forecasts by 27% on average for the 2016-17E period. However, we have increased our price target by a wider margin of 47% to N21.0 mainly because of our decision to roll over our DCF valuation to 2017. From current levels, International Breweries shares are trading on a 2016E P/E multiple of 29.9x (compared with the brewery sector average of 32x) for average EPS growth of 4% y/y over the 2017-18E period. Year-to-date, the shares have gained 27.9% and have outperformed the broad index by 45.8%. Given the strong rally of recent, we see only a modest upside potential of +2.5% to our N21.0 price target. As such, we have retained our Neutral rating on the stock.

Relatively good Q3 2016 numbers: 

Q3 sales of N6.3bn grew by 21% y/y, while PBT and PAT grew much faster, by 470% y/y and 1,030% y/y to N1.4bn and N1.0bn respectively. Although operating expenses increased by 16% y/y, the effect of this was offset by a combination of a 753bp y/y gross margin expansion to 51% and a -66% y/y decline in net finance costs. These led to the significant improvement in PBT y/y. The PAT was further boosted due to a lower tax rate of 28%, versus 64% in Q3 2015. On a quarterly basis, sales grew by 29% q/q, while both PBT and PAT increased by over 250% q/q. Compared with our estimates, while sales were ahead by 17%, PBT and PAT were ahead by 118% on average.

Near term outlook: International Breweries’ Q3 results were mainly boosted by increased sales and gross margin expansion. We believe that the sales increase was driven by volume growth rather than pricing as manufacturers are currently finding it difficult to pass on cost increases to consumers. We recall that the company had plans to increase capacity by around 200,000hl over 15-18 months late last year. On gross margin expansion, although imported raw material prices declined modestly y/y over the Oct-Dec period, we had expected the naira devaluation to have an offsetting impact. Given that fx pressures persist, we have been conservative in our forecasts because we do not see continued gross margin expansion. In the near term, we see sales and EPS growth of 6% y/y and 9% y/y on average respectively over the 2016-17E period.