After Namibia Breweries posted its results last week which indicated fallen revenues and decreased export volumes to the South African market, experts project the decline in beer volumes to continue given that the economy still continues to remain under pressure.
In the mean time, NBL’s results show an overall decline in volumes of beer by 7.7% accompanied by a fall in revenue by 3.0%.
“We expect beer volumes to continue trending down and expect trading conditions to remain tough as the economy struggle to find a bottom,” says Simonis Storm Securities’ analyst Megameno Shetunyenga.
The market is pricing in a significant turnaround at the associate, which the firm does not foresee in the medium term.
“At the current PE, the associate does not just have to breakeven but needs to deliver high earnings to support the current P/E level (FY18E P/E, HEPS at 22.5). Assuming price equals value, 70.9% of the current share price is present value of growth opportunities. This points to quite a high expectation from Heineken SA which we are yet to be convinced on,” says Shetunyenga.
He also indicates that Simonis Storm updated its forecasts after Namibia Breweries Limited (NBS) released its HY18 results on the 09th of March 2018.
As such, Simonis Storm’s Headline Earnings per Share forecast for FY18E, FY19E and FY20E are 199.9 cents, 203.5 cents and 207.0 cents, respectively.
“We make minor adjustments on our sales and opex forecast and now expect FY18E sales and opex to decrease by 5.3% and 6.9%, respectively,” says the analyst.
He adds that their adjustments were mainly driven by the lower than expected beer volumes growth, associate operational improvements that’s starting and the export market (outside SA) that continues to be difficult to penetrate sustainably.
“Our HEPS slow growth forecast is driven by the sharp downturn brought on by the slowdown in the economy that we expect to continue and a positive turnaround at the associate. On the back of these adjustments to our model, our TP is now 2631 cents (from 2561 cents) as we roll forward our valuation and maintain our rating at SELL,” says Shetunyenga.
He adds, “We like the fact that management are yielding results from their efforts to drive efficiencies. This is evident in HY18 numbers where operating expenses decrease by 5.4% despite revenue decreasing by slightly less at 3.0%. In FY17, sales increased by 11.7% while operating expenses only increased by 11.3%, pointing to the excess capacity that NBS has and ability to increase volumes production without needing to increase capacity. We expect a similar trend to continue as management continues to grind out efficiencies.”
Namibia, South Africa and Export volumes decreased by 1.8%, 22.9% and 1.8% respectively. This resulted in the overall beer volumes and revenue decreasing by 7.7% and 3.0%.
Management did indicate that the original transfer pricing agreement between NBS and Heineken SA comes to an end on 1 April 2018.
The new pricing agreement has been agreed on a reduced margin for the Group, which will see operating profit for the Group diluted.
It is estimated that the new pricing agreement will have an impact of between 1% and 3% on the management forecasted operating profits for the year ended 30 June 2018.
“We have factored this in our forecast and do expect export volumes from Namibia to South Africa to continue to decline as the Heineken SA operations turn around. Management have indicated that Heineken SA is expected to breakeven by FY19E. To us, this is a wait and see. We are more interested in the guidance post breakeven.”
“We have frequently pointed out in the past that the market seems to be pricing this stock as if the associate is an extremely profitable section of the business. The proof remains to be in the pudding as to whether it can be turned around sustainably and successfully,” says the analyst.
PSG Namibia has also maintained that investors will be pleased with the 150% increase in Net Profit (PSG forecast of 28.6%) and the interim dividend of 46 cps compared to 42 cps 12 months ago, despite the revenue decrease of 3.0% as this points toward greater efficiencies within the Group and also correlates with lackluster economic growth in Namibia.
“The significant reduction in the loss from the associate compared to previous years bode well for NBL prospects. The Group expect the associate to turn profitable in the next financial year. Our target price and recommendations will be updated in our full report,” says Eloise Du Plessis.