International Breweries Bullished Rating Maintained Despite Upside in Q2 2020 Results

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International Breweries‘ (IB) Q2 2020 results suggest that volumes declined by double-digits y/y, largely because of the lockdown during the quarter. This marks the biggest volume loss since the company’s merger in 2017.

That said, pretax loss improved by 18% y/y on the back of a 19% y/y decline in opex and a 6x y/y increase in other income. Indeed, amid the lockdown, IB cut spending on promotional activities by half; this drove the opex decline.

Also, gains from derivative and sundry income booked for the quarter boosted other income. Looking beyond Q2, we continue to see sustained pressure on volumes because of subdued demand.

We also expect competitive and fx headwinds and the likely non-recurrence of other income to squeeze earnings. We have made modest cuts to our sales and gross margin forecasts in response to -9% and -57bps negative surprises respectively in H1.

Nevertheless, the cuts for 2020E are offset by favourable adjustments to opex and other income. As such, our 2020E pretax loss forecast is now 35% lower. We, however, model an average increase of 6% in our 2021-22E pretax loss forecasts, largely driven by marked cuts to our interest income estimates considering the lower yield environment.

Essentially, we forecast an average decrease of 8% to pre-tax losses for 2020-22E. Our new price target of N6.9 is 15% higher because we rolled over our valuation to 2021.

Year-to-date, IB shares have sold off by -65%, underperforming the broad market by -57%. Our new price target implies an upside potential of 109%.

Despite the considerable upside, we retain our Underperform rating for the following reasons: i) the market continues to discount the valuation argument, and ii) we see bearish sentiments persisting given negative earnings over forecast years.

Bottom line improvement supported by opex and other income

Q2 sales declined by -25% y/y to N25.3bn while gross margin contracted by -380bps to 13.3%. These negatives were however offset by the favourable y/y changes in opex and other income. These supported the 18% y/y reduction in Q2 pretax loss.

On a sequential basis, sales and gross margin fell by -29% q/q and -414bps q/q respectively. The pretax loss was however better by 44% q/q as a result of a 13% q/q decline in opex, and other income of N1.1bn versus a -N5.6 loss in Q1.

Relative to our forecasts, gross margin was -168bps narrower. Opex, however, surprised positively by 15%, while other income compares to our loss forecast of -N5.8bn. These positive surprises led to a 56% lower-than-forecast pretax loss for Q2.

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