2014 Breweries Sector Report
Transcript of 2014 Breweries Sector Report
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Breweries Sector Report 2014
Unearthing the compelling growth potentials
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Investment Précis
Introduction: This report reassesses the most recent developments in the Nigerian
brewing space noting the fact that developments in the global brewing market stays
consistent with trends in domestic economies.
Global beer market: Mergers and Acquisitions (M&As) appear to be the most
remarkable trend in the global beer industry. To stay dominant, profitable and more
competitive, top players are expanding into markets with the highest potential for
growth via M&As. As beer volume growth begins to slow in developed markets,
Africa and emerging market economies (EMEs) are now the major engines for
growth. Given the above, the top beer companies seem to be on a quest to identify
which of the EMEs portends the largest potential for growth thereby driving a
remarkable global expansion into these growing markets in a bid to capture moremarket share.
Africa’s blooming market: With a consumer market of over one billion people,
average GDP growth of 5% up to 2020 and a beer consumption per capita of 9liters
(vs.25liter peer average), beer volume growth in Africa is without doubt compelling.
Two of the big four largest players (SABM and Heineken) have their foot prints
firmly rooted in Africa. SABM dominates the continent with 35% volume share,
Heineken and CASTEL in the second position share 23% each whereas, Diageo
controls 13%. We think markets with the strongest fundamentals for growth will
attract further investment going forward.
Eye on the Nigerian brewing Space: Nigeria is the most populous and largest
economy in Africa, with substantial potential for a double digit growth. Huge
consumer market, beer consumption deficit and demand deficit plus intense
competition are amongst the major driving factors in the Nigerian brewing space.
Drags in discretionary spending as well as security challenges remain the key
challenges to the budding prospect. Nonetheless, we project five year beer volume
growth at 24.25mhl, translating to a 5% five year average growth rate.
Dominant global players: Heineken N.V controls 70% of Nigerian beer market with
majority stake in Nigerian breweries, Consolidated and Champion breweries Plc.
Diageo is the second major player (27%) through its ownership of GUINESS Plc. New
entrant, SABMiller, is challenging the dominance of the major players via stake in
International breweries and Pabod breweries.
…Unearthing the compelling growth potentials: In this report, we uncover the eye-
catching growth potential in the Nigerian beer market as a key volume growth
driver in Africa and the rest of EMEs.
alyst
wale Olusi [email protected]
348025672325
http://c/Users/oolawale/Documents/sector%20reports/[email protected]://c/Users/oolawale/Documents/sector%20reports/[email protected]
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Table of ContentExecutive précis 2
1. Brewing in the Global Space 5-8
Overview 5
Industry Consolidation… shaping the global market dynamics 6
Global beer market outlook 8
2. The African Brewing Market 9-12
Eye Catching Growth Story 9
Competitive Landscape in Africa 11
Prospect For Growth Remain Strong 12
3. The Nigerian Brewery Sector Overview 13-21
The Nigerian Beverage Market 13
Structure of the Nigerian Beer market 15
Market Share: A terrain of two dominant players 16
Beer consumption: Nigerians drink-less compared to peers 19
Key Growth drivers: The demographic dividend fulcrum 19
Major Challenges: Discretionary spending softens 21
4. Value Chain Analysis 22-27
Beer Making Inputs 22
Five Competitive Forces Shaping the Beer Industry In Nigeria 26
Financial Ratio analysis 27
5. Industry Prospect and Valuation 28-30
Valuation 28
Industry prospects 29
Where do we see the beer market going forward? 30
6. Company Analysis 31-53
Quoted Brewers 31
Nigerian Breweries Plc. 33-38
Company Profile 34
Route to the Market 35
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Performance + Outlook 36
Guinness Nigeria Plc. 39-42
Company Profile 40
Route to the Market 41 Performance outlook 42
International Breweries Plc. 44-50
Company Profile 46
Route to the Market 47
Performance and outlook 48
Other Listed Beer Makers 51-53
Champion Breweries plc. 51
Jos Int. Breweries Plc. 52
Premier Breweries Plc. 53
Golden Guinea Breweries. Plc. 53
Non-Quoted Brewer: Consolidated Breweries Plc. 537. Concluding Highlights 53
8. Appendices (Financials: Historical+ Forecast) 54-60
9. Analyst certification, Disclaimer and Disclosure 61-65
10. Glossary 66-67
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Asia
35%
America
29%
Europe
28%
Africa
7%
Australia
1%
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Asia America Europe Africa Australia
M i l l i o n s
2011 2012
1. Brewing in the Global Space
1.1 Overview
Beer is the most widely consumed alcoholic beverage in the world after waterand tea. According to Euro-monitor, Beer volume and value grew by 7% and 2%
respectively in 2013. Canadian global beer trend report estimates beer
consumption at 2bn hectoliters (hl) in 2013.
Despite the effect of global economic crunch on discretionary spending and byimplication on the beer consumption, the Canadian beer report held that
average growth of the global beer industry is expected to expand by 2.8%
between 2009 and 2015, although this is expected to vary across regions. The
Middle East market is forecast to grow by 5.5% CAGR (2009 to 2015) while Asianand African markets are to expand at 5% CAGR and Latin American by 3%. In
contrast, consumption in European and American markets is expected to
experience marginal growth in the same period.
Though the global growth in the industry is expected to be driven by thedeveloping markets, European and American markets continue to account for
more than 50% of global beer production.
Exhibit1: Global Beer Production (Mhl) by Region 2013
Source: Barth Report 2013
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25.1%
11.8%
6.8%5.0% 4.8% 4.2%
42.3%
2.5%
12.5%
22.5%
32.5%
42.5%
CHINA USA BRAZIL RUSSIA GERMANY MEXICO others
Top 4
Countries
48%
Next 35
34%
Others
18%
According to the 2013 Barth report, Africa accounts for 7% of the total globalproduction making the region the least producer. Asia is the largest producer
accounting for 35% of total global production in 2012. USA is the second with
11.8%; Brazil, Russia, Germany and Mexico follow with 6.8%, 5%, 4.8% and 4.2%
accordingly.
When considered globally, an obvious feature is the dominance of globalproduction of beer by the four brewing giants (ABInBev, SABMiller, Heineken
and Carlsberg) accounting for 48% of total volume produced.
1.2 Industry Consolidation… shaping the global market
dynamics
Industry consolidation is perhaps the most noteworthy feature in the globalbrewing space as globalization and rapid consolidation continue to inform M&A
amongst the largest global industry player. Over the last ten years the top ten
industry leaders have gone through continued steady consolidation in a bid to
forge stronger, more profitable and competitive global institutions.
Exhibit3 below shows how market share among top players has been changedbetween 2003 and 2013, with Anheuser-Busch topping the list in 2003 (8.5%
market share). However, in 2013, consolidation between Anheuser-Butsch,Interbrew and Ambev has led to a more competitive, stronger and bigger
ABInBev with 21% market share.
In 2013, ABInBev completed the acquisition of Mexican brewer, Grupo Modelo.Heineken acquired Asia Pacific Breweries and Molson Coors acquired StarBev in
Central and Eastern Europe. CR Snow (SABMiller’s joint venture with CRE)
announced the intended acquisition of Kingsway Brewery in China.
Exhibit2: Global Beer production by Brewers Global Beer Production by Country
Source: Barth Report 2013
InBev, SABMiller, Heineken
d Carlsberg have emerged
p four after series of
nsolidations.
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ABinBEV, 21%
SABMiller, 10%
Heineken, 9%
Carlsberg, 6%
CRB, 6%
Tsingtao, 4%
Molson coors, 3%
Beijing yanjing,
3%
kirin holdco, 3%
Asashi group, 1%
others, 35%
MARKET SHARE352.9
190171.7
120.4
0
50
100
150
200
250
300
350
ABINBEV SABMiller Heineken Carlsberg
BIG 4 GLOBAL PRODUCER…
The biggest five global industry players produce 52% global beer volume. Theycontinue to drive regional expansion both organically and through acquisitions;
increasing their collective share of the market at the expense of smaller players,
while the next 6 firms produce 13%. Others account for the remaining 35%.
ABInBev, SAB-Miller (SABM), Heineken and Carlsberg are currently the top
global players by market share with 21%, 10%, 9% and 6% in that order.
Exhibit4a: Global Market Share among Top Ten Global Players
Source: Euro-monitor, Goldman Sachs Global Investment Research and Barth report
iggest five global Firms
ccount for 52% global
olume produced
Exhibit3: Industry Consolidation in the Global Brewing Space
2003 2013
Anheuser-Busch 8.50% ABInBev 21%
SABMiller 7.60% SABMiller 10%INTERBREW 6.00% Heineken 9%
HEINEKEN 5.70% Carlsberg 6%
Ambev 4.00% CRB 6%
Grupo Modelo 2.60% Tsingtao 4%
Adolph Coor co. 2.60% Molson Coors 3%
Tsingtao 2.20% Beijing Yanjing 3%
Carlsberg 2.00% Kirin hold co 3%
Asashi group 2.00% Asashi group 1%
Others 56.80% others 35%
Source: Euro-monitor, Goldman Sachs Global Investment Research
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1.3 Global beer market outlook: Africa and developing
markets to drive growth
Overall, with slowing growth in beer volume in the developed market,indications remain enduring that developing markets are the main engine to
drive growth in the global beer market. With improving disposable income and
consumer spending, consumers in these markets are seen trading unbranded
alcohol for more standardized beer, hence, strong volume growth in Africa, Asia
and Latin America. However, the global players continue to screen these
markets with a realization of uneven attractiveness amongst them. African and
Latin American markets emerge as spotlight for long-term global volume
growth.
African and Latin American
markets are spotlights for
long-term global volume
rowth.
Exhibit4b: Around the World in Alcohol
Source: WHO
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2. The African Brewing Market
2.1 Eye Catching Growth Story
With a population size of 1.03bn people and a projected growth rate of 2%(CAGR) up to 2020, Africa will account for 20% of the global population by 2020
according to IMF estimates. By income, the continent is projected to grow by 7%
up to 2020. Six among the top ten fastest growing economies in the world are in
Africa, with Nigeria, the most populous and largest economy growing at an
average growth rate of 6.5% for the past 5 years.
Relatively, Beer volume has shown remarkable growth in Africa in the last 10year due to improving income level, expanding middle class and changing
demographic features compared to other region. We reviewed data on beer
volume growth globally, Exhibit 5 below indicates that, while the composition of
volume growth continues to dip in the America and Europe, (32.40% &34.90% in
2003 vs. 29.28% & 27.94% in 2012), Africa and Asia have sustained a steady
growth in the same period. (26.90% &4.40% in 2003 vs. 35% & 6.41% in 2012).
1.03Bn people
Population growth of 2% CAGR to
2020
Avrg. GDP growth of 6% to 2020
Six fastest growing economies are in
Africa
2011-2020 CAGR Beer market 4.1%
BCCP 9liters Vs.
2012 Beer production 125.06 mhl
frica has sustained steady
rowth in a decade
ompared to developed
markets.
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1%
3%
5%
7%
9%
0
10
20
30
40
50
60
E/ Europe Latin America China and
S/korea
S/E Asia AME India and Sri
lanka
BCCP Avrg BCCP CAGR
Africa
4%
2003
Africa
7%
2012
Despite the appealing fundamentals, Beer consumption per capita (BCCP) inAfrica is very low (9liter per head, Global insight 2012), compared to other
markets. This number implies that the potential for growth for beer
consumption is massive in the region. The sector’s 10-year average growth rate
(CAGR) of 4.1% substantiates this view.
Exhibit 6: Per Capital beer consumption (BCCP) in African vs. Peers and 2020 forecast CAGR
Source: Global Insight, Euro-monitor, Plato beer report
Exhibit 5: African Beer Volume Growth in 2003 vs. 2012
Source: Beverage Marketing corp., Barth Report.
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35%
23%
23%
13%
6%
SABM
HEINEKEN
CASTEL/BGI
DIAGEO
OTHERS
2.2 Competitive Landscape in Africa
The Africa beer market is dominated by Global brands such as SABM andHeineken, two of the big four. They have their foot prints firmly rooted in Africa.
SABM dominates the continent with 35% market share; Heineken and CASTEL
occupy the second position with 23% each, Diageo, the parent company of
Guinness Nigeria Plc. Follows with 13% share of the market, Others makers
control the residual 6%.
Source: Global Insight
Exhibit 8: Beer volume market share in Africa
Source: Plato African beer report 2012
Exhibit7: Beer Volume Growth In Africa Vs. Global Growth
REGION 2003 2005 2007 2008 2011 2012
Asia 26.90% 28.50% 31.20% 31.70% 35.25% 35.27%
America 32.40% 31.60% 29.90% 30.00% 29.31% 29.28%
Europe 34.90% 34.10% 33.10% 32.20% 28.49% 27.94%
Africa 4.40% 4.50% 4.70% 5.00% 5.82% 6.41%
Australia 1.40% 1.30% 1.20% 1.20% 1.13% 1.11%
TOTAL 100% 100% 100% 100% 100% 100%
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2.3 Prospect For Growth Remain Strong
Going forward, the prospect for long term growth of the sector in Africa anddeveloping economies remain strong. This will be driven by factors such as
improving level of income, huge consumer market and attractive demographics.Besides, in a bid to enlarge market share and stay dominant the degree of rapid
consolidation (M&A) among major players in globally, is expected to serve as an
impetus for this growth. Most of the major firms are currently undergoing
regional expansion, both organically and via acquisition most especially into the
high growth sub regions in Africa.
However, we note the awareness of uneven growth amongst these states. On
the back of this, we suspect that attention will be focused majorly on economies
in Africa with the strongest fundamentals for growth.
e suspect that attentionll focused on markets with
e strongest fundamentals
r growth in Africa
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Demographics
Population: 170M (2013est)
Most populous in Africa
c.70% of population < 30 years
Median age: 19yrs
Religion: 45% Christian, 48% Muslim
and 7% indigenous
Economy
Largest economy in Africa
GDP NGN80.09Tri
5yr Avrg. GDP Growth of 6.5%
Largest oil producer in Africa
Beer Market
10yrs Avrg. growth of 10%, 2011
2020 est. CAGR of 5.9%
Installed capacity: >26.9mhl
BCCP: 10Liters
Political Stability
Moderate
3. The Nigerian Brewery Sector Overview
3.1 The Nigerian Beverage Market
Nigeria’s beverage industry is largely dominated by the Beer and CarbonatedSoft drink (CSD). Packaged Juice, Spirit, Wine and Other ‘Ready-to-drink’
beverages (RTDs) cover the remainder. Report by Heineken quoted CSP
magazine and indicated that, of the total beverage volume in Nigeria, 45.29% is
attributed to the beer segment, 42.06% goes to CSDs, Packaged Juice takes
10.29% whilst Spirit, Wine and RTDs takes the remaining 2.35% in 2010.
The Soft Drink Market: The CSD segment of the market is dominated by theNigerian bottling company (NBC- bottles Coca-Cola and Fanta brands) given the
long established history of the Coca-Cola Company in the country together with
strong distribution network and aggressive marketing techniques. 7-UP bottling
company, the bottlers of the Pepsi and Mirinda brands is however another
multinational CSD player.
Coca-cola dominates the
CSD segment, but La-Casera
is gaining a lot of ground.
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15.414.3
3.5
0.3 0.3 0.2
0
4
8
12
16
Beer CSD Juice Spirit Wine RTDs
Notable among the domestic players is the La Casera Co, Ltd (formerly known
as Classic Beverages Nigeria Ltd)the producer of the La Casera brand, with
innovative marketing strategy such as beauty contests (Miss La Casera) continue
to gain a distinct proportion of the market. The company recently introduced
the first sugar-free carbonate with real fruit, Latina. According to Euro-monitor,
the company was one of the first to use PET (Polyethylene Terephthalate)
bottles and has introduced a new 'Ice Feel' bottle to raise the stakes.
The Packaged Juice segment: Awareness about Health and Nutritional balance
(better education about nutrition and risk factor embedded in high sugarconsumption which may lead to diabetes, obesity and hypertension) is growing
amongst Nigerians. This has so far led to a sustained growth in the fruit juice
consumption as against CSDs. Other notable factors include busier life style
amongst the rising middle class has left majority with less time to prepare
balance nutrition for their family hence juice consumption is resorted to as a
suitable way of ensuring the intake of essential nutrients.
Also, the sophisticated social life style and the value Nigerians placed on social
occasions also serve as contributory factor driving the growth of juice
consumption amongst Nigerians. Hence, more consumers generally favourpackaged juice to CSDs. Chi Nigeria Ltd (45% volume share) dominates the
segment with varieties of the Chivita brand, ahead of NBC’s 5-Alive brand (35%
volume share). Other players in the segment include GlaxoSmithKline Nigeria
Plc, Dansa Foods, Cway Food & Beverages Co Nig Ltd, Frutta Juice & Services Ltd
and Fumman Foods Industries Nigeria Ltd.
Source: Heineken, CSP
Exhibit 9: Beverage Market Breakdown In Nigeria (mhl) in 2010f
Health and nutritionalawareness is driving
growth… Chi -vita controls
45% market share.
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5.00
7.00
9.00
11.00
13.00
15.00
17.00
19.00
21.00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E
The Spirit and Wine Segment: A phenomenal game changer in the spiritsegment of the alcoholic drink market was the introduction of Alomo bitters in
2010, an alcoholic herbal drink that challenged the dominance of all other
alcoholic drinks (other spirit) including beer. The product was favoured by the
majority as a result of the perceived medicinal benefits and virility in men
accorded to herbal products.
The product is inexpensive (NGN180 to NGN250) compared to other spirits and
Lagers. Growth in consumption of Alomo was partly responsible for the drag in
the performance of beer in 2012 according to Euro-monitor. As a result of this
trend, Guinness Nigeria Plc (a subsidiary of the Diageo group with key strength
in the spirit segment in Africa) recently launched ‘Orijin bitters’, a blend of herbs
and fruits with bitter-sweet flavor to challenge the dominance of Alomo bitters
in the segment.
3.2 Structure of the Nigerian Beer Market
Growth: Though the history of the Nigerian Beer industry may be traced back toperiod prior to the independence of Nigeria. It was the establishment of
Nigerian Breweries limited in 1946 that pioneered brewing in Nigeria. Based on
the report by the Financial Derivative Company (FDC) on the Nigerian beer
market, beer makes up 96% of all alcohol sales in Nigeria, historical data
suggests that beer consumption in Nigeria has been experiencing an average
growth of 10% for the last ten years (2002 – 2012).
CAGR 10%
Exhibit 10: 10Yr Growth path of the Nigerian Beer Market
Source: Heineken, Meristem Research NB: 2013E is based on Meristem Research’s estimate
lomo Bitters threatens
ther alcoholic beverages
cluding beer… Guinnesstroduced Orijin bitters in
eaction
eer market growth
xperienced drags in recent
me compare to historical
verage of 10%.
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58%
15%
27%
Beer Segment
Lager
Stout
Malt40%
28%
13%
5%
6%
5%3%
Beer Parlour
Provision Store
Informal Conveniences
Kiosk
Restaurant
Hotel
Others
This growth hinges on the huge demographic features, a population of 170M
people, growing middle class, abundant oil reserves, and an enormous
consumer market. As at 2012 estimate, the value of the Nigerian beer market
pegged at 20mhl. However, as a result of higher cost of living, slowing
discretionary income pressuring spending and insecurity challenges, recent
performance of the sector has recorded a drag. The industry climbed 3% in
2012 compared with 11% in 2011, while the 2013 performance has been
estimated to decline by 3%.
Segmentation and Market Channel: A further breakdown of the Nigerian beermarket indicates that of the total beer consumption in Nigeria, Lager beer takes
58% of the market share; Stout has 27% while 15% goes to Malt. In terms of
consumption channels, majority of Nigeria beer consumers (c.40%) drink in beer
Parlours, 28% through provisional store purchases, 13% via informal
convenience spots, while the rest go through kiosks, restaurants and hotels and
others.
3.3 Market Share: A terrain of two dominant players
The Nigerian brewing space can be approximated as an oligopolistic-duopoly,with two major players controlling about 90% of the market, while other fringe
players control a thin margin of the market.
Nigerian breweries (NB), without mincing words, is the biggest player in the
sector with a total installed capacity of 15.4mhl (61% volume share). Guinness
Source: Nigeria Breweries
Exhibit 11: Segment Distribution of the Beer Market Nigeria Beer Market Channels
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61%
27%
10%2% Beer Volume Share
NB
Guinness
consolidated
others
Nigeria Plc. (GUINNESS) is the second biggest player (5.5mhl installed brewing
capacity and 27% share), while others include consolidated breweries
(CONSBREW) with 3.7mhl (10% market share), International breweries Plc
(0.5mhl), Champion Breweries (CHAMPION) and Jos Breweries (JOSBREW) are
among the fringe players (2% market share).
Heineken controls over 70%: Heineken N.V Global, with majority stake in NB,CONSBREW and Champion Breweries Nigeria Plc. control 71% of the Nigerian
beer market. The three companies operate independently in the Nigerian
market, but their operations are consolidated in the financial of Heinekenglobal. Champion Breweries Nigeria Plc. was fully integrated in 2013 via a
transfer of 57% stake from CONSBREW to Heineken through her wholly owned
subsidiary, Raysum Nig. Ltd.
Heineken recently announced its intention to merge the operations of NB and
CONSBREW. Post merger, both entities are to exist as NB with a wider product
portfolio in both the premium and value segment of the market. It must be
noted that Heineken has been strategic in the operations of both companies in
terms of area of focus. Whilst NB dominates the market in the premium and
mainstream segment of the of the beer market with brands like Gulder, Starlager and Heineken, CONSBREW plays the same role in the lower end/Savings
segment with cheaper and low income earner friendly brands like ‘33’ Export
lager, Turbo King amongst others.
GUINNESS controls 27% of the Nigerian market: GUINNESS is a subsidiary ofthe Diageo Group. The company produces the most popular stout (Guinness
extra stout). The beer maker started operations in Nigeria in 1963, with Lagos as
eineken controls more than
0% of the market with
terest in NB, CONSBREW
nd CHAMPION
Exhibit 12: Nigeria Beer Market Share
Source: Heineken, FDCL, Euro-Monitor
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its first location outside the British Isle to brew the Guinness brand. Currently,
Nigeria is the largest Guinness Stout Market in the world by Net Sales Value.
Guinness has a market share of 27% in Nigeria.
SABMiller threatens dominant players: The latest amongst the global bigwigs inNigeria is SABM through its stake in Pabod Breweries Ltd (Port Harcourt) in
2008. In 2012, following the combination of the Castel and SABMiller businesses
in Nigeria and Angola, SABM took operational management of the Castel
Nigerian business, International Breweries (INTBREW) on the 1st of January
2012. Other acquisitions include, Intafact Beverages Limited (Onitsha), Voltic
Nigeria Ltd (Lagos). SABM is the largest beer producer in Africa and 2nd largest
brewer in the world with more than 200 beer brands and some 70,000
employees in over 75 countries.
It must be said that with recent investment of over US$100 million in Nigeria,
SABM is intensifying its penetration into the Nigerian market through strategic
regional approach, the most popular brands currently gaining a lot of patronage
in the country include the Trophy and Hero brands with markets in the South
Western and Eastern parts of Nigeria respectively.
BM continues to intensify
gional penetration...Trophy
Hero Lagers are piercing the
estern and eastern Nigeria.
Source: Company fillings
Exhibit 13: Global Players in Nigeria 2014
Global players Domestic Subsidiaries
Installed capacity
(mhl)
HEINEKEN GLOBAL Nigerian breweries 15.4
Consolidated breweries 3.7
Champion Breweries 0.5
19.6
DIAGEO GROUP Guinness Nig. Plc. 5.5
SABMILLER International breweries 1.8
Pabod Breweries Ltd (PH) na
Intafact Beverages Ltd (Onitsha) na
Voltic Nigeria Ltd (Lagos) na
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Growth Drivers
Growingpopulation
Discresionary Income DemographicsEffective
marketingDistribution network
Acquisition andExpansion
-
10
20
30
40
50
60
70
S/Africa Angola Kenya Namibia Nigeria Tanzania
BCCP
Peer average
Global Avrg.
3.4 Beer Consumption: Nigerians drink-less compared to
peers
In terms of beer consumption, Nigeria‘s beer consumption per capita (BCCP)was estimated at 11 liters in 2012. Though this represents a significant growth
compared to 5 liters in 1999, it is still very low in the context of african peer
average of 36 liters (S/Africa-62liters, Angola-50liters, Kenya-42liters and
Namibia-40liters) and 25.67 liters global average.
3.5 Key growth drivers: The demographic dividend fulcrum
Population: A critical factor driving the beer market growth in Nigeria has beenthe huge population of the country. 2013 population estimate stays at
170Million, which puts the country’s consumer market on an amazingly
attractive level.
Exhibit 14: Nigeria Beer Consumption Per Capita (BCCP) in liters 2012
Source: Plato, Euro-monitor, Global Insight
11liters per head, the
ospect for beer volume
owth is massive.
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Income: The correlation between the beer consumption and income growth ispositive and significant according to recent studies. Income per head in Nigeria
has been growing reasonably well over the last decade at an average of 7.5%
according to World Bank data, while average growth of the beer market over
the same period correspond to this at 11%. Hence with rising level of disposable
income, discresionary consumption is expected to rise. However, the last two
years have witnessed a huge amount of pressure on consumer spending given
the removal of fuel subsidy, higher cost of living and security challenge which
have all led to the drag in the volume growth amongst major players in the
sector. Nevertheless, we think with election spending and improvement in
security situation, this pressure should ease going forward.
Demographics: Nigerian demographic dividend is another key driver of growth
of the breweries market. The country has a median age of 19years,c.55% of thepopulation is within the age bracket of 15 to 65years. The age distribution is
bottom heavy with only 2.73% as aged. Middle class is rising and urbanization
rate is expected to maintain a growth rate of 3.75% up till 15. We believe these
features point to the likelihood for beer consumption growth.
Effective Marketing: Marketing and distribution efforts among brewers isanother key growth factor for the industry. Top Management of the two major
players (Nigerian Breweries and Guinness) continue to leverage on strategic
means to market dominance with huge expenditure on marketing and
distributive activities to stay dominant, visible and appealing to the hugeyouthful popuation. Sponsorship of football games, advertisements on national
and international events and reality shows are amongst the popular channels
used in reaching the target market. A more meticulous observation suggests
that NB has been more consistent with the sponsorships of Nigerian reality TV
shows such as Gulder Ultimate Search, Maltina Dance All, Star Quest and the
company’s consistent sponsorship of the UEFA Champions League in recent
times.
Distribution Network: In terms of distribution network, NB sustains dominancewith the widest distribution network. The company has a fully integrated route
to the market, (total retail outlets of 525500, 35000 bulk breakers, 2000
wholesalers and 150 key distributors) and brewering plants well spread across
the southern and northern geo-polical zones of the Country. Its major
competitor, Guiness has a distribution network of over 200 Guinness
distribution centers, substantial amount of distributors and a distribution driving
team.
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MajorChallenges
Decliningconsumerspending
Competitionfrom other
Non-Alcoholicbeverages
High cost ofliving
Healthawareness
Religiousity
Securitychallenges
Acquisition and expansion: As noted earlier, industry consolidation is arecurring affair and a critical success factor in the global brewering sector.
Ability to expand and possibly acquire less dominant players is a major driving
force in increasing market share and maintaining dominance. While the two
leading brewers have leveraged on expansion and CAPEX over the years, the
entrance of SABM with the acquisition of INTBREW and PABOD breweries has
challenged the dominance of the leading two, reinforcing how acquisitions can
be crucial in the development of brewery businesses.
3.6 Major Challenges: Discretionary spending softens
Declining discretionary spending: A recent drag to growth in recent times is thewaning discretionary spending being observed in Nigeria. This is said to have
dipped as a result of partial removal of fuel subsidy in 2012 which has resulted
in higher cost of living, and consequently, less expenditure on discretionary
consumption.
Security challenges: The heightened menace of extremist activities in thenorthern part of the country brought about an increase in prices of basic food
stuff and hence increased the cost of living. Also, frequent bombing and
sporadic shooting, has gradually discouraged going to joints and bars that
account for 40% of beer consumption channel. Higher living cost pressurizes
household income and consumption spending, which trickles down to less
demand for beer.
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Milling
Mashing
Filtering
Boiling
Fermenting
Filtering
Packaging
Distribution
Non-alcoholic beverages: Apart from the lesser spending impact, increasingcompetition from non-alcoholic beverages as well as other alcoholic beverages
excluding beers, as noted above (Alomo bitters) continue to challenge the
market share of the beer segment of the beverage industry.
We attribute other challenges dragging the growth of the brewers to factorssuch as increasing health consciousness amongst the Nigerian middle class,
drink-drive and drinking age campaigns, level of religious belief and Sharia laws
in some part of the Northern region.
4.0 Value Chain Analysis
4.1 Beer Making Inputs
Major inputs: Key inputs in the preparation beer include Malting grains (Maltingbarley, Sorghum and Maize), Hops, yeast and water. Average price of Barley in
the world market has stayed at USD133.90 so far in 2014 compared to over
USD200 in 2013 (12M average). Due to local content strategy, a 5% import duty
BARLEY & SORGHUMWATER
HOPS
YEAST
BOTTLE CAN
Source: Guinness, SABM, Heineken, Meristem research
Exhibit15: Beer Making Value Chain
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•Barley
•Sorghum
•Maize
MaltingGrain
Hop Water Yeast
is imposed on Barley importation. Imported barley, however, still makes up 50%
of consumption among brewers in Nigeria (through a joint purchase agreement
with their parent companies).
Industry sources amonst brewers: Malting grains account for c.40% whileSorghum constitutes 7% of raw materials amongst major beer makers. NB
currently sources 43% of her raw materials locally but has a target of 60% local
sourcing of malting grains as part of its local content strategy. SABM’s strategic
plans include buying grains from local farmers in a bid to negotiate a tax
reduction agreement with government. The company is currently considering
the use of Cassava as a replacement for malting grain as a way of offering more
affordable beer to Africans. GUINNESS sources Barley majorly from Scotland,
Ireland and Kenya. The company sources for Sorghum majorly from Nigeria,
Ghana and Tanzania.
Nigeria is the largest producer of food sorghum (according to Heineken) which isparticularly attractive to brewers because of its malting quality. NB leverages on
local sorghum and continues to invest in research into development of better
capabilities. Hence, the company has maintained cost leadership amongst
brewers. Recent data indicate moderating prices of key inputs, so we do not
see any major risk to cost structure in the short to medium term. We expect
brewers to continue to capitalize on innovation to minimise costs.
By-products: Spent inputs from beer making production process serve as
animal feeds (spent grains), fertilizers (Spent Hops), Irrigation (Water) and yeastused for fermentation serves as input in Health products.
Animal feeds Fertilizers Health Product Irrigation
BY PRODUCTS
Source: Meristem Research
Exhibit 16: Beer Making Ingredients + By Products
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100
150
200
250
300
2010 10 10 11 11 11 12 12 12 13 13 13 2014
Barley ($/mt) Sorghum ($/mt)
Packaging/ Bottling: A recent trend in Nigerian is the growth in the amount ofCanned beer. Compare to 2006 with 100% bottle package, canned beer has
grown to 8% as at 2011. Currently 75% of Cans in Nigeria are for malted drinks,
this proportion is followed by beer and then CSD.
Local Aluminium Can Companies: Establishment of GZ Industries (GZI), the firstAluminium can beverage company in Nigeria has reduced the amount of
imported can into the country and has enhanced local content strategy. Prior to
the establishment of GZI, 100% of can consumed in Nigeria were imported. The
company currently has a 1.4bn unit of can production capacity per anum with a
target of 1.6bn units by 2016.
The company recently expanded its operation into Aba (Eastern Nigeria) to
meet the needs in the eastern part of the country, where major brewers are
expanding or building new capacity to meet the need of its customers (beer
makers). We think this is a great development for the breweries sector as
expansion of the can producer is expected indirectly enhance the cost profile
in the sector. However, the 100% dependence of GZI on global price of
aluminium exposes beer makers to indirect risks of global price volatility.
Exhibit17: Global price of Malted grains
Source: World Bank
Z Industries (GZI), the first
d the only Aluminum Can
verage company in Nigeria
Exhibit18: PACKAGING
DATE BOTTLE CAN
2006 100% 0%
2009 97% 3%
2011 92% 8%
Source: Heineken
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1300
1500
1700
1900
2100
2300
2500
2700
2900
2010 10 10 11 11 11 12 12 12 13 13 13 2014
Aluminum ($/mt)
Exhibit 19: Global price of Aluminium (USD)
Source: World Bank
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•The buyers of beer are represented by alcoholic beverage wholesalers, supermarkets, aswell as beer parlours, restaurants and clubs.
•There is a large number of buyers
•The buyers are able to switch brands easily
•Buyers' power is high.
•High buyers’ power is offset by varying preferences of the consumers
Buyer Power -Moderate
•The power of suppliers is Moderate
•Beer producers need the same input to produce beer (Malted barley, hops, sugar and
water)•No raw materials differentiation.
•Innovation and creativity are the key sources competitive advantage.
Supplier Power-Moderate
•This threat is moderate given that major regulation is the possession of the licenserequirements to operate in Nigeria.
•Apart from states with Sharia laws that forbid alcoholic products, there are no strict lawregulations on alcoholic products in Nigeria.
•Though CAPEX requirement is huge, itis not a major challenge to global player with eyes
on developing markets.
Threat of New Entrants-Moderate
•This is high given a large diversity of substitutes to beer
•Other alcoholic and non-alcoholic beverages and soft drinks (CSD, Wines, spirit and jucie).
•Cheaper prices of other alcoholic beverages
•Rising health concerns of the consumers.
Threat of Substitutes-High
•Rivalry is high
•Industry is oligopolistic
•Two dominant players have more than 90% market share.
•Other smaller players are gradually establishing regional visibility.
Degree of Rivalry-High
4.2 Five Competitive Forces Shaping the Beer Industry In
Nigeria
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4.3 Financial Ratio analysis
Cost to sales ratio: 5-year average cost to sales ratio for the Nigerian beermarket settles at 52.63%. Common size analysis of the major players indicates
that NB holds cost leadership (51% 5Yr average cost to sales) compared toGUINNESS (53.46% 5Yr average cost to sales).
OPEX Margin: The Nigerian beer market is highly advert intensive, with keencompetition between dominant player to expand or retain market share. As a
result of this, OPEX margin (sales and Distribution expenses) averaged 24.51%
among key players. 5yr average OPEX margin shows that NB stayed dominant in
terms of OPEX effciency with 23.54%, compare to GUINNES (25.47%) .
Profitability: Industry net-margin as proxied by the 5yr average of the two
dominant firms stood at 15.25%. Return on Equity (ROE) averaged 44.36% while
Return on total Asset averaged 19.69% for the sector. In all NB show better
operational efficiency compare to GUINNESS with all its (NB) key performance
metric showing better effeciency compare to the industry. Overall, Return on
Equity (ROE) is driven largely by Net profit margin which relies majorly on cost
effciency.
Ratio Analysis NB GUINNESS INTBREW Average
Cost to Sales Ratio 51.80% 53.46% 61.45% 55.57%
Gross Profit Margin 48.20% 46.54% 38.55% 44.43%
OPEX Margin 23.54% 25.47% 28.37% 25.79%
ROAA 21.93% 17.44% 0.71% 13.36%
Current Ratio (x) 0.75 1.13 0.95 0.94
Quick Ratio (x) 0.54 0.83 0.88 0.75
Cash ratio (x) 0.21 0.3 0.07 0.19
Inventory turnover (x) 4.87 3.54 3.12 3.84
ROE 49.40% 39.32% -12.07% 25.55%
Net Margin 16.19% 14.32% -0.94% 9.86%
Asset Turnover (x) 1.25 1.18 0.58 1.00
Leverage (x) 2.46 2.36 3.98 2.93
EBITDA Margin 30.21% 23.52% 8.67% 20.80%
Operating profit (EBIT) margin 25.05% 21.57% 11.24% 19.29%
Interest burden 0.95 0.95 1.63 1.18
Interest Coverage (X) 54.97 25.14 41.86 40.66
Tax burden 0.68 0.7 0.14 0.51
Interest coverage 54.97 25.39 40.35 40.24
Exhibit 20: Industry Ratio comparison (5-Year Average)
Source: Meristem Research 2014
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5. Industry Prospect and Valuation
5.1 Valuation
Seven brewing companies are listed on the Nigerian stock exchange (NSE), withNGN1.49trillion market capitalization. Together, they make up 12.37% of total
market capitalization of the NSE. Of the seven listed brewers NB, GUINNESS and
INTBREW represent 99% of the brewer market cap. Consequent on this, we
adopt NB, GUINNESS and INTBREW as proxies to represent the Nigerian brewing
space.
By relative valuation, current earnings multiples put sector average PE ratio at36.03x, this is ahead of three years historical average of 27.79x. While Book
value multiple suggests a current PBV ratio of 9.57x compared to 3 yr average
PBV ratio of 7.87x.
Though PE ratio suggests that the sector is over priced compared to historicalprice, whilst PBV of 9.57x vs 7.87x historical average support this position
further, we think the sector may be fairly over price at current price. Dividend
yield is however trailing the market at 2.70% vs. market yield of 3.47%.
e think the sector may be
rly over price at current
ce as current PE of 36.03x is
ead of average PE of 27.79
Tickers Div. Yield Average P/E Current PE Average P/B current P/B
GUINNESS 3.89% 27.77x 31.89x 7.91 7.18x
NB 3.07% 25.72x 30.83x 12.27 12.99x
INTBREW 1.14% 29.90x 45.38x 3.43 8.55x
Sector
Average2.70% 27.79x 36.03x 7.87x 9.57x
Exhibit 21: Sector Valuation
Source: Meristem research
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Beer Vol.
Beer Vol. = 2.01 PCI
R² = 0.55
-
5.0
10.0
15.0
20.0
25.0
6.76 7.26 7.83 8.04 8.32 8.62 8.89 9.26 9.73 10.16 10.52
Market value Linear (Market value)
5.2 Industry prospects
Despite recent slowing growth in the sector, we see huge potential for growthgoing forward. Exhibit 22 below show the relationship between beer market
value growth and Per Capita income (PCI) growth in Nigeria.
Our ten years correlation analysis between beer market growth and increasing
per capital income established a strong positive correlation (0.97) between
both variables.This is further butressed the slope and R-Square value of 2.01
and 55% respectively. In sum, these metrics indicate that beer market
expansion stays strongly consistent with Per Capita income (PCI) growth in
Nigeria.
Also, the fundamentals of the Nigerian Economy remain very strong. Accordingto NBS, Population growth is projected to grow at 2.3%. This puts the country’s
population at over 220M by 2025. The UN forecasts that Nigeria’s population
will surpass that of the US by 2050. Middle class and Urbanisation rate are
expanding significantly, and age ditribution favours a youthful workforce (more
than 55% between age 15 to 65 years), implying increasing demographic
divdends for the country.
These numbers point to the fact that Nigeria remains a huge consumer marketfor the beer sector to grow, and we expect this to translate into a massive
opportunity for growth.
er Volume growth is
nsistent with Per Capita
ome growth in Nigeria.
Exhibit 22: Correlation Analysis of Beer Market Volume vs.PCI (USD) in Nigeria (2002-2012)
Source: World Bank, Heineken, Meristem research
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140
Million
170
220
120
130
140
150
160
170
180
190
200
2005 06 07 08 09 10 11 12 13 2025
3437
41 42
54
63
7181
85
9096
103
15
25
35
45
55
65
75
85
95
105
115
2010 2011 2012 2013f 2014f 2015f 2016f 2017f
t r i l l i o n
Old GDP New GDP
Macro Economic outlook: Nigeria’s GDP has sustained an average growth rate
of 6.5% over the last 7 years. Following the rebasing of the GDP of the country,
Nigeria became the largest economy in Africa with a GDP figure of USD510,
ahead of South Africa and 21st in the World. Per Capita income is estimated at
USD2,760 The services sector emerged as the major driver of the economy with
53% of sector breakdown. Agric and Industry now take 22% and 25% share
accordingly. Recent commitment of Governemnt to revive key sub- component
in the services sectors indicates that services sector growth may be larger than
anticipated (7.72%). Based on the foregoing we strongly believe that the
output level will continue to expand by over 6% for the next 5 years and this is
expected to impact the Beer market growth positively.
5.3 Where do we see the beer market going forward?
Given the established strong positive correlation (relationship) between beer
market growth and income per head, juxtaposing this with the attractive
fundamentals of the Nigerian economy, we maintain that there exists a
significant positive relationship between income growth and Beer marketperformance. Against this background, we project an annual growth rate of 5%
for the breweries sector going forward. Consequently, our projection put 5-
years beer market growth at 24.25mhl.
DP is expected to grow by
ver 6% for the next 5-y rs…
xpected to impact beer
arket positively
ur projection puts 5-year
eer market growth at4.25mhl
Exhibit 23:Population Growth & Forecast Nigeria GDP (trn NGN) + Forecast
Source: NBS, World Bank
2.3% Growth
6.5% growth
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14.64
19
24.25
12
14
16
18
20
22
24
26
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
m h l
6.
Company Analysis
6.1 Quoted Brewers
There are seven quoted breweries company on the Nigerian stock exchange.These include Nigerian Breweries Plc (NB), Guinness Nigeria Plc (GUINNESS),
Internatinal Breweries Plc (INTBREW), which are the three largest in terms of
market capitalization. Others include Champion breweries Plc. (CHAMPION), Jos
Breweries (JOSBREW), Golden Guinea Breweries Plc (GOLDBREW) and Premier
breweries (PREMBREW). All together, the seven listed beer producers have a
total market capitalization of NGN1.75trillion representing 12.36% of the NSE
market capitalization.
We further categorize the aforementioned beer makers into Large Cap (marketcapitalization of NGN100bn and above), Mid Cap (Market capitalization
between NGN1bn to NGN100bn) and Small Cap (Market Capitalization less
than NGN100bn) brewers, based on market capitalization of these company.
Based on this classification, we classify NB and GUINNESS as large cap, INTBREWCHAMPION and JOSBREW fell within the Mid Cap criteria while PREMBREW and
GOLDBREW are grouped as the Small Cap beer makers.
Exhibit 24: Nigeria Market Growth + 5Yr forcast (mhl)
Source: World Bank, Heineken, Meristem research
CAGR 5%
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The remainder of this report analyses the performance of each of thesecompanies. Though the availability of information on the Mid to Small Cap
stocks was a constraint, efforts were made to do a thorough overview of each of
these companies as mentioned above.
Exhibit 25: QUOTED BREWERIES FIRMS
Ticker
Share
Outstanding (bn) Mkt. Price Mkt. Cap (bn’NGN’) Mkt. Cap (%) Rating
Large Cap
NB 7.56 178.20 1,347.19 77.04% HOLD
GUINNESS 1.51 198 298.98 17.10% HOLD
Mid Cap
INTBREW 3.26 28.05 91.44 5.23% SELL
CHAMPION 0.9 9.67 8.70 0.50% UNRATED
JOSBREW 0.56 2.58 1.44 0.08% UNRATED
Small Cap
GOLDBREW 0.27 0.71 0.19 0.01% UNRATED
PREMBREW 0.98 0.77 0.75 0.04% UNRATED
1,748.71 100.00%
Source: NSE, Meristem research
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0
1
2
3
4
5
6
2007 08 09 10 11 12 1
NB NSEASI
Target Price: NGN169.1
Rating: HOLD
Market Information NGN
Current Price 177.09
52wks high 181.03
52wks low 141.55
Mkt Cap 'bn 1,339
Average Value (mn) 278.83
Average vol.(mn) 1.709
S/Outstanding (bn) 7.563
Valuation Metrics
Market Price
2014EPS
2014BVPS
12-month TP (N)
Capital Gain
Dividend Yield (2014)
Total Return expected
Ratings P/E
P/BV
Beta
COE
ROE - 5 year avrg.
ROE - 2014
Div. Payout 5 year avrg.
Div. Payout – 2014e
PRICE TRAJECTORY
Sustaining Dominance through Strategic Expansion
Nigerian Breweries Plc. NSE: NB; Bloomberg; NB: NL
With an installed brewing capacity of 15.4mhl/pa and continuous capacity
mprovement. The beer maker has a market share of c.60% in the Nigerian beer
ndustry. Following the recent acquisition of Sona Systems Associates Business
Management Limited and Life Breweries Company Limited from Heineken
nternational B.V, the premium beer maker has indicated the proposal to merge its
operation with that of Consolidated Breweries Plc, a sister firm in the value segment
of the sector. The market share of NB is expected to jump to over 70% once the
merger is concluded.
5.74% turnover growth in line with expectation: In the last 2014H1 result, NB posted
a turnover growth of 5.74% (NGN141.49bn vs. NGN133.82bn Q2:2013) despite issues
around keen competition, sector slowing growth due to pressured consumer
discretionary income and security challenges in the northern part of the country. We
attribute the sustained impressive performance of the premium beer maker to
ncreasing operating efficiency and well spread route to market.
Cost of sales increased by 5.79% year-on-year (NGN71.35bn Q2:2014 vs. NGN67.44bn
n Q2:2013) compared with most recent five year average growth of 12.35%;
suggesting improvement in cost management. Also, Cost to sales ratio settled at
50.42% in the period (vs. 50.40% in erstwhile period) to further buttress the
aforementioned most especially when compared to peer average of 52.63%., We
pegged our full year cost to sales ratio at 49.19% on the back of improving cost
management.
Earnings growth buoyed by declining finance cost: Juxtaposing revenue growth with
cost efficiency, NB posted a double-digit earnings growth, i.e. PBT and PAT growth of
23.95% and 15.53% respectively. The result indicates that earnings expansion was
driven not only by operating efficiency, but also by 37.53% decline (NGN2.37bn vs.
NGN3.82bn in Q2:2013) in interest expense and 60.12% increase in finance income
NGN0.602bn vs. NGN0.376bn in prior period).
NB is rated a ‘Hold’ at current price: We adopt a blend of dividend discount model
DDM) and relative pricing valuation to arrive at a fair value for NB. The company’s
consistent dividend payout history of 70.35% (5-year historical average) informed our
adoption of DDM model, while relative pricing model factors in some sentiment on
the stock. In all, valuation put target price at NGN169.12 which suggests an upward
review from NGN156.11; but a downside potential of 4.50% compared to current
price of NGN177.09. We therefore maintain our ‘HOLD’ rating on the stock.
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HEINEKEN
54%STANBIC
NOMINEES
32%
OTHERS
14%
6.2.1 Company Profile
NB has over 6 decades history of operations in the Nigerian brewing space, thebeer maker has sustained the position of both the pioneer and largest brewing
company in the country. A subsidiary of Heineken N.V, one of the top four
Brewing giants in the world. Hence, Heineken’s stake in NB is strategic to its
business priorities of capturing opportunities in Africa and its growth drive into
emerging economies (EMs) with a 55% beer volume in EMs vs. 45% in
developed markets.
Heineken strategy in emerging market is captured in its 8 cardinal points of;investing to build strong brand, optimizing route to the market, build strong
local brand, investing ahead of the curve, build international premium segment,
engage with government, ‘brewing a better future’, and exploring new market
opportunity. Given the investment of Heineken Global in NB (54%) and a total installed
brewing capacity of 15.4mhl/pa, NB sustained dominance in the Nigerian beer
market in terms of market value and brewing plants. Heineken has further
indicated its intention to merge the operations of Nigerian Breweries Plc and
Consolidated Breweries Plc (Another subsidiary of Heineken in Nigeria). This
merger is expected to bring to total install capacity of NB to 19.1mhl and total
market share to 71%. Both entities will exist as Nigerian Breweries Plc. post the
merger.
Currently, the premium brewer operates with 10 brewing and malting plants(Kakuri brewery, Kudenda brewery and Kudenda malting plant in the Northern
part of Nigeria, Lagos, Ota and Ibadan Breweries in the south-western part of
Nigeria, Onitsha, Aba and Ama breweries and malting plants in south east
Nigeria) to retain 61% market share.
Exhibit 26: Geographical Spread of NB’s Brewing and Malting Plants Shareholding Structure
Source: Company fillings
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In terms of market capitalization and holding structure, NB is one of the topmost capitalized stocks listed on the NSE with a total of NGN1.16trillion,
representing 9.30% of total market capitalization. The shareholding structure of
NB has Heineken with 54% majority holding, Stanbic Nominees as the second
largest shareholder with 32% while other holders share the remaining 14%.
By product portfolio, the company operates a broad base product portfolioacross all the segments of the market from international premium (IPS),
national premium (NPS) to mainstream and savings segment. In the IPS
segment, Heineken lager sells at NGN260, Gulder lager beer sells at NGN210 in
the NPS segment, while Star lager (NGN200), Legend extra stout (NGN200) and
Maltina-non-alcoholic malt drink (NGN100/120) sell within the mainstream
segment. Others include Amstel malta, Goldenberg, Malta gold, Climax and
Fayrouz. The most recent innovation to the portfolio is the introduction of StarLite Ice Cold Filtered lager, an extension line of Star lager. “The temperature
sensitive labeled beer contains no additives and preservatives and is a healthy
offering for all our health conscious consumer s” , according to management.
6.2.2 Route to the Market
Route to the market: NB has a fully integrated route to the market that linksproduction to retail oulets via key partners. This is conducted through direct
sales from 150 key distributors and 2000 wholesalers to 52500 retail outlets
through a channel of 35000 bulk breakers. The company continues to grow
Exhibit 27: Product portfolio
Source: Company fillings
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•NIG.BREWERIESPLC
10 Brewering andMalting Plants
•150 KeyDistributors
•2000 WholeSalers
35000 BulkBreakers
•525000•Retail Outlets
CUSTOMERS
cooling capacities in its outlets to give its customers increasing optimal
satisfaction. Overall, 23% of the outlets are located in lagos, 31% in South-West,
16% in the South, 10% in the East and 20% across the Northern region. This is
further supported with customer and consumer targeted reality shows for each
of the brands to drive sales across each of the brand portfolios. Notable among
these are, Maltina Dance All, Gulder Ultimate Search, Star Time,Real Deal,
Heineken’s sponsorship of the UEFA Champions League and the most recent
hosting of the UEFA cup in Eko Hotel and Suites here in Lagos to sustain
consumers’ loyalty.
6.2.3 Performance+ Outlook We note the sustained dominance of Nigerian breweries Plc. in the the Nigerian
market and the impact of the support of Heineken global’s commercial
expertise on the performance of the Nigerian brewering giant. We think the
enhanced route to the market coupled with the company’s continuous
investment in assets, people and brand innovation will continue to uphold
future performance despite the recent softness in consumer discretionary
spending.
Going forward, we see the performance of the company to be driven largely bythe proposed merger with Consolidated Breweries Plc. This is given the fact
that CONSBREW operates in the Value segment of the beer market which is
currently driving growth in the sector.Based on the foregoing, while we await
the updates on the outcome of the merger arrangment, we expect NB to sustain
a topline growth of over 7%, based on a 10.34% five year CAGR growth.
Source: Heineken presentation.
Exhibit 28: Route to the market
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0%
5%
10%
15%
20%
25%
30%
150
170
190
210
230
250
270
290
310
330
350
2009 2010 2011 2012 2013 2014 2015 2016
M i l l i o n s
Turnover Turnover growth
0
10
20
30
40
50
60
70
2009 2010 2011 2012 2013 2014 2015 2016
M i l l i o n s PAT PAT Growth
We think NB will continue to leverage on operational efficiency to improveearnings growth. Our 5 years projection puts the company’s EBIT margin at
28.24% vs. 25.05% 5 years historical average. PBT and PAT are expected to
expand by 9.82% and 10.18% accordingly.
Exhibit 29: Historical & Forecast Turnover vs. Growth Rate Historical & Forecast PAT vs. Net Margi
Source: Company’s fillings, Meristem research
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Exhibit 30: FINANCIALS and RATIO (Million’NGN)(HISTORICAL+FORECAST
NIGERIAN BREWERIES PLC 2011 2012 2013 2014f 2015f 2016f
Key Headlines FORECAST HORIZON
Turnover 230.12 252.67 268.61 287.42 308.97 331.37
Gross profit 109.76 125.45 136.48 145.86 157.58 169.83
EBITDA 64.67 80.77 90.36 92.86 100.73 110.84
Operating Profit (EBIT) 56.65 63.93 69.17 78.92 85.81 94.92
Profit before Tax 56.37 55.62 62.24 71.77 78.79 87.43
Profit After Tax 38.03 38.04 43.08 49.49 54.69 61.09
Non-current Asset 153.14 196.77 207.47 209.72 224.40 237.93
Total Current Asset 63.24 63.24 63.24 63.24 63.24 63.24
Total Asset 216.37 253.63 252.76 269.87 288.76 308.25
Current Liabilities 72.21 72.21 72.21 72.21 72.21 72.21
Total non-current Liabilities 66.10 66.10 66.10 66.10 66.10 66.10
Total Liability 138.31 138.31 138.31 138.31 138.31 138.31
Net Asset 78.07 93.45 112.36 122.26 133.20 145.41
Cost to Sales Ratio 52.30% 50.35% 49.19% 49.25% 49.00% 48.75%
Gross Profit Margin 47.70% 49.65% 50.81% 50.75% 51.00% 51.25%
OPEX Margin 23.23% 25.14% 25.83% 23.49% 23.43% 22.81%
ROAE 59.30% 44.36% 41.86% 42.19% 42.82% 43.85%
ROAA 22.99% 16.19% 17.01% 18.94% 19.58% 20.46%
Current Ratio (x) 0.88 0.65 0.45 0.63 0.78 1.01
Quick Ratio (x) 0.57 0.55 0.36 0.52 0.53 0.70
Cash ratio (x) 0.30 0.11 0.10 0.11 0.24 0.31
Inventory turnover (x) 4.94 4.88 5.83 5.94 5.41 5.40
Du-Pont Analysis
ROE 48.71% 40.71% 38.34% 40.48% 41.06% 42.01%
Net Margin 16.52% 15.06% 16.04% 17.22% 17.70% 18.43%
Asset Turnover (x) 1.06 1.00 1.06 1.07 1.07 1.08
Leverage (x) 2.77 2.71 2.25 2.21 2.17 2.12
EBITDA Margin 28.10% 31.97% 33.64% 32.31% 32.60% 33.45%
Operating profit (EBIT) margin 24.62% 25.30% 25.75% 27.46% 27.77% 28.64%
Interest burden 1.00 0.87 0.90 0.91 0.92 0.92
Interest Coverage (X) 35.31 7.21 9.24 10.17 11.11 11.46
Tax burden 0.67 0.68 0.69 0.69 0.69 0.70
Interest coverage 35.31 7.21 9.24 10.17 11.11 11.46
Source: Company fillings, Meristem forecasts
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0.00
0.50
1.00
1.50
2.00
2.50
3.00
2007 08 09 10 11 12 13
GUINNESS NSEASI
Target Price: NGN199
Rating: HOLD
Market Information NGN
Current Price 200
52wks high 293.6
52wks low 161
Mkt Cap 'bn 301.2
Average Value (mn) 88.25
Average vol.(mn) 0.346
S/Outstanding (bn) 1.506
Valuation Metrics
Market Price
2014eEPS
2014eBVPS
12-month TP (NGN)
Capital Gain
Dividend Yield (2014e)
Total Return expected
Ratings
P/E
P/BV
Beta
COE 1
ROE - 5 year avrg. 3
ROE - 2013 6
Div. Payout Rate- 5 year avrg. 8
Dividend Payout Rate - 2013 8
PRICE TRAJECTORY
Beset by Performance drag
Guinness Ni eria Plc. NSE: GUINNESS; Bloomberg; GUINNESS: NL
Guinness operates as the second largest brewer in the country (after Nigerianbreweries Plc), with operating plants in four sites, (Ogba and Ikeja in Lagos, as well
as Benin and Aba). In the last two years, GUINNESS launched five innovative
products to support its weakening performance (Malta Guinness Low Sugar, Dubic
Extra Lager, SNAPP, Alvaro and the recent Orijin) in a campaign tagged the ‘colourful
world of more’ . In order to enhance revenue and profit, the company has invested
NGN52bn to expand its breweries and distribution network. Although we expect
these huge investments to begin to strengthen performance, recent numbers
indicate sustained performance drags.
Dragging Performance depresses Bottom-line: The 9M Earning releases of the
premium brewer shows that revenue tumbled by 11.40% (NGN78.019bn vs.NGN88.059bn in previous period) yet again. With this, the beer maker has recorded
three quarters of consecutive reduction in revenue (5.41% in 2014:Q1 and 13.34%
in 2014:Q2). Though management attributed this performance drag to sustained
softness in consumer discretionary spending, insecurity in the north and pricing
review, we suspect that keen competition in the Nigerian brewing space may be a
major factor responsible for the slowness in growth of the beer producer. The fact
that Nigerian breweries (GUINNESS’ major competitor) in the sector continues to
sustain top line growth despite the challenges in the industry buttresses this fact.
Slowing Revenue Growth Continues to Pressure Earnings: Despite declining top-
line, the company’s nine month performance indicates that the brewer has
recorded improving cost of sale (NGN41.680bn vs. NGN48.110bn), representing
13.37% decrease in cost of production. This is also in line with the half year result of
the company, with a 15.65% slip in cost of sales. OPEX (NGN26.493bn vs.
NGN26.763bn) and finance charges (NGN2.597bn vs. NGN2.528bn) recorded
12Month marginal changes of -1.01% and 2.71% accordingly.
Shrinking turnover accounts for the major pressure on bottom line: With sustained
decline in revenue, PBT (NGN7.824BN vs. NGN11.234bn) and PAT (NGN5.943bn
vs.7.633) contracted further by 30.36% and 22.14% respectively. While EPS
followed suit with similar margin (22%) decline from NGN5.07 per share in previous
period to NGN3.95 currently.
The counter is rated a ‘Hold’ at current price: We adopted a blend of DDM and
price multiples to estimate the intrinsic value of GUINNESS. On a dividend payout
assumption of 85% based on historical performance, our valuation model suggests a
12 month target price of NGN 199.20, implying an upside of -0.40% to current price
at NGN200. Hence, we recommend a HOLD.
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Guinness
Oversea
Ltd
46%Others
46%
Atlantaf
8%
6.3.1 Company Profile
GUINNESS is the second largest brewer in Nigeria. The company startedproduction in Nigeria following the establishment of the first brewing plant in
Lagos outside the British Isles In 1963. In 1965, Guinness Nigeria was listed on
the Nigerian Stock Exchange. With consistent growth of Guinness Stout and
Harp Lager beer in the Nigerian market, GUINNESS has expanded its brewing
plant from just one in Lagos to a total of four across Lagos (Ogba and Ikeja),
Benin and Aba in Abia state. The Company expanded its brewing capacity in
Benin and Ogba in 2011 to meet the growing demand of its consumers.
GUINNESS is a subsidiary to the Diageo Group (46% stake), the fourth largestbrewer in Africa and a world's leading premium drinks producer with a broad
base portfolio of spirits, beers and wines with popular brands like JohnnieWalker, Crown Royal, J&B, Windsor, Buchanan's and Bushmills whiskies,
Smirnoff, Ciroc and Ketel One vodkas, Baileys, Captain Morgan, Tanqueray and
Guinness. Guinness Nigeria remains Diageo’s largest market for the sale of the
GUINNESS stout brand.
In terms of market capitalization and holding structure, GUINNESS represents2.18% of NSE market capitalization with a market cap of NGN 301.2. While 46%
of the shares of the premium brewer is held by its parent company, Guinness
Oversea Ltd; other major stake holders include Atlantaf (8%) and the Nigerian
public (46%).
Exhibit 31: Geographical Spread of GUINNESS Brewing Plants Shareholding Structure
Source: Company fillings
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By installed capacity, GUINNESS holds the position of the second biggest playerin Nigeria with a total installed capacity of 5.5mhl, operated via its four brewing
plants in Lagos, Benin and Aba.
Product portfolio: The company’s products include, Guinness Foreign ExtraStout, Guinness Extra Smooth, Malta Guinness, and Harp Lager beer. Other
brands include Gordon’s Spark, Smirnoff Ice, Armstrong Dark Ale, Satzenbrau
Pilsner, Top Malt, Harp Lime, and more recently introduced Malta Guinness Low
Sugar. In response to the competition in the industry and the growing
challenges resulting from volume softness and slowing consumption the
company recently launched a number of innovative products to support its
performance (Malta Guinness Low Sugar, Dubic Extra Lager, SNAPP, Alvaro and
Orijin).
6.3.2 Route to the Market
Route to the market: The overall goal of increasing the availability of its brandsin key outlets is the ma jor thrust of the company’s strategy to increase market
share. The company intends to achieve this by increasing its direct coverage by
increasing the number of its sales personnel as well as dedicated teams to drive
distribution, and Increase availability in rural areas. The brewer boasts of over
200 Guinness distribution centers and a plan to continue to increase the
number of distributors. Other initiatives include, improving the efficiency and
effectiveness of distributors, sales force and sales organizations to enhance
turnover. Sufficient distributors’ funding and financing scheme, and new credit
terms are other means the company adopts for working capital management.
Apart from the above, GUINNESS also tries to stay in the sights of consumersthrough sponsorship of popular events like the Barclay’s Premier League, FIFA
Exhibit32: Product portfolio
Source: Company’s filings
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Outlet Coverage
•Increasedavailability ofbrands & share inkey outlets
•Substantiallyincreased direct
coverage•Increase in sales
people
•Pilot furtherincreases in Lagos
Rural Distribution
•Increase availabilityin rural areas
•Over 200 GuinnessDistribution Centers
•Substantial rise innumber ofdistributors
•Dedicated teamsdriving distribution
Off Trade MgtIncrease
•Share in thegrowing off tradechannel
•Dedicated KeyAccount Structure
for modern retail
•Piloting alternativeoff trade route toconsumer
Sales Effectiveness
•Improving theefficiency ofdistributors salesforce
•Improve theefficiency &
effectiveness ofsales organization
•Sales Academy
Working Capital
•Sufficientdistributor fundingto support growthambition
•Distributor
financing scheme
•New Credit Terms
World cup and the likes. With this, the company continues to catch the
awareness of its teeming consumers via beer parlours, viewing centers and
other sporting gatherings.
6.3.3 Performance outlook
Guinness has invested NGN52bn in the last three years to expand its breweries
and distribution network. Recent (last two years) performance of the company
has not been impressive, owing partly to growing competition, slowing
consumer spending etc. which were noted earlier in this report. However, we
expect huge CAPEX and recent innovative products to strengthen performance
going forward. We also expect election spending to improve discretionary
spending. Based on this background, we anticipate that Guinness will grow top-
line by a modest 5% going forward. This is further supported by the company’s
6.65% historical 5 year revenue CAGR.
Earnings: As stated above, Guinness has invested CAPEX worth NGN52bn in
plant and distribution expansion in the last 3 years. Earnings in this period werestrained by increased finance charges attributable to this investment.
Nevertheless, we expect Guinness to deleverage in the short to medium term, if
this play out as expected, moderating finance cost should begin to impact
positively on earnings going forward. On the back of this, we foresee the
premium brewer growing Net earnings by 9.53% on the average, for the next
5years.
Exhibit 33: Route to the market
Source: Company’s filings
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-10%
0%
10%
20%
30%
105
110
115
120
125
130
2010 11 12 13 14e 15f 16f
M i l l i o n s
Turnover turnover growth
0%
10
20
30
40
50
1
3
5
7
9
11
13
15
1719
2010 11 12 13 14e 15f 16f
M i l l i o n s
Profit After Tax Net Margin
Exhibit 34: FINANCIALS and RATIO (Million’NGN)(HISTORICAL+FORECAST
Source: Company fillings, Meristem research
Exhibit 34: Historical & Forecast Turnover vs. Growth Rate Historical & Forecast PAT vs. Net Margin
GUINNESS NIGERIA PLC 2012 2013 2014e 2015f 2016f 2017f
Key Headlines FORECAST HORIZON
Turnover 116.46 122.46 114.50 118.22 124.14 130.96
Gross profit 55.18 56.08 53.82 56.16 58.96 62.47
EBITDA 31.39 29.16 30.61 30.31 31.65 32.86
Operating Profit (EBIT) 21.90 20.61 21.10 22.16 23.39 24.91
Profit before Tax 20.38 17.01 20.81 23.05 23.58 24.78
Profit After Tax 14.21 11.86 14.15 15.67 16.04 16.85
Non-current Asset 77.23 88.82 85.60 88.17 88.03 91.97
Total Current Asset 28.78 32.24 59.86 61.56 63.13 68.13
Total Asset 106.01 121.06 115.66 118.82 122.91 128.40
Current Liabilities 45.20 51.28 35.57 46.39 52.80 46.88Total non-current Liabilities 22.20 23.75 31.92 21.92 17.19 26.07
Total Liability 67.40 75.02 67.50 68.31 69.99 72.95
Net Asset 39 46 48 50.51 52.92 55.45
Cost to Sales Ratio 52.62% 54.21% 53.00% 52.50% 52.50% 52.30%
Gross Profit Margin 47.38% 45.79% 47.00% 47.50% 47.50% 47.70%
OPEX Margin 29.22% 29.62% 29.27% 29.45% 29.15% 29.18%
ROAE 36.03% 28.03% 30.05% 31.77% 31.01% 31.10%
ROAA 14.34% 10.45% 11.96% 13.37% 13.27% 13.41%
Current Ratio (x) 0.64 0.63 1.68 1.33 1.20 1.45
Quick Ratio (x) 0.53 0.57 1.21 0.96 0.86 1.06
Cash ratio (x) 0.11 0.06 0.47 0.37 0.34 0.39
Inventory turnover (x) 4.00 5.19 3.32 2.53 2.58 2.61
Du-Pont Analysis
ROE 36.81% 25.77% 29.39% 31.03% 30.30% 30.39%Net Margin 12.21% 9.69% 12.36% 13.26% 12.92% 12.87%
Asset Turnover (x) 1.10 1.01 0.99 1.00 1.01 1.02
Leverage (x) 2.75 2.63 2.40 2.35 2.32 2.32
EBITDA Margin 26.95% 23.81% 26.73% 25.64% 25.50% 25.09%
Operating profit (EBIT) margin 18.80% 16.83% 18.43% 18.75% 18.85% 19.02%
Interest burden 0.93 0.83 0.99 1.04 1.01 0.99
Interest Coverage (X) 46.98 10.46 5.42 9.96 10.71 11.42
Tax burden 0.70 0.70 0.68 0.68 0.68 0.68
Interest coverage 10.46 5.42 9.96 10.71 11.42 11.89
Source: Company fillings, Meristem forecasts
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0.80
0.90
1.00
1.10
1.20
1.30
1.40
Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-1
NSEASI INTBREW
Target Price: NGN21.22
Rating: SELL
Valuation Metrics
Market Price
2014EPS
2014BVPS
Target Price
Capital Gain
Dividend Yield (2014)
Total Return expected
Ratings
P/E
P/BV
Beta
COE 1
ROE - 5 year avg. 2
ROE – 2014
Div Payout Rate-5 yr avg.
Div Payout Rate – 2014
Market Information NGN
Current Price 28.05
52wks high 30.01
52wks low 18
Mkt Cap 'bn 92.00
Average Value (mn) 20.03 Average vol.(mn) 0.85
S/Outstanding (bn) 3.263
PRICE TRAJECTORY
Riding on SABM’S Strategic Objective
Revenue Growth Pressured by slowing Growth and Competition in the Sector:
INTBEW operate majorly in the value segment of the beer market, with broad
base product portfolio in the south-western part of Nigeria. We attribute recent
impressive performance of the company to its concentration on the value
segment which is currently driving the overall growth in the breweries industry.
INTBREW grew its 2014FY turnover by 6.36% a huge deviation from five year
historical average growth of 103.62%. Performance in the last three quarter saw
a significant increase in its product portfolio which initially included Trophy
Larger beer and Betamalt. Newer products such as Castle milk stout, Castle larger
and Redds as well as other products from SAB Miller brands (Grand malt, La
Voltic Water plus other castle brands) have been introduced. Improved route to
market in our view accounted for the turnover growth recorded in recent times,
however, 6.36% 2014FY turnover growth of the beer maker indicates that the
brewer’s operations is having its share of the slowing growth and keen
competition in the sector.
Going forward we expect the company to leverage on its strength in the value
segment of beer market to sustain positive topline growth, even as it ride on the
strategic relationship with its parent company (SABM) to stay competitive.
Improved Cost Management but Higher Finance Cost, Pressured Earnings:
INTBREW recorded significant improvement in its production cost as 2014FY cost
of sale declined 0.99% (NGN9.591 Vs.NGN9.687 in 2013FY), cost to sales ratio
moderated to 51.86% (vs. 2013FY: 55.71%). When compared to 3-year historical
cost to sales ratio of 62.46%, this suggest impressive improvement. Nevertheless,
INTBREW’s earnings for the year was pressured by an unusual jump in finance
charges which went up by over 5000%, hence earnings before tax settled at
NGN3.925 (vs.NGN3.556 in 2013FY) representing a 10.40% growth. However, the
company’s after tax profit dipped 9.53% due to deferred tax liability of
NGN1.36billion.
Market price runs ahead of fair valuation: We adopt a blend of dividend
discount model (DDM) and relative pricing valuation to arrive at a fair value for
INTBREW. The company has proposed a 32kobo dividend for the year, this
implies a 50% payout and a dividend yield of 1.14%. Valuation put 12 month
target price at NGN21.22, which imply a downside potential of 24.37% compared
to market price. Hence the stock is rated a SELL.
International Breweries Plc. NSE: INTBREW l Bloomberg INTBREW NL
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6.4.1 Company Profile
International breweries Plc. is the third largest brewer in Nigeria (by marketcapitalization). Following the rejuvenation of the brewing plant in Ilesha, Osun
State after more than 2 decades of zero production and