MERISTEM Breweries Sector Update 10 June 2010

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Nigeria I Breweries I Equities

1www.meristemng.com

Disclosure and analysts certification: Please see page 24 for analysts disclosures and certifications

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NB GUINNESS INTBREW

12% of Nigerian equities market

Brewery Sector Update

Equity I 24 Pages I June 10,2010 I 17:00 GM

Brewers earnings pull-back!but the thirst continues

The brewery products continue to ride on relatively price inelasticity

of demand for beer and strong loyalty of consumers to grow

turnover and volume amidst contraction in disposable income

growth and overall economy slowdown. Contrarily, soaring

commodity prices mount cost pressure on global brewers to create

an aura of earnings paradox as bottom-lines slid in the face of

volume growth, albeit, we see the challenges coming-off soon as thecommodity cycle eases out.

Increasing beer consumption per capita to sustain industrygrowth:We see beer consumption per capita in Nigeria trendingnorth as consumers drift away from traditional liquors to pitch tent

with premium beers. This change in lifestyle will be corroborated

by growing population and demographic dynamics to increase

domestic beer sales going forward.

Dominant players defense of market share and scaleeconomies mount barrier to entry: The Nigerian brewery

industry is still highly concentrated with Nigerian Breweries Plc andGuinness Nigeria Plc dominating the industry with c90% market

share. While these duopolies continue to use product

differentiation, cost-cutting R&D and a host of advertising and

marketing strategies to defend market shares, the natural

economies of scale of beer brewing continues to suppress fringe

players competitiveness and potential entrance.

SABMillers entrance may pose threat to market titans: Theforceful entrance of the South African brewer, SABMiller, into the

Nigerian beer market with acquisition and imminent acquisitions of

fringe players may challenge current titans positions as this global

player roars to take its fair share of the market.

Our fair valuation suggests a BUY investment rating on NBand a NEUTRAL rating on GUINNESS:We see the current pricesof both NB and GUINNESS closely tracking our 12-month target

price though we see more upside in NB (21.1% Total return

Potential) than GUINNESS (18.02% total return potential) and thus

rate NB a BUY based on rating criteria.

NBCurrent Price (NGN) 62

Target Price (NGN) 71

Implied Total Return 21.

Ratings* OVERWEIG

GUINNESSCurrent Price 155

Target Price 177

Implied Total Return 18.0

Ratings* NEUTR

Africa I Nigeria

Analysts:

Razaq Ahmed Kemi [email protected] [email protected]+234 805 162 6281 +234 803 933 2928

Abiola Rasaq Abiodun [email protected] [email protected]+234 803 365 1808 +234 802 988 7713

*see disclosure of ratings criteria on page 24

Market Capitalization (Nbn)Exhibit 1

Investment RecommendationExhibit 2


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- 1 ,0 00 2,0 00 3,00 0 4 ,0 00 5,00 0 6 ,0 00 7,0 00

beerconsumptionpercapita(

litre)

Income per capita (US$)

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South

Africa

Congo Algeria Burundi Nigeria Rwanda DRC

Nigerian Beer Industry

Low beer consumption signals growth gapsIn terms of volume, the Nigerian beer market grew by 18% CAGR

between 2003 and 2008 to stand at 15.4 million hectoliters (mhl)on the heels of premiumisation and capacity additions by the duo

market leaders. Despite the impressive growth recorded, this level

still appears shallow when benchmarked against the 28.5 mhl

South African market. Though beer consumption has strong

positive correlation with income level, the huge population base of

150m offers enormous potential market for Nigerian brewers.

With beer consumption per head of 10 liters, Nigeria trails

emerging peers such as South Africa (59 liters), China (36 litters)

and Angola (35 liters) and thus signals enormous growth potentials

particularly with the strong momentum in per capita income andthe widening middle class bracket. Burundi, a Central African

country with barely US$172 income per capita (vs. Nigerias per

capita income of US$1371) has a beer consumption per capita level

of 18 liters. Assuming this level of beer consumption for Nigeria,

we see a hypothetical beer market size of 26.8mhl, representing

some 74% above the current level.

Source: Meristem Research, Plato and Global Finance

Rwanda

Nigeria

South

Africa

Algeria

Congo

DRC

Burundi

Low beer consumption signals growth gapExhibit 3 Income level dictates beer consumptionExhibit 4


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South Africa Nigeria Algeria DRC Congo Burundi Rwanda

We are bullish on the Nigerian beer market

Our bullish outlook of 10% CAGR growth in breweries sector over

our forecast horizon is hinged on population growth and dynamics

coupled with the currently low beer consumption per capita.

Furthermore, we think the increasing urbanization and changing

lifestyle of the beer consumers will bode well for the future of theNigerian beer market as we continue to see consumers drifting

from traditional liquor towards premium beer.

Increasing investments in capacity additions by current giants

coupled with increasing interest of potential entrants and

avalanche of product launch will boost industry growth going

forward. The continued capacity expansion and efficiency of

brewers via investment in R&D and innovations should project

supply along demand growth path. We continue to think that the

less price sensitivity of demand for beer will suppress the impact of

fiscal policy measures aimed at modifying the consumption patternof beer addicts, thus provide further support for beer demand.

Source: Meristem Research and Plato

Nevertheless, the mounting religious and moral campaign against

alcohol may slightly choke growth momentum especially with the

increasing adoption of Sharia Law in the Northern states (which

accounts for c60% of Nigerian population) and government moral

ban on alcohol sales in specific volume-driven sales points such as

motor parks. Moreover, distribution and logistics bottlenecks

coupled with high cost of inevitable independent power generation

remain daunting challenges to the sectors growth.

Nigeria: 2nd

largest beer market in AfricaExhibit 5


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NB, 57%Guinness, 31%

Others, 12%

A market of two brewers: How long will the

duopoly subsist?

The Nigerian brewery industry is still highly concentrated with Nigerian

Breweries Plc and Guinness Nigeria Plc dominating the industry with

slightly less than 90% combined market share. While these duopoliescontinue to use product differentiation, cost-cutting R&D and a host of

advertising and marketing strategies to defend market shares, the natural

economies of scale of beer brewing continues to suppress fringe players

competitiveness and potential entrants. In addition, the strong brand

loyalty of beer consumers accentuates the duopoly structure of the

market.

Source: Meristem Research, Heinekens N.V and Diageo

We continue to think that SABMillers entrance may pose competitive

threat to the industry duopolies as it leverages on global brand and

product mix to scoop market share. While we see SABMiller deepeningbeer market penetration in Nigeria, the chance of eroding NB and

GUINNESS market shares is more probable since its products will become

close substitutes to the titans brands. This will consequently weaken the

price dictating ability of the market leaders as beer demand becomes

increasingly price-elastic given wider availability of close substitutes.

SABMiller is one of the global leading brewers with operating and

distribution footprints in six continents. Premised on 2009FY volume

estimates, SABMiller, with a beer volume of 235 mhl, is about 1.7 times

each of Heinekens N.V. and Diageo (the parent companies of NB Plc and

Guinness Nigeria Plc respectively).

The company, in line with her recent aggressive diversification to otheremerging economies, acquired 2 fringe Nigerian brewers (Pabod

Breweries and Standard Breweries) as strategic entry move into the 2nd

largest African beer market. Though SABMillers move appears listless

relative to market expectations with no significant footprints since the

acquisitions in 2008, we continue to view it as a potential threat to NB and

Guinness market dominance.

Nigerian beer market: Still highly concentratedExhibit 6


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GUINNESS

EPS (N)

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NB

EPS (N)

DPS (N)

Payout (%)

ValuationWe pitch tent with the 2-Stage Dividend Discount Model (DDM) in

the valuation of the Nigerian brewery industry given the stable

dividend history of the duo brewers in focus. The dividend history

of both companies reflects a disciplined payout rate as thedividend streams mirror earnings growth and cycles; particularly

for Nigerian Breweries Plc which has a c100% payout policy

(Guinness has an average payout rate of 75%).

Source: Meristem Research

Growth assumptions:

Our adopted 6% sustainable growth rate is informed by ourview of the beer industry long-term growth potential which we

see as attractive premised on the current beer consumption

level and per-capital income growth expectation of 5%. We

think the 2.8% population growth and rapidly increasing

urbanization are positive drivers of the industrys long-term

outlook.

Contrarily, the theoretical long-term growth rate of GuinnessNigeria Plc stands at 9.3%, barely 170 basis points to the near-

term growth rate. While we do not doubt the ability of

Guinness Nigeria Plc to achieve this growth feat, the potentialinflux of new global players who are aggressively searching for

the next emerging beer market coupled with our outlook on

the industry growth over the forecast horizon suggest a quasi-

scientific judgment.

Established dividend policy supports the adoption of DDM as a measure of valueExhibit 7


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Cost of Equity estimate:

Our cost of equity is CAPM-derived with a risk-free rate of 9%(1-year average yield on generic 10 years tenor sovereign

bonds) and an equity risk premium of 6% (given the defensive

nature of FMCGs like beer and the maturity of the brewers in

focus). Our adjusted 3-year beta estimate of NB stands at 0.82,thus translating to a cost of equity of 13.38% while the

adjusted beta of GUINNESS over the same time frame yields

0.67 and consequently a cost of equity of 12.00%.

Cost of Equity Estimate

From liquidity and size perspectives, we think NB should enjoyvaluation premium over GUINNESS given that NB is roughly 2

times bigger than GUINNESS and has a 12-month liquidity ratio

of 8% vs. 6% for GUINNESS. Liquidity ratio is measured as the

percentage of market capitalization that is turned over in a

year.

In the overall, we believe a uniform cost of equity is apt inadjusting for the risk elements and thus adopt 12.69% (the

arithmetic average of the costs of equity of both firms) to

discount our projected cash flows.

We analyze below the financial performance and position of both

firms with particular emphasis on key variables that shape our

earnings outlook on the companies.

NB implied cost of equity 13.36%

GUINNESS implied cost of equity 12.00%

Adopted Uniform COE (average) 12.69%


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NSE ASI NB

Nigerian Breweries Plc

We believe the equity of Nigerian Breweries Plc is worth NGN481.6,

translating to an intrinsic value of NGN63.68/share based on her

shares outstanding of 7.56bn units. Rolling this intrinsic value over

our 12-month investment cycle (June 2011) implies a target price of

NGN71.76. In the overall, we rate the shares of Nigerian Breweries

Plc OVERWEIGHT as we see its trading price of NGN62.00 (June 10,

2010) offering 21.1% total return potential.

Our earnings projection implies a weaker performance in 2010FY aswe see the companys earnings dropping by 10.4% y/y (2009A:

N27.9bn vs. 2010F: N25bn). However, we expect a strong earningsrebound in 2011 and 7.8% CAGR through 2014. This earnings

outlook is largely shaped by our expectations on improved volume

sales and margin improvement having factored in the positive

impact of the recently completed plant optimization and capacity

expansion project.

This performance outlook is slightly below the recent five yearstrack record of 40.6% (buoyed largely by the ultra-modern Ama

Brewery established in 2003) as we do not expect any momentous

CAPEX programme from Nigerian Breweries Plc within our forecast

horizon.

Valuation and Ratings

12-Months Target Price NGN 71.7

Current Price (June 10, 2010) NGN 62.0

2010e Dividend Yield 5.2%

Expected Total Returns 21.0%

Ratings OVERWEIG

Unit 2007A 2008A 2009A 2010F 2011F 201

Turnover bn NGN 111.7 145.5 164.2 172.4 189.7 20

Gross Profit bn NGN 59.2 70.9 75.5 77.6 87.2 9

Gross profit Margin % 53.0 48.7 46.0 45.0 46.0 4

EBITDA bn NGN 32.9 43.1 48.5 46.6 53.1 5

EBITDA Margin % 29.4 29.6 29.5 27.0 28.0 2

Operating profit (EBIT) bn NGN 27.4 36.8 41.7 39.7 45.5 5

PBT bn NGN 27.9 37.5 41.4 39.3 45.3 5

Profit-after-tax bn NGN 18.9 25.7 27.9 25.0 29.6 3

Net Profit margin % 17.0 17.7 17.0 14.5 15.6 1

ROAE % 47.7 68.2 70.8 53.4 62.5 6

Shares outstanding bn units 7.6 7.6 7.6 7.6 7.6

EPS NGN 2.5 3.4 3.7 3.3 3.9

DPS NGN 2.5 3.4 3.7 3.2 3.8

BVPS NGN 5.7 4.3 6.2 6.2 6.3

NSE: NB I Bloomberg: NB: NL I Reuters: NB.LG I www.nbplc.com

NSE ASI vs. NB: Price trendsExhibit 8


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Valuation and Recommendation NGN71.76 Target Price; 21% Total Return potential: Our

Target Price is DDM-based and is valid over the next 12 months

(June 2011). Based on the current market price of N62 (Date: June10, 2010), we expect a total return potential of 21% over the next

12-month investment cycle. Hence, we rate the shares

OVERWEIGHT with a low risk level.

Current valuation is attractive, driven by low cost of equity:The market currently prices Nigerian Breweries shares at 18.75x

2010E earnings and 15.85x 2011E earnings. The weak expected

earnings performance in 2010 is a likely drag on the share price

performance, but our fair valuation estimate has impounded this

earnings weakness already. We continue to see earnings growth in

2011 and will recommend an entry for a 21% 12-M return potential.

Our valuation estimates are detailed below:Valuation Feeds

Forecast Horizon (2010 - 2014) 5-years

First Stage CAGR 8.0%

Second Stage Growth Rate 6.0%

Cost of Equity (COE) 12.69%

Average Payout rate 98%

Shares Outstanding (bn units) 7.56

Implied Terminal P/E (x) 15.53

Implied Terminal P/BV (x) 12.66

Equity Value

PV of Dividend (2010-14) in NGN'bn [1] 116.62

PV of Terminal Value (NGN'bn) [2] 364.99

Fair Value of Equity (NGN'bn) [1 + 2] 481.60

Fair Value Per Share (NGN) 63.68

12-M Target Price (NGN) 71.76

Source: Meristem Research estimates

Valuation Multiples and Ratios 2010F 2011F

P/E (x) 18.75 15.85

P/BV (x) 9.96 9.84

EV/EBITDA (x) 9.82 8.61

Div. Yield 5.2% 6.2%

ROaE 53.4% 62.5%

EBITDA Margin 27.0% 28.0%

Net Margin 14.5% 15.6%



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Performance: Review + outlookBusiness model Nigerian Breweries Plc is a leading and the largest brewer in Nigeria

with 57% market share. The company is a focal point of HeinekenN.V. of the Netherland and forms part of the global brewers

expansion vision in Africa (Nigeria being the second largest beer

market in Africa). Heineken N.V. currently has a controlling equity

interest of 54% in NB and the Nigerian market contributes about

12% to the Groups profitability.

NB Plc currently has 5 brewery plants and 1 malting plantstrategically located across Nigeria. The combined production

capacity stands at 10m hectoliters. NBs product portfolio is diverse

and ranges from larger stout, non-alcoholic drinks to soft drinks.

Nigerian Breweries Plcs operation is purely a mono-market playwith sales in the Nigerian market contributing about 99.8% to thecompanys turnover. The major source of foreign exchange risk lies

in the companys exposure to imported materials and services from

her parent company.

Route-to-market

Source: Heineken, Meristem Research

NigerianBreweries Plc

(Super) KeyDistributors (KD): 145

Wholesale

Independents (WI): 778

Bulk breakers (BB):

22,078

Retail Outlets:

354,000

Diagrammatic illustration of Nigerian Breweries Plcs distribution chainsExhibit 9


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111.7

145.5

164.2172.4

189.7

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2007 2008 2009 2010f 2011f Turnover (N'bn) growth (%)

17% CAGR in historical turnover, but a

slowdown going forward The brewer compounded her turnover by an impressive 17.4% over

the last 5 years. We posit that this growth feat is buoyed largely bythe growing beer market, price increase, deepening diversification

into the non-alcoholic beverage market (with the launch of Farouz)

and the companys continuous plant optimization and expansion

initiatives as we trace the recent historical performance to the

positive contribution from the ultra-modern Ama plant which threw

the companys capacity into an impressive 10mhl.

Our medium-term projections translate to a slowdown in NBs top-line growth informed largely by our perception of 10% industry

CAGR, stable beer prices and our assumption of slim CAPEX in the

medium-term. Though, we see the recently completed

refurbishment and expansion of the Lagos Brewery (now 2.5mhl

capacity- 35million cartons) playing its part in NBs performance,

our expectations are more of efficiency deepening than volume

growth. In the overall, we project 2010FY turnover of N172.4bn (a

sales/share of N22.8), representing 5% growth over 2009

performance given the time lag to put the refurbished plant to full

utilization. However, we expect better top line growth of 10% in

2011.

Source: Meristem Research, NBPlc

Top-line growth to slow down over our forecast horizon Exhibit 10

Historical CAGR17.4%

Forecast CAGR

10.0%


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Barley price (US$/mt)

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49%46% 45% 46%

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Gross Profit Net Profit Margin

Margin reversal; is 2010 the trough? Nigerian Breweries Plcs steady net margin improvement, from

barely 6.9% in 2004 to an impressive level of 17.7% in 2008 is

commendable. Albeit, the profitability of the brewer dipped in 2009

on the heels of soaring commodity (key input- barley) cost.

In our opinion, NB is taking advantage of her significant use ofdomestically sourced raw material (sorghum), a product of the

companys R&D investment. We also believe that NB is leveraging

on Heinekens centralized purchase of input to cut cost.

Source: Meristem Research, Index Mundi

While we acknowledge the easing commodity cycle (though stillrelatively volatile) and NBs improving strategy of outsourcing

distribution logistics in a bid to cut cost and further hedge risk, we

still see cost headwinds roaring from increased energy cost given

the appalling state of power supply in the country and the gradual

implementation of the new Petroleum Industry Bill cum oil-subsidy

withdrawal.

Barley price peaked mid-2008, having soared 179% within 3yrsExhibit 12

We ex ect mar in im rovement in 2011Exhibit 11


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Turnover Cost of sales OPEX (B4 Dep) Depreciation Finance Cost Tax PAT

2009 decomposition of turnover (N'bn)


Our projections imply a 2010e net margin trough of 14.5%. While we

do not expect margin to reverse to its historic high in the near-term,

we see it climbing steadily to record 16.1% in 2014. This outlook is

largely shaped by the historic proportion of cost of sales-to-turnover

and OPEX-to-turnover as we see OPEX climbing up due to increased

energy cost.

Earnings: History + Quality + OutlookWe observe a 40.6% CAGR in NBs earnings-after-tax supported largely

by the consistent improvement in net margin, an indicator of

management efficiency. We gauge the quality of this earnings

performance with ratio of net operating cash-flow per share (OCFPS) toearnings per share (EPS) and found adequate coverage as the track

record of OCFPS shows a consistent premium over EPS.

This enriches our confidence in the quality of earnings of the brewer as

we see superior earnings being supported by operating cash flow

(OCF). Though, the OCF cover on earnings appears to be trending south

(see table below), key apparent indicators lay evidence to the buoyant

operating cash generative ability of Nigerian Breweries Plc and we do

not see the downside risk to such performance crystallizing over our

forecast horizon.

Per Share Data 2005 2006 2007 2008 2009OCFPS 3.80 3.29 3.34 5.28 4.89

EPS 1.09 1.44 2.50 3.40 3.69

DPS 1.05 1.44 2.50 3.40 3.69

OCFPS/EPS 348% 229% 134% 155% 132%

OPEX and tax burden taking a large chunk of the Gross ProfitExhibit 13


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NBs net cash conversion cycle is attractive, with less than a week/day

net cash conversion cycle in the face of improving profitability ratios.

This further reflects the ability of NB to finance its operation and

growth. We see NB sustaining this superior working capital culture

going forward.

Working Capital/Activity Ratios 2006 2007 2008 2009 2010f

Days of sales outstanding 15.3 20.4 14.3 8.3 8.3

Number of days payables 121.4 111.6 101.0 100.6 94.5

Days of inventory holding 108.7 100.1 90.3 88.0 85.2

Net cash conversion cycle 2.6 8.9 3.7 (4.3) (1.0)

Total asset turnover 1.1 1.2 1.4 1.5 1.6

Return on Average Assets 15% 23% 26% 26% 24%

Financing and Capital StructureDebt free stance gives room for low-cost financing

In line with NBs working capital structure, the firms financing and

capital structure show a low level of gearing with recent history of zero

long-term debt and marginal short-term finance. While NB may be

indirectly leveraged by Heineken N.V. via deferred payment for

centralized input purchase, we think shareholders value may be further

enriched if the company takes advantage of its robust interest coverage

and debt free stance to make leverage recapitalization for its regional

expansion. This in our view will not only minimize the business risk ofNB but also rub-off positively on Heineken brand.

Debt ratios 2006 2007 2008 2009 2010f

Interest coverage (x) 32.25 1047.48 138.32 56.42 46.00

Financial leverage (x) 2.30 2.09 2.59 2.68 2.27

Total debt to equity (x) 0.00 0.00 0.00 0.01 0.01

Capital structure (N'billion) 2006 2007 2008 2009 2010f

Total debt - 0.02 - 0.50 0.32

Market Value of Equity 272.25 370.57 308.93 400.97 521.82

Total Capital 272.25 370.58 308.93 401.47 522.13

Split:

Equity (%) 100.0% 100.0% 100.0% 99.9% 99.9%

Debt (%) 0.0% 0.0% 0.0% 0.1% 0.1%

100% 100% 100% 100% 100%


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NSE ASI GUINNESS

Guinness Nigerian Plc

We believe the equity of Guinness Nigeria Plc is worth NGN232.5bn,

translating to an intrinsic value of NGN158/share based on her shares

outstanding of 1.47bn units. Rolling this intrinsic value over our 12-

month investment cycle (June 2011) implies a target price of

NGN177.62. In the overall, we retain our NEUTRAL rating on the

shares of Guinness Nigeria Plc as we see its trading price of

NGN155.00 (June 10, 2010) offering just 18% total return potential.

We forecast Guinness Plcs net sales to hit historic high ofNGN107bn for the 2010FY (June year end), representing 20% y/y

growth. We expect growth to be supported by combination ofincreased volume and prices in her key products. Net sales recorded

13.4% CAGR in the past 5 years and we project 11.5% CAGR over

our forecast horizon (2010- 2014).

However, we are bearish on GUINNESS 2010FY profitability on theback of elevated marketing spend and increased commodity prices.

We project a PAT of N12.1bn in 2010FY, representing a 10.7% y/y

decline and an EBITDA margin of 22.5% (vs. 26.2% in 2009FY). We

expect very strong earnings growth in 2011FY (29.5%) on margin

rebound and 12.5% CAGR in earnings over our forecast period.

Unit 2007A 2008A 2009A 2010F 2011F 2012F 2

Turnover bn NGN 62.3 69.2 89.1 107.0 117.7 129.4 14

Gross Profit bn NGN 28.1 33.6 42.6 48.1 55.3 60.8 6

Gross profit Margin % 45.2 48.5 47.8 45.0 47.0 47.0 4

EBITDA bn NGN 17.0 18.9 23.4 24.1 28.2 32.4 3

EBITDA Margin % 27.3 27.4 26.2 22.5 24.0 25.0 2

Operating profit (EBIT) bn NGN 14.2 15.8 19.8 20.3 24.1 27.8 3

PBT bn NGN 14.9 17.1 19.0 18.8 23.3 27.1 3

Profit-after-tax bn NGN 10.7 11.9 13.5 12.1 15.7 18.6 2

Net Profit margin % 17.2 17.1 15.2 11.3 13.3 14.4 1ROAE % 40.7 34.6 39.6 36.9 44.0 47.8 5

Share outstanding bn units 1.5 1.5 1.5 1.5 1.5 1.5

EPS NGN 7.2 8.0 9.2 8.2 10.6 12.6 1

DPS NGN 4.5 6.0 7.5 6.6 8.5 10.1 1

BVPS NGN 21.5 25.0 21.4 23.0 25.2 27.7 3

Valuation and Ratings

12-Month Target Price NGN 177.

Current Price (June 10, 2010) NGN 155.

2010e Dividend Yield 4.2%

Expected Total Returns 18.0%

Ratings NEUTRA

NSE: GUINNESS I Bloomberg: GUINNESS: NL I Reuters: GUINNESS.LG I www.guinness-nigeria.com

NSEASI vs. GUINNESS: Price treExhibit 14


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Valuation and Recommendation NGN177.62 Target Price; 18% Total Return potential: Our

Target Price is DDM-based and is valid over the next 12 months

(June 2011). Based on the current market price of N155 (Date: June

10, 2010), the shares of GUINNESS Nigeria Plc offer 18% total returnpotential over the next 12-month investment cycle. Hence, we

retain our NEUTRAL rating on the shares.

Current valuation appears fair; above market multiple justified by low risk profile: The market currently pricesGuinness shares at 18.69x 2010e EPS and 14.4x 2011e EPS. The

weak expected earnings performance in 2010FY is overweighing on

the share price, but our fair valuation estimate has impounded this

earnings weakness already. Though we continue to see strong

earnings growth in 2011, we recommend that investors hold for a

good entry opportunity.

Our valuation estimates are detailed below:Valuation Feeds

Forecast Horizon 5 years

First Stage CAGR 11.5%

Second Stage Growth Rate 6%

Cost of Equity (COE) 12.69%

Average Payout rate 80%

Shares Outstanding (bn units) 1.47

P/E (x) 12.68

P/BV (x) 6.44

Equity Value

PV of Dividend (2010-14) in NGN'bn [1] 52.98

PV of Terminal Value (NGN'bn) [2] 179.26

Fair Value of Equity (NGN'bn) [1 + 2] 232.24

Fair Value Per Share (NGN) 157.46

12-M Target Price (NGN) 177.62


Valuation Multiples and Ratios 2010F 2011F

P/E (x) 18.69 14.44

P/BV (x) 6.97 6.37

EV/EBITDA (x) 9.35 7.79

Div. Yield 4.28% 5.54%

RoAE 36.9% 44.1%

EBITDA Margin 22.00% 24.00%

Net Margin 11.30% 13.30%



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Diageo plc

46.03%

Atalantaf Limited

7.77%

Nigerians

46.20%

Performance: Review + outlook

Business model Guinness Nigeria Plc is the second largest brewer in Nigeria (after

Nigeria Breweries Plc) with c.30% market share. The company is a

majority-owned subsidiary of Diageo Group (46.03% equity

interest), which has Africa as one of its longest established and

largest markets for its generational Guinness brand. The Nigerian

subsidiary has been one of the major growth poles for the Diageo

Group in recent times.

The Company currently has 3 brewery plants located in Lagos (SouthWest Nigeria), Benin (South-South) and Aba (South East). The

combined production capacity stands at c.5m hectoliters (mhl).

Guinness brews and markets diverse alcoholic and non-alcoholic

beverages.

Just like her key competitor, Guinness Nigerian Plcs operation ispurely a Nigerian play with sales in the Nigerian market

contributing about 99% to the companys turnover. The major

source of foreign exchange risk lies in the companys exposure to

imported raw materials and services from her parent company.

Source: Guinness, Meristem Research

The ownership structure of Guinness Nigeria PlcExhibit 15


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6269

89

107

118

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

-

20

40

60

80

100

120

140

2007 2008 2009 2010F 2011F

Turnover (bn NGN): LHS

Turnover growth rate (RHS)

13.4% 5-year CAGR in turnover, but a

slowdown going forward Guinness Nigeria Plc has recorded consistent double-digit growth in

turnover in the past 4 years. Current sales level represents about

55% of Nigerian Breweries plc sales. Net Sales growth has beenfueled by strong volume increase, price realizations and product

innovation. This growth record has been contributing strongly to the

Diageo annual sales (3.2%).

Our medium-term projections for Guinness Nigeria Plc translate to aslower-than-historical top-line growth (though we expect stronger

growth than NB Plc). Given the industry expected growth rate of

10% and growth scenarios for the players, we estimate that

Guinness sales level will firm up to 62% of NB Plc by 2011 (currently

54%). The key drivers of growth remain improved capacity

optimization coupled with increased throughput and price increase.

In the overall, we project 2010FY turnover of N107bn, representing20% y/y growth and 11.5% CAGR over our forecast horizon.

Source: Meristem Research, Guinness Nigeria Plc

Top-line growth to slow down over our forecast horizon Exhibit 16

Historical CAGR

13.4%

Forecast CAGR

11.5%


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0%

10%

20%

30%

40%

50%

60%

70%

2004 2005 2006 2007 2008 2009 2010F 2011F

Gross Margin

EBITDA Margin

Net profit margin

Margin pressure to continue in 2010FY;

we forecast rebound thereafter Guinness Nigeria Plc cost structure is heavy on cost of sales (much in

line with industry trend), which represents about 52% of the

companys turnover. On our estimate, this ratio is likely to weakento 55% in 2010FY on the back of reversal in commodity prices most

especially barley). This combined with increased marketing spend

will exert significant pressure on Guinness EBITDA margin in 2010FY

which we forecast to slide by 420 basis points (2010FY: 22% vs.

2009FY: 26.4%).

On our estimate, the positive impact of the marketing spend shouldreflect more in post-2010 revenue and stabilization in commodity

price should help margin recovery. Hence, we forecast margin

recovery in 2011FY. We expect gross margin to improve by

200basis points with a corresponding improvement in EBITDA

margin (2011F: 24%).


Our projections imply an average EBITDA margin of 24.6%, which islower than 26.5% historical average. Our expectation of lower

average margin going forward is premised on expected competition

in the industry given the entry plan of SABMiller. Though, the beer

market is still home for pocket of opportunities via market

deepening due to rising GDP growth and expected increase in per

capital consumption, increased competition is likely to slightly

impair the pricing power of the players.

We expect margin improvement in 2011Exhibit 8


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Earnings: History + Quality + Outlook Guinness earnings have been treading double-digit growth path in

the past 4 years with a 5-year CAGR of 11.3%. This growth profile is

significantly lower than the 41% CAGR recorded by NB Plc over the

same time reference. While a portion of brewers earnings growth is

attributable to efficiency gains as reflected in improved margins

over the years, a sizable proportion is explained by volume growth.

Hence, the weak CAPEX programme in capacity upgrade of Guinness

Nigeria Plc compared to NB Plc is a key factor in this growth

differential.

The quality of Guinness Plcs earnings, as measured by theproportion of its earnings backed by its operating cash flow, has

shown weakening trends. The weakest operating cash flow

generation occurred in 2009 with operating cash flow covering 83%

of earnings. We regard ratio of above 1x as a likely indicator of

superior earnings quality. This is reflected in the table below:

Per Share Data 2005 2006 2007 2008 2009

Operating CF/share (NGN) 9.92 16.11 10.31 9.89 7.65

EPS (NGN) 4.12 6.31 7.25 8.04 9.18

y/y Chg % (38.60) 53.12 14.96 10.94 14.17

DPS (NN) 3.00 4.00 4.50 6.00 7.50

y/y Chg % (42.86) 33.33 12.50 33.33 25.00

Dividend Payout rate 72.9% 63.4% 62.1% 74.6% 81.7%

OCF/Earnings (x) 2.41 2.55 1.42 1.23 0.83

Guinness Plcs net cash conversion cycle is less than 30 days butsignificantly slower than the impressive record of NB Plc. Total asset

turnover has improved with increased profitability though we

expect a dip in 2010FY.

Working Capital/Activity Ratios 2006 2007 2008 2009 2010f

Days of sales outstanding 15.93 29.00 39.52 35.66 31.18

Number of days payables 153.12 153.30 167.92 126.92 112.65

Days of inventory outstanding 175.09 137.12 131.14 116.60 104.40

Net cash conversion cycle (days) 37.90 12.82 2.73 25.34 22.92Total asset turnover (x) 0.90 0.87 0.93 1.21 1.40

Return on Average Assets 14% 16% 16% 18% 16%


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Financing and Capital StructureEquity heavy capital structure

Much like her close peer, Guinness Nigeria plc operation has beenfinanced largely by equity capital. On our estimate, the companys

capital structure is made up of 95% equity on market value basis. Inour view, financing might not be an issue for Guinness given her

internal cash flow generating ability (though this is weakening in

recent time) and the likely support accruable from the ultimate

holding company, Diageo Plc.

Debt ratios 2006 2007 2008 2009 2010f

Interest coverage 7.88 9.24 36.18 9.77 8.04

Financial leverage 2.80 2.50 2.14 2.17 2.30

Total debt to equity 0.41 0.27 0.10 0.22 0.32

Capital structure (N'billion) 2006 2007 2008 2009 2010fTotal debt 8.50 8.50 3.71 6.90 10.70

Market value of Equity 127.43 187.32 182.89 190.27 224.19

Total Capital 135.93 195.82 186.60 197.16 234.89

Split:

Equity (%) 93.7% 95.7% 98.0% 96.5% 95.4%

Debt (%) 6.3% 4.3% 2.0% 3.5% 4.6%

100% 100% 100% 100% 100%


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Appendix

Contact Information

Brokerage [email protected] (+234 803 353 7703)

Investment Banking/Corporate Finance [email protected] (+234 805 056 9557)

Wealth [email protected] (+234 803 301 3331)

www.meristemwealth.com

Tel: +234 01 738 9948

Fax: +234 01 269 0118

[email protected] (+234 803 324 7996)

www.meristemregistrars.com

Tel: +234 01 892 0491 2

Fax: +234 01 270 2361

Client [email protected] (+234 803 613 9123)

[email protected] (+234 802 326 4685)

Investment [email protected] (+234 802 454 6575)

[email protected] (+234 805 162 6281)

[email protected]

Tel: +234 01 271 7350 - 5

Fax: +234 01 269 0118, 271 7356

Corporate websites: www.meristemng.com www.meristemwealth.com www.meristemregistrars.com


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As at the date of this report, any ratings, forecasts, estimates, opinions or views herein constitute a judgment, and are not

connected to research analysts compensations. In the case of non-currency of the date of this report, the views and contents

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Investment Ratings

Copyright 2010 Meristem Securities Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or

redistributed without the written consent of Meristem Securities Limited.124, Norman Williams Street, South West, Ikoyi, Lagos,Nigeria Email: [email protected], website: www.meristemng.com

Intrinsic Value EstimateWe estimate stocks fair value by computing a weighted average of projected prices derived from intrinsic and relative valuation

methodologies. The choice of relative valuation methodology (ies) usually depends on the firms peculiar business model and what

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However, we attach the most weight to discounted cash flow valuation methodology.

Ratings Specification

OVERWEIGHT (BUY): Fair value of the stock is above the current market price by at least 20 percent

NEUTRAL (HOLD): Fair value of the stock ranges between -20 percent and +20percent from the current market price.

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MERISTEM Breweries Sector Update 10 June 2010

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Transcript of MERISTEM Breweries Sector Update 10 June 2010