brewers on the rise
TRANSCRIPT
0 Executive Summary
� Validation. Recent events have clearly validated our earlier expressed and continued optimism in the Brewery Sector. In our ‘Chronicles of 2008’ as well as our subsequent ‘Securing the Future’ and ‘Revived Spirits’ reports published in December 2008, February 2009 and August 2009 respectively, we expressed our confidence in Nigerian Brewers and their ability to move against the market’s then bearish trend. Our
views have been proven right as the Brewery Sector has continued to reveal significant divergence against the broader market.
� Flight to Safety: Manufacturing Companies Hold the Ace. In the face of sustained uncertainty surrounding stocks in the Financial Service Sectors due to the current Banking Sector reforms, investors have shown a preference for shares in companies producing consumer goods as in the Breweries, Food and Beverage and Conglomerate Subsectors. This level of investor’s predeliction continues to portray a positive prognosis for capital appreciation for investors in the Brewery Sector.
� Increased Multinational Presence. We had earlier opined in our outlook for 2009, that the Nigerian Brewery Sector would experience
increased multinational presence on the back of the potentials of the Nigerian market. Beer Consumption per capita in Nigeria is currently quite low relative to other African countries and around the world. This opinion has held true as multinational brewers have been increasing their activities justifying the growth potentials of the market.
� Expansion, Innovation & Restructuring. The view amongst Industry operators is that industry capacity is inadequate to meet market potential demand. Consequently, the two market leaders have been expanding capacity as a first line strategy considering their market
dominance to fight threats from new entrants. Focus is also on operational efficiency and innovation to ensure lower cost of production and a deeper market penetration
� Threat of New Entrants. The structure of the Nigerian Brewery Industry is a pseudo- duopoly, due to the large number of inactive and moribund companies that exist within the sector. Most of the key activities within the industry are attributable to the market leaders, NB and Guinness. However, in recent times, we have witnessed a resurrection of these erstwhile moribund companies, with many of them
enjoying interests and financial injections, from new multinational entrants. Does this mark the onset of a paradigm shift?
� Our Optimism Remains. While we are conservative with our forecasts, analysis, and expectations, we remain largely optimistic; that despite the infrastructure challenges, as well as the erosion of disposable incomes faced by Nigerian consumers, the cultural and habitual premise of consumption in the brewery Industry as well as the observed bottom heavy and growing demographics will mitigate against these challenges to revenue and earnings growth. We remain
overweight in the Nigerian Brewery Sector.
Industry FMCG Sector Breweries
Vetiva Equity Research Oluwakemi Owonubi Head, Research Division Gbadebo Bammeke Senior Analyst Adedoyin Adelakun Analyst
Eloho Onwah Analyst Adesoji Solanke Analyst Uduakobong Equere Analyst Oluwaseun Oyegunle Analyst Vetiva Capital Management Limited 266B Kofo Abayomi Street Victoria Island, Lagos Tel: +234-1-46175213 Fax: +234-1-4617524 Email: [email protected]
Brewers on the Rise…
24 September 2009
September 2009
29 September 2009
2
TABLE OF CONTENTS
AFRICA IN PERSPECTIVE ...........................................................................................................3
THE NIGERIAN BREWERY SECTOR IN VIEW .................................................................................7
UNVELING OF NEW PLAYERS ................................................................................................... 18
RESURRECTION OF UNLISTED PLAYERS .................................................................................... 21
MEET THE FRINGE PLAYERS .................................................................................................... 24
PRESENT TRENDS AMONGST KEY PLAYERS ............................................................................... 25
THE EVOLUTION OF THE BREWERY SECTOR .............................................................................. 11
MARKET UPDATE - BREWERS SHOW RESILIENCE ....................................................................... 29
LEADING THE PACK - NIGERIAN BREWERIES PLC ...................................................................... 30
HOLDING FORT: GUINNESS NIGERIA PLC ................................................................................. 37
SUMMARY ............................................................................................................................. 42
3
AFRICA IN PERSPECTIVE In recent times, Africa has been looked upon severally as an investment haven with limitless potentials, thus qualifying as a prime investment
destination. Key drivers are strong consumption and bottom heavy demographics, urbanisation and industrialisation, growing levels of disposable income, stable leadership (with democracy gaining hold in most of its countries), strong economic growth (as against declines in the developed nations) and low penetration levels. Besides these, are the opportunities created by mono-product economies such as Nigeria
seeking to re-strategise and diversify their GDP profiles. This theme has inspired increasing levels of Foreign Direct Investment (FDI) in recent times into emerging market nations and Africa at large. As potent as the argument is, the African Brewery industry highlights the case more succinctly and transparently than many other investment options. This highlights the Brewery Sector as an imperative investment
class for insightful investors in Africa and likewise Nigeria and this report will attempt to highlight the basis for our unbridled optimism. Although this report discusses the Brewery Industry in Nigeria, we also attempt to draw parallels and otherwise between the Nigerian market and other African Brewery markets. Whilst we are not in doubt as to the striking effect the global credit crunch will have on consumption across
the world, especially in more developed economies, we believe African consumption is likely to go against the trend. This is largely premised on the obvious dearth of credit in Africa, and where available, its limited availability, thus restraining growth significantly to the self sustaining and self financing abilities of
Companies. Thus most growth in African economies is self funded rather than credit financed and this has to a large extent inhibited the growth of local brewers across Africa. This perhaps accounts for the significant stake of multinational parent brewers in Africa’s largest breweries. SAB Miller leads the pack, with controlling stakes in 4 African brewers, Diageo and Castel in 2 each and the O&L Group owning controlling stakes in 1. This breakdown perhaps also explains the aggression by SABMiller to
commence operations in Nigeria, a country largely regarded as a highly profitable African brewery market.
Brewer Country Parent Company
Delta Corporation Zimbabwe SABMiller
East African Breweries Limited Kenya Diageo
Namibia Breweries Limited Namibia O&L Group
Nigerian Breweries Nigeria Heineken
Sechaba Breweries Botswana SABMiller
National Breweries Zambia SABMiller
Societe des brassieries du Maroc Morocco Castel
Solibra Cote d'Ivoire Castel
Zambian Breweries Limited Zambia SABMiller
4
African Brewers: Investment Highlights
Large Upside Potential Exists
Consumption per capita in Africa is anywhere but near saturation, as with the exception of South Africa, Namibia and Botswana, consumption levels remain at very dismal levels. Considering the data presented below, this translates to an average per capita consumption of 10.4 litres per person for Africa. In comparison with that of more developed countries reveals significant upside potential, sometimes exceeding 8 multiples. Note that
we have excluded South Africa, Botswana and Namibia from this analysis, as they have estimated per capita consumption levels of above 90 litres pp.
44.1
119.7
119.2
91.0
18.3
12.7
12.4
10.4
8.9
4.0
Zambia
Nigeria
Kenya
Zimbabwe
South Africa
Cote D’Ivoire
Morocco
AFRICAN BREWERS: CONSUMPTION PER CAPITA(Litres Per Person)
Botswana
Namibia
Average
Source: Bloomberg, Imara Research, Vetiva Estimates
Company Delta EABL Guinness NamBrew NB NatBrew SABMiller Sechaba SBM Solibra Zambrew
Country Zimbabwe Kenya Nigeria Namibia Nigeria Zambia
South
Africa Botswana Morocco
Cote
D'Ivoire Zambia
Parent SABMiller Diageo Diageo O&L Group Heineken SABMiller SABMiller SABMiller Castel Castel SABMiller
Population(mn) 12.00 37.00 144.00 2.10 144.00 11.70 47.60 2.00 30.9 20.60 11.70
Capacity (mhl) 7.00 5.80 4.70 3.00 9.00 1.50 45.00 2.50 1.10 2.00 1.30
Production(mhl) 2.20 4.70 3.76 2.50 8.50 1.50 43.20 2.40 1.10 1.80 1.00Per Capita
capacity (litres) 58.33 15.68 2.78 142.86 6.94 12.82 94.54 125.00 3.56 9.71 11.11Per Capita
consumption 18.30 12.70 2.70 119.70 6.90 12.40 91.00 119.20 4.00 8.90 8.60
Market Cap (US$) 157 1,145 1,357 123 3,015 50 22,875 248 682 387 85Per Capita GDP
(US$) 203 1,477 1,703 3,725 1,703 1,305 6,311 6,940 6,433 1,153 1,305Capacity
Utilisation(%) 31% 81% 99% 83% 94% 97% 96% 100% 92% 92% 80%
Market Cap/hl ($) 22 197 289 41 335 33 508 99 620 194 65Mkt
Cap/Hectolitre 3.20 34.04 61.43 13.67 37.22 22.22 11.30 39.68 563.64 96.75 50.30
Sales Growth (%) 30.70 11.10 27.30 29.50 29.60 5.10 15.00 19.30 5.90 12.70 7.60
EBITDA Margin 10.00 19.80 29.00 16.40 29.40 20.90 19.40 26.20 50.00 22.40 25.30
Source:Bloomberg, CIA factbook, Vetiva forecasts and estimates
5
Per Capita Capacity Levels Lower than international averages The ten foremost Brewers in Africa are estimated to produce about 45m hectolitres annually. With an assumption that they currently produce at 90% capacity, this would put Africa’s total production capacity at 50
million hectolitres per annum. With the African population estimated at 1 billion, this translates to a per capita capacity of 5 litres per person. Further accounting for a significant Muslim (and mostly alcohol averse), population, inspires a per capita alcohol consumption of 10 litres per person for the continent. This is much lower relative to international per capita capacity averages and indicates growth potential. This is especially in the light of currently bottom heavy demographics which are beginning
to come of age and translate into increased demand, mounting pressure on previously low capacity levels. Income vs. Alcohol Consumption
A clear relationship exists between income levels and alcohol consumption as is exemplified by the chart below. Accounting for the skew in Morocco (by reason of a significantly higher Muslim population) as well as Namibia (a large proportion of sales is exported); one sees a patent relationship as consumption levels are largely premised on per
capita income levels.
0
2
4
6
8
10
12
NB Delta EABL Guinness Nambrew Natbrew Sechaba SBM Solibra Zambrew
Capacity Production
AFRICAN BREWERIESCapacity/Production (Millions of Hectolitres)
Source: Bloomberg, Imara Research, Vetiva Estimates
6
Value Beckons! A comparison of the brewers across Africa in terms of market
capitalisation per hectolitre produced reveals a largely unexplored and undervalued market in certain countries. African brewers have continued to record double digit growth in sales and increased volumes, especially in Kenya and Nigeria. Despite slowing sales growth and sometimes decline in developed countries across the world, African brewers have continued to record growth in turnover, many times in strong double digits. This is representative of an industry that is largely in the rapid
growth stage and holds potential for much more growth especially in the light of currently low penetration levels.
30.7%
11.1%
27.3%
29.5%
5.1%
15.0%
19.3%
5.9%
12.7%
7.6%
EABL Guinness NamBrew NB Natbrew SABMiller Sechaba SBM Solibra ZamBrew
Sales Growth
AFRICAN BREWERIES FY’08 SALES GROWTH(%)
Source: Company Financials, Imara Research
-
20
40
60
80
100
120
140
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Zimbabwe Kenya Nigeria Namibia Zambia South
Africa
Botswana Morocco Cote
D'Ivoire
Zambia
Per Capita Income
Per Capita Consumption
PER CAPITA INCOME VS. PER CAPITA CONSUMPTION
Source:CIA Factbook, Bloomberg, Imara Research, Vetiva Estimates
Pe
r C
ap
ita
In
co
me
(U
S$
) Co
nsu
mp
tion
in L
itres
7
Sales growth across Africa in 2008 has remained largely robust. However, considering the current Valuation per hectolitre, Delta Breweries is clearly the cheapest at $22 per HL while NB and Guinness lie somewhat in between at $335 and $339 per hectolitre, cheaper than SAB Miller and SBM of Morocco at c. $600/hl. This highlights again the attractiveness of the Sub Saharan brewery market.
COMPARISON BETWEEN KENYAN AND NIGERIAN BREWERY MARKETS
Certain parallels lie between the Nigerian and Kenyan markets, and we have identified some of these parallels herewith (using East African Breweries Limited (EABL) as a proxy for the Kenyan market), and market leaders, Nigerian Breweries and Guinness for the Nigerian market.
� Both have played host to an emerging middle class and a rapid growth in consumption volume growth, large Diaspora inflows,
industrialisation, financial reform and deregulation and infrastructure rehabilitation and expansion.
� EABL has majority foreign shareholding, held by the Diageo Group, which again presents a similarity with the Nigerian market majors, Guinness, Nigerian Breweries and Consolidated Breweries.
� Similar to the Nigerian market, EABL also has backward integration policies in place with over 400 contracted farmers, especially on account of the attractiveness of the East African region for barley cultivation. In this regard, production trials have commenced in Nebbi, Northern Uganda. The Company which has a Malting subsidiary, East African Malting Limited (EAML) has a malted barley
plant and succeeded in producing 33,000 tons of malt in 2008, a 13% increase relative to the previous year’s output. Although this does not fully meet the brewing requirements of the Company, production volumes are on the increase and this has enabled the Company hedge against escalating imported barley prices.
-
100
200
300
400
500
600
700
0
5
10
15
20
25
30
35
Mkt Cap/HL Sales Growth
VALUATION PER HL VS VOLUME GROWTH (US$/Litre)
Source: Bloomberg, Imara Research, Vetiva Estimates
Ma
rke
t Ca
p/h
l (US
$)
Sa
les G
row
th 2
00
8 (
%)
8
� Same as with the Nigerian market, energy costs were a serious
challenge for EABL, driven mainly by Heavy Fuel Oil (HFO) price increases.
� EABL also has nil gearing with a strong dividend policy, same as the
top 3 players in the Nigerian brewery industry, Guinness, Nigerian Breweries and Consolidated Breweries.
9
THE NIGERIAN BREWERY SECTOR IN VIEW
The Nigerian business climate has proven favourable to the Brewery
industry over the years with the major players reporting increasing patronage and high profit levels year after year. In addition to the re emergence of the once eroded middle class, the Nigerian economy continues to play host to accelerated urbanization and the consequential
modern lifestyle, which has resulted in a shift in demand patterns from the locally brewed products to the more modern bottled products. This has resulted in a steady and sustained decline in the demand for traditional beers, generating a steady demand for the modern and easily accessible beers.
The Nigerian Brewery Industry is a highly active sector, severally ascribed to as a ‘pseudo duopoly’) on account of the significant size and influence of the two leaders (Nigerian Breweries and Guinness) in the Industry relative to several other much smaller fringe players. Players in the sector
are engaged in the brewing, bottling, sales and distribution of alcoholic and non alcoholic beverages such as stout, beers and malt drinks amongst others and in some cases, soft drinks.
There are seven listed Companies in the highly concentrated Sector with the leaders, controlling circa 85% of the Sector’s production volumes. However, there also exist several unlisted brewers operating in Nigeria such as Consolidated Breweries and Sona Breweries amongst others resulting in about 11 brewers in all. Of the listed players, besides NB, Guinness and International Breweries, the other brewers have failed to
regularly publish performance scorecards and have lagged behind their peers in this regard.
The Brewing process is highly technical and hugely capital intensive, and has benefitted from significant foreign direct investment inflows in recent times. This has to a large extent ensured that the volumes and thus market share has remained with the most technologically advanced manufacturers with cutting edge technology and up to date expertise. Growth in the sector is also largely skewed to marketing and branding
prowess, thus, success in the industry is highly predicated on marketing ability, the strength of the distribution network and extensive advertising expenditure. Brand loyalty is another key factor, requiring significant periods of time to develop and as it appears, even longer time periods to betray previously established brand loyalties. Owing to the highly asset intensive with heavy economies of scale alongside the aforementioned, new entrants and small firms oftentimes find themselves highly disadvantaged.
The growth of the sector over the years has been strong, predicated on
improving economic conditions, growing disposable income, improved product quality and the marketing activities of manufacturers. Alcohol consumption is considered a social activity in Nigeria with every festive/social activity taken as an opportunity to indulge in extensive consumption. Besides this is the general perception that Nigerians are happy people, as well as the cultural tendency of Nigerians to throw parties for several reasons. (A recent survey of over 65 countries
published in the UK’s New Scientist Magazine suggests that Nigeria has the highest percentage of happy people, followed by Mexico and Venezuela).
Source: Vetiva Research
BREAKDOWN OF BREWERIES SECTOR BY MARKET CAPITALIZATION
Others
Jos Intl. Breweries– 0.42%
Champion Breweries– 0.51%
Golden Guinea- 0.03%
Premier Breweries- 0.02%
NB –65.72%
Guinness – 32.25%
Intl. Breweries– 1.05%
Others-0.98%
Breweries
Last
Released
Result
As at August
31, 2009
Champion
Breweries Plc FY'07 One year
Golden Guinea
Breweries
Not
released
since 2005 Three years
Guinness
Nigeria Plc Q3'09 Nil
International
Breweries Plc Q1'08 Three months
Jos
International
Breweries FY'07 One year
Nigerian
Breweries Q2'09 Nil
Premier
Breweries FY'08 Three months
Source:Vetiva Research
10
Worthy of note is the defensive nature of the Brewery Industry’s products viz its ability to grow sales volumes despite over riding economic considerations. The resilient and largely inelastic demand profile of the Sector’s products inspires volume growth irrespective of the economic
climate. The perception is that in times of depression, consumers drink to drown their fears and anxieties and in times of excitement, they also drink to express their joy. We note that consumption is directly linked to individual lifestyles and so, though volume consumed may be dependent on economic fortunes, the industry continuously plays host to new entrants as well, (new consumers) whose demand compensates for the marginal loss in sales volumes occasioned by declining disposable
income. This has also translated into increased revenue for the Brewery Industry, especially in the light of the recent economic challenges facing Nigerians. New brands, we believe with an understanding and appreciation of the opportunities inherent within the Nigerian market, have made their entrance into the Nigerian Brewery Market and it is our expectation that they would continue to intensify competition and result in increased sensitivity marketing activities from companies, which will
also fuel growth.
As shown by the scorecards of major players in recent times, (mostly in the past two/ three financial years), the Sector has continued to witness strong growth especially in the alcoholic products markets. We premise
this growth on the significant improvements in macroeconomic indices which have precipitated a renewed demand for alcohol and non alcoholic volumes, thus positively impacting sales volumes within the industry. Improved quality of products and the ability of the leading companies to react innovatively to consumer needs has enabled them stay ahead of competition. Also contributing are the highly flexible and far reaching
distribution networks which have ensured that the market leaders continue to hold sway.
11
THE EVOLUTION OF THE BREWERY SECTOR We have adduced the changing face of the Nigerian Breweries Sector to various factors referenced below:
� First is the increasing population & bottom heavy
demographics, Nigeria has been estimated severally to have a
population growth of 3.0 percent and we opine that consumption
volumes will continue to grow as new consumers continue to make
their entrance into Industry. This has necessitated the Brewers to
continually seek measures by which to expand and increase
production and match demand with supply. Youth under the age of
15 represents 45% of Nigerian’s population and a potential market
for the brewery sector. We believe that the increasing population
promises a steady pipeline of consumers for the Sector’s products
and necessitates growth levels, at least commensurate with that of
the population, at the barest minimum.
� Second is increasing international pressure. We opine that the
significant incursions of global players such as Castel of France and
SABMiller who have a presence in the African breweries market into
the Nigerian space have somewhat threatened and awakened
incumbent players from their previous inactivity. Although they
appear unfazed at present, we recognise significant capacity
additions and attempts to consolidate market presence by the
major players.
� Third is the identified Nigerian market. The Nigerian market for
Brewery products has proven largely defensive and resilient to
economic challenges. This is further buttressed by the very social
and festive nature of a significant portion of the Nigerian populace,
many of whom seek solace for the many economic and social
challenges in alcohol. Although this cultural effect cannot be
overemphasized, we believe it helps explicate some of the
uniqueness and divergences in the demand patterns of the Nigerian
market, relative to other foreign markets where demand is mostly
premised on earnings and thus has been on the decline. Thus the
failure of the recent economic slowdown to significantly impact the
sector’s demand has again reiterated the uniqueness of emerging
markets such as Nigeria’s and awakened investor interest once
again in the industry.
We retain our optimism in the Brewery Sector premised on the observed proactivity of key players within the market, and our belief in their ability to return strong earnings as clear cut opportunities still exist in the Nigerian market despite the steady incursion of foreign brewers. Increasing health awareness, education and rural-urban migration, we opine has reduced the demand for locally brewed beers and created an
additional market for premium brewed beers such as the leading breweries currently have the capacity to brew and distribute.
45%
27%
41%
32%
28%
20%
19%
18%
16%
13%
Nigeria
Asia
Africa
India
World
USA
China
U.K
E.U
Japan
POPULATION DISTRIBUTION%<15 YEARS
Source: World Population Data Sheet 2008
12
INVESTMENT HIGHLIGHTS
Strong Turnover and Earnings Growth
The Brewery Sector has rewarded investors with robust growth rates, commendable especially when viewed relative to the broad performance of companies in the real sector. Most of these companies have recorded falling margins and profitability under the weight of infrastructural deficiencies and increased operating expenses. Turnover and Earnings for
NB and Guinness have grown at a combined CAGR of 18% respectively over the past 5 years. This is further evidenced by post FY’08 scorecards which have continued to show remarkable growth in both top and bottom lines.
Consistent Dividend Payout The Brewery Sector has consistently rewarded its investors over the years
with attractive dividend payouts. NB has consistently, in the past two financial years, fully paid out its earnings to investors as dividend while Guinness paid out a total of N12.80 as dividend (comprising N6.00 ordinary and N6.80 special) for the most recent financial year (FY’08). These dividend payments represent 100% and 75% payout ratios respectively. Both Company earnings have grown consistently and potentials remain strong. Consolidated Breweries (an unlisted player)
recently paid out N7.65 as dividends for the 2008 financial year. In our opinion, the liberal dividend policy is certain, to continue as the multinational nature of their ownership ensures that dividends are repatriated to serve the interest of the parent companies. All the aforementioned companies have significant foreign stakes. However, we note that this may be slightly challenged as firms resort largely to internally generated cash flows in the face of tightening credit lines.
45,000
60,000
75,000
90,000
105,000
120,000
135,000
150,000
165,000
180,000
2004A 2005A 2006A 2007A 2008A 2009F
BREWERIES SECTOR TURNOVER
N(millions)
NB GUINNESS
Avg. 5 yr
Turnover
CAGR
18%
Breweries
Parent
Company
Foreign
Stake
Consolidated
Breweries Heineken N.V 50.50%
Guinness
Nigeria Plc Diageo 46.03%
Nigerian
Breweries Heineken N.V 54.10%
Source:Vetiva Research
13
Unsaturated Market The market for alcoholic and non alcoholic beverages in Nigeria is
relatively unsaturated and holds some potential for the discerning producer. The African region is credited with an average per capita beer consumption of 6 litres, lowest of all regions, with the exception of the Middle East (which is significantly low owing to its Islamic leaning). It is our opinion that in the near term, there exists significant headroom for growth in sales volumes and profit margins. This is further reiterated by Nigeria’s demographics which lend credence to our earlier optimism.
Nigeria’s per capita beer consumption stands at approximately 10 litres pp in 2008 and we anticipate a further growth in consumption to about 13.5 litres by 2012 and even higher post 2012 as the Industry grows nearer to its maturity stage. Relative to other African and emerging economies, the Nigerian market remains largely unsaturated.
44.1
119.7
119.2
91.0
18.3
12.7
12.4
10.4
8.9
4.0
Zambia
Nigeria
Kenya
Zimbabwe
South Africa
Cote D’Ivoire
Morocco
AFRICAN BREWERS: CONSUMPTION PER CAPITA(Litres Per Person)
Botswana
Namibia
Average
Source: Bloomberg, Imara Research, Vetiva Estimates
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
2003 2004 2005 2006 2007 2008
EPS DPS
NIGERIAN BREWERIES PLCEPS VERSUS DPS (N)
Source: Company Financials
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
2003 2004 2005 2006 2007 2008
EPS DPS
GUINNESS NIGERIA PLCEPS VERSUS DPS (N)
Source: Company Financials
14
Qualitative factors Our optimism will not be well justified if it lies bereft of an analysis of the quality of management and business model employed by the Industry’s
market leaders, which has to no small degree influenced our optimism. Both companies which have over the years enjoyed and continue to enjoy a good management, favourable track record, key technical partnerships and adequate corporate governance structures in place, remain the sector’s largest and profitable players. Swot Analysis Of Nigerian Brewery Sector
INTERNAL
EXTERNAL
NEGATIVEPOSITIVE
� Bottom heavy demographics� Growing Industrialisation;
� Culture driven consumption;
� Strengthening and increasingoil prices
� Strong relationship of bigbrewers with parent companiesinspiring technical expertise;
� Strong brand essence of keyplayers products
� Improved Macro-Economicindices
� Backward Integration utilisinglocal sorghum grains
� Poor infrastructuraldevelopment
� Declining purchasing power� Increasing inflation
� Increasing presence of foreignplayers to spur capacityexpansion in the Sector;
� Low alcohol penetrationrelative to other Africancountries and emergingeconomies around the world:
� Resurging nightlife in majorcities
� Niger Delta unrest andmilitancy impacting oilproduction volumes and FGrevenue;
� Banking reforms likely toimpact credit and short termfunding
� Volatile foreign exchange rates
� Increasing commodity and rawmaterial prices
� Poor power supply andexorbitant costs of alternativepower supply
15
BACKWARD INTEGRATION TAKES CENTRE STAGE In the early 1980’s, the brewery industry alone was credited with the
importation of grains worth about 140 million Naira. At the time, the grains were being sourced from several European Union countries. However, in a bid to stimulate the growth of the local industry, the Nigerian Government in 1988, banned the importation of several grains such as barley and wheat, compelling Nigerian brewers to look inwards and modify their value chains to incorporate substitute raw materials in their brewing process.
Sorghum had been hitherto cultivated as a subsistent crop, produced mostly by small famers and consumed as a food alternative in northern Nigeria. However, in 1984, the Government announced its intention to impose the policy of backward integration in which agro industries such as breweries would be required to source their raw materials within the Country. They were also required to establish farms as a prerequisite for
import licence allocations from the Government. With the anticipated ban of barley and maize imports by 1988, brewers had to seek a viable alternative and sorghum was discovered to have good malting qualities. The crop experienced a sudden change in status becoming an industrial raw material for Nigerian brewers.
Resulting from its erstwhile limited use, sorghum production still remained in the hands of small, uneducated farmers scattered across different parts of the country. The existing breweries were compelled to compete for this limited commodity and smaller brewers either folded up or were acquired and absorbed by bigger and stronger breweries. This precipitated an over fifty percent reduction in the number of brewers in Nigeria over time from 34 in 1984 to 16 in 2002. Clearly, both industry
leaders, Nigerian Breweries Plc and Guinness Nigeria Plc survived this blitz in the Nigerian business terrain. NB currently has sorghum farms and has engaged farmers from whom it off takes sorghum for its several brewing plants spread across the country. Guinness on the other hand, utilizes malted barley, sorghum, rice, maize and hops as raw materials for its brewing process. Like NB,
the company sources most of its raw materials locally by developing local sorghum seeds for farmer groups and locating appropriate farm marketing channels.
16
SECTOR CHALLENGES
The Nigerian Real Sector is currently beset with multi faceted challenges, a ripple effect of the present economic malaise the Nigerian economy (of which the real sector is a subset) presently contends with. We have previously been faced with the reality of declining earnings quality from the stables of several manufacturers, and no assurance that this will not
continue in the near term, in the face of prevailing economic challenges. Although, the defensiveness of the Sector relative to the economy, has been brought to the fore in recent times by the commendable performance of some players within the sector, we highlight that the core challenges remain, reiterating our erstwhile cautious optimism.
Exchange Rates:
The final months of 2008 witnessed a severe unexpected erosion of the Naira, howbeit, with the onset of the Retail Dutch Auction system, previously put in place by the Central Bank of Nigeria (CBN); exchange rates eventually regained some level of stability. This stability was however somewhat threatened by a return to the pre-existing Wholesale Dutch Auction System by the new Governor of the CBN, following which
we have witnessed a continued depreciation in the Naira. The vulnerability of manufacturing companies earnings to exchange rates movements cannot be over emphasised as many of their raw material inputs as well as production costs are directly impacted by the exchange rate volatility. The brewers for instance have to manage the exchange rate volatility, expected to reflect in the costs of raw materials such as barley and hops.
110
120
130
140
150
160
Dec-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09
Exchange Rate
EXCHANGE RATE MOVEMENT(USD VS NAIRA)
Source: www.oanda.com
17
Drilling down to the Brewery Sector, although market leaders, Guinness and Nigerian Breweries appear to have successfully mitigated against a significant portion of the exchange rate risk by their backward integration arrangements, smaller players, we opine may remain relatively exposed,
as they still import and depend largely on barley as a mainstay of production. Consequently, except they opt to utilise local sources of starch for the fermentation and brewery process at the risk of a lower quality produce, they may still suffer the risks of some exposure. However, considering that the quality of final produce depends largely on the nature of starch utilised, and further considering the limited sources of sorghum and the ability of the big players to effectively cultivate and
demand for the same, it is highly uncertain that the fringe players, in competition with the Big players will find adequate quantities of sorghum to meet present demand. High Operational Costs:
Power generation in Nigeria remains a significant challenge to the operations of the brewers in Nigeria. Nigerian Breweries recently disclosed that c.7% of turnover was expended on alternative power generation in FY’08, significantly increasing the Company’s operating costs, and reducing profitability. Guinness also faced the power generation challenge and is currently deploying gas powered generating
plants at its Benin and Lagos plants. Besides power, other operational challenges include the dearth of good road networks and distribution infrastructure, exorbitant increases in the prices of grains and distribution costs on the back of spiking diesel prices. These pose significant threats and continue to challenge the operational efficiency of the real sector and brewers in Nigeria. Besides this, CET Power Projects Limited recently received a licence from the Nigerian Electricity Regulatory Commission
(NERC) for a 5MW off grid independent power plant for the Nigerian Breweries plant in Iganmu, Lagos. We hope this will bring some respite to the currently exorbitant power costs of Nigerian Breweries and improve profitability. Religious Faith And Healthy Consumption
Although, the sector has witnessed continued growth in sales volumes, individual faith and lifestyle restrictions advocated by some religions against alcohol consumption has served to somewhat limit the growth of the sector’s volumes. In the Southern and Eastern parts of Nigeria which are largely Christian, as well as the Northern region which is largely Muslim (some of the Northern States have adopted the Sharia Islamic
code which frowns strongly at alcoholic consumption), religious faith is growing and with this growth, to some extent, a declining consumption of alcohol is being experienced. With increasing proportions of the populace seeking solace in various religions, typical consumption levels are likely to be negatively impacted. Another challenge is the increasing desire for healthy foods and drinks by some individuals. This, we opine, may continue to limit the consumption of alcoholic products as several health
campaigns advocate for reduced alcohol intake.
18
Increasing Raw Material Input Costs Although, we readily admit the success of backward integration in the Brewery Sector, we also note brewers’ continued exposure to raw
materials such as barley and hops for the flavour of its brewed products, although the raw material remains largely sorghum based. We had in earlier reports, noted the spike in commodity (barley) prices alongside crude oil prices, one for which we had highlighted the ability of sorghum to substitute for barley, and disclosed the existing backward integration strategy as a mitigating factor. The decline in oil prices ensured a commensurate decline in commodity prices such as barley, as barley
prices depreciated over 50% between July and December 2008. This resulted in a decrease in input costs for the brewers, and was reflected in improved operating margins. However, between April and July 2009, barley costs have recorded an increase of 26.06%, thus necessitating our concern as to the sector’s exposure to raw material input prices.
UNVELING OF NEW PLAYERS In our recent breweries report, ’Securing the Future’ dated February, 2009 , we opined that significant expansions’ and capital expenditures in the Breweries sector were not likely in the near term. We premised this assumption on the fact that the various players had recently engaged in significant expansion and that the present capacity was adequate for the
market at its present state, further assuming stability at prevailing growth rates. However, we are faced with a Breweries Sector that appears to be presenting a new face and challenging the status quo which we had earlier assumed. As we had earlier posited, some of the market share
currently accruing to the market leaders may be under threat in the near term as several multinational brewers are currently making steady incursions into the Nigerian market. Some of them are joining forces with already established fringe brewery players, in a bid to ease what would otherwise be a very difficult entry into an already established Nigerian market.
Highlights of new Brewery entrants, as well as planned entry strategies are presented below: SAB MILLER SAB Miller is a multinational brewer formed by the acquisition of Miller Breweries by South African Breweries in 2002. The Company which is one
of the world’s largest breweries has several investments across the world, with operations in six continents. The Company which controls a large portion of the African market finally commenced operations in Nigeria, after months of speculations and rumours in the industry about its eventual entry. The Company is a strong player in the African breweries market with a presence in Angola, Botswana, Ghana, Lesotho, Malawi,
Mozambique, Swaziland, Tanzania, Uganda and Zambia. The Company holds controlling stakes in 4 of Africa’s 10 largest brewers (representing a strong presence in Africa’s fastest growing markets). Perhaps this explains why the company has been seeking an inroad into the promising Nigerian market for several years.
100
120
140
160
Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jun-09
Barley
BARLEY PRICES ON THE RISE($ per metric tonne)
Source: www.indexmundi.com
19
Entry Strategy
SABMiller had earlier in the year unveiled its Nigerian entry strategy and has since made its debut into the Nigerian market. According to the
Company’s Management, it will not be making a frontal attack on the Lagos1 market, which is one of the country’s largest markets, choosing rather to make a subtle entry from the smaller cities. It further revealed its intention to utilise locally cultivated grains such as maize and cassava as raw materials for the production of cheap beer, to compete with the existing premium beer brands. This strategy has proven successful in previous market entry attempts made by the Company, in the East
African markets of Kenya. Low income earners in Nigerians who can hardly afford premium beers have continued to produce local homemade brews ranging from ‘ogogoro’, ‘shepee’ and ‘’burukutu’ amongst others. These brews are unregulated and could be largely unhealthy, creating a potential need for healthy, cheap and affordable beers. This class of consumers, previously
unaccounted for by current market leaders may represent a potential market for SAB Miller’s products.
Acquisition! Acquisition!! Acquisition!!!
In our opinion, the acquisition of existing breweries represents the best entry strategy for potential new entrants into the Nigerian breweries market. The market has historically shown in previous observed new product/company entry attempts, that it is more receptive of an existing
brand/ company (Existing brand loyalty is very strong). Thus, beginning with a regional brewer status may enable SAB Miller establish a presence in the near term, a strategy which the Company has already adduced to, in the recent disclosure of its acquisition, and willingness to further acquire existing regional brewers.
The Company had earlier acquired Pabod Breweries and Standard Breweries to help cushion its landing into the Nigerian market. Sequel to
its acquisition of the aforementioned breweries and further lending credence to its aggressive acquisition strategy, the Company recently acquired 100 percent of La Voltic, a bottled-water manufacturing company based in Lagos. The acquisition is with the intent to transfer the company’s plants to Port Harcourt, open a new production line there and begin manufacturing bottled water by August. The acquired company represents the Nigerian operation of Voltic International, a leading
mineral water producer in Ghana. The Company, (Voltic) has since spread to Nigeria with funding of $4 million from the Aureous West Africa Fund (AWAF). Pabod Breweries, currently has a production capacity of 30,000 hectolitres, with an expansion target to produce about 250,000 hectolitres of alcohol by February 2010. (This represents an eight fold
increase in capacity and production volumes). Since acquiring Pabod, SABMiller has reintroduced many of the company’s older brands, including Grand Lager and Grand Malt (which have some market presence in the Port-Harcourt/South Eastern region), and may roll out more products in the near future.
1 Lagos is Nigeria’s cosmopolitan commercial centre with an estimated
population of 20 million people, who practice a very active social lifestyle.
20
HURDLES TO PROFITABLE ROLL OUT BY NEW PLAYERS
Price Consistency
Industry leaders, NB and Guinness have successfully eliminated
inconsistent base prices and likely arbitrage opportunities across geographical locations within the country, by establishing factories and distribution outlets in the various regional locations across the country, ensuring that distribution costs are minimal, as well as enabling the adoption of a single pricing policy for each product in all geographical regions.
The inability of new players to successfully establish such distribution
outlets and strategically located breweries will hamper their abilities to ensure uniform final costs are borne by consumers and may create unwanted arbitrage opportunities for third party distributors, an act which also does little for brand loyalty. Existing distribution and ‘on sale’ outlets
The ‘on sale’ outlets and strategically branded distribution outlets are put in place by many of the existing players. The outlets assures their
products a sure marketing channel and distributor loyalty. Major players also equip several sales outlets with deep freezers and branded facilities with a salient understanding that such distributors will continue to distribute their products. This ensures a significant presence in all the nooks and crannies, where there are customers, and provides a defined and reliable distribution strategy for the Company’s products.
Packaging
In the event that the new players choose to retain the bottled method of packaging for their products, we foresee significant difficulty as bottle production; design and distribution come with significant costs, which will place them at an additional disadvantage to their already established
competitors. However, to mitigate the aforementioned problems, it is not unlikely that such companies may choose to acquire product canning infrastructure, and can their products for ease of distribution. Another likely fallout of the packaging challenge is that potential consumers and retailers may be unwilling to incur costs to acquire the bottles (empties and crates) which are necessary to facilitate the demand
for the Company’s products. Pabod Breweries (newly acquired by SAB Miller), has already highlighted its inability to compete with the industry leaders in the canned packaging of its products as it cannot immediately afford the cost of setting up of a canning line. This will effectively restrict the Company to sales only through returnable bottles.
21
Location
We note the predominance of brewery factories in the South Eastern part of the country, and partly adduce this to the habits of the residents of
these communities. A close look at the prominence of palm wine in the local culture provides some premise for the deep rooted and habitual consumption of beer and thus the concentration of brewers in the area and the market for their products. Thus, it is our opinion that the choice of location for the new breweries may make or mar their entry and eventual performance in the Nigerian market.
LOCATION OF BREWERY PLANTS IN NIGERIA
International Beer and Beverage
Nigerian Breweries
Benue Breweries
Jos Intl Breweries
Edo Breweries
ChampionBreweries ,
Uyo
Nigerian
Breweries ,
Aba
Consolidated Breweries
,Ijebu Ode Life Breweries Onitsha Nigerian
Breweries ,
Iganmu,
Guinness
Ikeja
Premier Breweries,
Onitsha
GuinnessBreweries
Golden Guinea
Breweries, Aba
Nigerian Breweries
Ibadan
Consolidated
Breweries, Awo
Omamma
Source: NSE, Company Reports
Pabod
Breweries,
Port-Harcourt
Standard
Breweries
Nigerian
Breweries, Ama
International Breweries, Ilesha,
Brewery Plants
22
RESURRECTION OF UNLISTED PLAYERS The Brewery Sector as we know it, up until recently was defined as a ‘pseudo duopoly’, comprising Nigerian Breweries, Guinness and ‘the rest’.
‘The rest’ here was accounted for by the myriad of small brewers, listed and unlisted, with most of the listed players reporting unprofitable scorecards year after year as they bowed consistently under the weight of production costs and other operational challenges. In recent times, however, activities around the unlisted brewers have necessitated a new thinking.
Consolidated Brewers- shaping a niche...
Consolidated Breweries was incorporated in 1980 and is credited as the third largest brewer in Nigeria after NB and Guinness. Consolidated Breweries operates two breweries located in Ijebu Ode, Ogun State and Awo Omamma, Imo State. The Company has remained unshaken by the
market majors, shaping a niche for itself in the low price segment of the beer market. Heineken N.V sequel to an agreement in principle reached with Consolidated Breweries, increased its investment in the latter from 24.00% to a controlling stake of 50.05%. The Company is involved in the brewing of its main brand “33” Export, an alcoholic beverage brewed
under licence and the Hi-Malt brand, a non-alcoholic drink. The Company recently introduced a new product “Turbo King” into the market. The launching was considered highly successful, with the magnitude of its success affirmed as Consolidated Breweries won the award for the best launch in Heineken Africa and Middle-East Region. The
Company posted highly impressive financials for the period ended 31st December 2008, with Turnover and After Tax Profits, standing at N17.5 billion and N3.04 billion respectively, relative to N13.2 billion and N2.2 billion respectively in the previous year. The Company paid out a total dividend of N7.56 per share to its shareholders for the year ended 31st December 2008.
In a bid to further improve its current products mix, the Board recently sought the approval of the Company’s shareholders to acquire 323,349,410 ordinary shares of one naira (N1) each held by CFAO Nigeria Plc in DIL/Maltex Plc. The acquisition of the shares in DIL/Maltex will enable the Company leverage on the brand resilience of Maltex which was the first malt product in the Nigerian market. The acquisition, we opine
will further boost the presence of the Company in the malted products segment in addition to its current malted product, Hi Malt. The Nigerian malted products market currently boasts of over 8 malt brands including Malta Guinness, Maltina and Amstel Malt (NB), Vitamalt, Nasmalt, Maltonic amongst others.
23
Sona Breweries- Redefining Flagging Business
Sona Breweries is a member Company of the Sona Group which is in the business of manufacturing beer, beverages, plastic and glass ware. The
Group practices a strategy of acquiring distressed companies and turning them around by investing modern technology and efficient management. In line with this strategy, the Group has stakes in several other fringe brewers in Nigeria such as � International Beer and Beverage Industries (Nigeria) Limited (IBBI) � Champion Breweries Limited, Uyo
� Life Breweries Company Limited. � Benue Breweries Limited
Together, the above mentioned breweries are responsible for the brewing of several alcoholic and non alcoholic products in the Nigerian Breweries market, some of which are Kronenbourg Beer, Tigre Bock, Champion Lager Beer, and Champ Malta. Renowned brands from the stables of the
parent Company include Maltonic (a malted drink), Sun Top (a line of packaged juices. marketed under a franchise arrangement), Wilfort Dark Ale, a 7.6% alcoholic product which enjoys a monopoly position in the small ale segment of the lager market. However, in the recent past, we have watched the Company emerge from
its previously inactive state, launching two new brands into the Nigerian drinks market. The products are Williams, another dark ale, quite like the previous Wilfort Dark Ale and Malta Gold, in the malted drinks market. We are yet to ascertain if these newly launched products are intended to run simultaneous to previously running Wilfort and Maltonic, but the Company has embarked on several aggressive media campaigns to re-introduce itself into the market.
Whilst, we acknowledge that the two market leaders yet hold a strong grip on the market in terms of volumes, market share and distribution, we opine that should Sona Breweries manage a very successful product launch, it may yet prove successful in the reviving of its product lines and increasing the size of the pie, although we do not see its products posing a threat to the ‘Big Two’ in the near term.
24
MEET THE FRINGE PLAYERS International Breweries:
The Company was incorporated in December 1971 primarily to carry out the business of brewing beer and non-alcoholic malt drinks. Its brewery is sited in Ilesa, Osun State. In a move to rebuild the capital base of the Company and to carry out restructuring, staff right-sizing, improvement and expansion of production facilities, the Company recently successfully
raised N1.3 billion from the Nigerian Capital Market. International Breweries Plc has a subsisting Technical Services Agreement with Brauhaase International Management GmbH (a wholly owned subsidiary of Warsteiner Group of Germany), which owns 60.0% equity in International Breweries Plc. The Company has been the Technical Partner of International Breweries Plc since inception and became the majority shareholder following the conclusion of the company’s public offering in
2007. Some of the company’s products include Trophy Lager Beer and Beta Malt.
Golden Guinea Breweries
Golden Guinea Breweries Plc was incorporated in September 1962 and subsequently listed in 1979. Located in Aba, the Company is engaged in the brewing, bottling and marketing of Golden Guinea lager beer and Eagle Stout, as well as the producing and marketing of Bergedorf premium lager beer and Bergedorf Malta under a franchise from Holsten
Brauerei AG of Hamburg.
Champion Breweries Plc
Champion Breweries Plc was incorporated in July, 1974 and listed in September 1983 for the purpose of brewing and bottling lager and Champ Malta drinks. It is located in Uyo, Akwa Ibom State. Recently, following the banning of the importation of bottled beer and the high importation tariffs, InBev, a global player in the alcoholic drinks market, has started
domestic production of Beck’s in Nigeria in partnership with Champion Breweries. Considering the financial and technical capabilities of InBev, who are global market leaders, Nigerian Breweries and Guinness Nigeria may be in for some competition. The Company also operates under the umbrella of the Sona Group.
Jos International Breweries Plc
Jos International Breweries Plc (JIB) came into existence in 1975 following a tripartite investment agreement signed between the
Government of Plateau State of Nigeria, the Danish firm of A/S Cerekem International Limited and the Industrialization Fund for Development Countries IFU. Jos International Breweries Plc was incorporated and is involved in the brewing of Lager Beer in the brand names of ‘Rock’ and ‘Class’ as well as the production and sale of malted drink in the brand name of ‘Malt Royale’. The Company has indicated its raised funds from the Nigerian Capital Market in 2004 to strengthen its operations but the
company appears to still be largely moribund with its facilities lying fallow and profitability very low.
Premier Breweries Plc
The Company was incorporated in 1976 and subsequently listed on the
floor of the NSE in 1988. It is located in Onitsha in Anambra State and was incorporated for the purpose of brewing alcoholic products.
Recent
Results
Turnover
(N mill)
PBT
(N mill)
FY'08 931.92 63.50
Q3'08 735.60 131.92
Q1'08 238.86 5.73
FY'07 561.67 -118.21
FY'06 313.05 -361.36
INTERNATIONAL BREWERIES
25
PRESENT TRENDS AMONGST KEY PLAYERS
Having itemised the likely changes in the marginal players as well as key opportunities and challenges, this report will be incomplete should we fail to identify some of the other trends in the Breweries industry stewarded
by the industry’s giants. We have noticed organic growth within the Industry, especially from capacity additions and output and sales growth across the breadth of the Industry.
NIGERIAN BREWERIES- VALUE ADDITION THROUGH EXPANSION AND INNOVATION
Following the completion of the multi billion naira Ama factory, with a capacity of 3 million hectolitres per annum and the recent successful amortization of the loan obtained by the Company in this regards, industry pundits expected that it would step back on capital expenditure and looked to its full dividend payout policy as an indication of its
preference to reward its shareholders and reap the dividends of its expansion. As at FY’08, the Company had a combined capacity of roughly 9.0 million hectolitres per annum.This further serves to reiterate the Company’s pride of place as market leader by volumes in the Brewery Industry. However, in a simultaneously proactive and reactive move to stem an
erosion of its current market share, Nigerian Breweries’ has elected to continue its expansion programme, especially showing a strong resilience in view of the pressing entry attempts by many of global foreign players.
•Increased Backward Integration (Sorghum Plantation)
•Commissioning of Sorghum Malting Plant
•Reduced dependence of imported barley
1. Investment in Raw Materials
•New Canning Line for Fayrouz in Ibadan
•Reopening off Aba brewery with new production line
•Commissioning of new brewery line in Kaduna
2. Expansion of Capacity
•Canning of all product lines
•Relaunch of Legend Extra Stout
•Fortification of Maltina with calcium
3. Innovation in Production
•Strengthening of distribution hubs
• Aggressive on site marketing
•Brand Promotional outreaches
4. Marketing and Distribution
5. Increased Sales Volumes
26
Expansion
Nigeria’s top most brewer has shown tremendous resilience in its position as a leader, sustaining an aggressive expansion programme to continually
increase capacity. Following its most recent record sales of 8.5 million hectolitres for the 2008 financial year, the Managing Director had disclosed that brewing capacity was a constraint in terms of volumes for the year. Nigerian Breweries currently boasts of 5 brewing plants up and running, located in Lagos, Ama, Ibadan, Aba and Kaduna. The Company has added on several brewing lines, one for its Fayrouz non-alcoholic line in Ibadan and another in Kaduna, simultaneously installing canning lines
for its various product lines. In this light, we have identified two massive expansion projects undertaken by NB in recent times. Aba Malting Plant
In furtherance of its commitment to its expansion plans, Nigerian
Breweries recently commissioned a malting plant in Aba. The Aba Sorghum Malting Plant which was acquired two years ago was formerly known as the Universal Malting Plant and was incorporated in 2004 to produce and supply high quality malted sorghum for the food and beverage industry. The malting plant is an automated sorghum malting plant with cutting edge technology and is reputed to be the biggest of its kind in Africa and the world. As at December 2008, the Company had
committed about N10 billion to the Aba Malting plant project. The investment has as one of its objectives, to assume the role of an African regional knowledge centre for sorghum research as well as to create sustainable employment through direct engagement in sorghum farming and other activities related to sorghum supply chain
management.
The Malting Process represents the foremost step in the brewing process, which is broken down into Malting, Milling, Mashing, Brewing, Cooling, Fermentation, Maturation (Racking) and Finishing (Filtering and Carbonation). This helps provide some insight into the significance of NB’s multibillion naira investment in the Aba Malting Plant as it provides the basic raw material for the Brewing Process. The malting process refers to
the process of preparing grains for further processing and the commissioning of this plant we reckon, positions NB to increase its market volumes significantly going forward as well as aid the reduction of operating costs.
THE BREWERY PROCESS
Source: Vetiva Research
27
Expansion of Lagos Brewery
Nigerian Breweries is currently expanding the capacity at its Lagos
brewery with an additional line which is billed for commissioning in
September 2009. The proposed expansion is expected to increase the
company’s production capacity by an additional one million hectolitres
(c.13.9 million cartons of Star Beer). It is our expectation that this would
translate into increased revenues when production commences, just in
time for the final quarter of the year. The fourth quarter is traditionally a
festive period, (as shown in the table below) which historically returns the
largest sales volumes in the year. We have approximated additional
revenues from this plant per annum to add up to about N11.26 billion per
annum (at 80% capacity).
Period Turnover PBT
Q4'08 29.63% 30.58%
Q3'08 23.59% 21.06%
Q2'08 24.51% 24.19%
Q1'08 22.27% 24.17%
Q4'07 30.65% 35.58%
Q3'07 22.99% 19.22%
Q2'07 23.52% 21.40%
Q1'07 22.83% 23.80%
Q4'06 28.69% 23.09%
Q3'06 24.61% 16.48%
Q2'06 23.73% 27.94%
Q1'06 22.97% 32.49%
NB QUARTERLY CONTRIBUTION
28
GUINNESS- GROWING VOLUMES; STRENGTHENING PROCESSES
The second largest Guinness market in the world has continued to pursue
organic growth via an expansive strategy, strengthening its existing brand portfolio; increasing price and output simultaneous to an over haul of its operations. As at FY’08, the Company had a combined capacity of roughly 4.0 million hectolitres per annum and remains an undisputed leader in the stout market category. That notwithstanding, the Company is not resting on its
oars, and has recently played host to several initiatives to cushion its market share from potential erosion and maintain its position relative to its peers in other countries around the world.
Expansion
The company previously operated from 3 plants located in Aba (Eastern), Benin (Southern) and Lagos (Western) parts of the country. However, owing to its current overhauling of operations, the Company recently closed down its Malta Guinness plant in Aba, deploying the production to the Lagos and Benin Breweries. The Company has revealed its current expansion attempts at both the Lagos and Benin breweries and it expected that this will yield additional volumes of at least a million
hectolitres. Besides the capacity expansion, extension into the canned segments market is expected to yield further growth.
Structural Re-organization
Guinness has recently been involved in a reorganisation of its processes,
and expectations are that this would continue to yield operating leverage to the firm. Its reorganisation recently involved the offer for sale of its administrative offices in Ikeja and plans are on to relocate the administrative functions elsewhere. The deployment of the Systems Application and Products (SAP) operating system is also fallout of ongoing re-organisation processes. Besides this, arrangements to deploy gas plants at its Benin Brewery have reached an advanced stage and it is
expected that the deployment would yield operating leverage for the company and improve erstwhile impressive margins.
29
MARKET UPDATE - BREWERS SHOW RESILIENCE In recent times, especially in the wake of prevailing uncertainty in the Financial/Banking System, the Brewery Sector has played host to
renewed investor interest in a flight to quality. We had earlier adduced to this flight to quality and the position remains unchanged. This is more evident especially in the heat of the most recent Banking Sector reforms which has precipitated yet another bearish run.
-80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Banking
Breweries
Conglomerates
Insurance
Petroleum
Building Materials
Food and Beverages
SECTORAL RETURNS (YTD)(%)Based on September 24 prices
Source: NSE, Vetiva Research
0.40
0.60
0.80
1.00
1.20
1.40
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09
NSE ALSI
BREWERIES
INSURANCE
BANKING
AGAINST THE TIDE- BREWERIES VS FINANCIAL SERVICES VS NSE ALSI (Rebased 02/01/09)
Divergence of
Brewery Sector from
broader market
Brewery Sector
continues to lead
market as flight to
quality strengthens
Source: NSE, Vetiva Research
30
LEADING THE PACK - NIGERIAN BREWERIES PLC Company History
Nigerian Breweries Plc (“NB”) was incorporated in Nigeria on 16 November 1946 under the name Nigerian Breweries Limited and commenced operations in 1949 at its Lagos brewery with the roll out of the first bottle of Star Lager Beer.
The company is a subsidiary of Heineken N.V. Its first brewery in Lagos commenced production in June 1949 and five other breweries were subsequently commissioned. The Aba brewery was commissioned in 1957, Kaduna in 1963, Ibadan in 1982, Enugu in 1993 and the largest brewery in Nigeria and one of the most modern in the world, the Ama Brewery in 2003. However the operations at the Enugu brewery were discontinued in 2004 and the company presently has five operational
breweries. Its initial paid up capital on incorporation in 1972 was N3 million and as at 31st December 2007, it had an authorised share capital of N4 billion and paid up capital of 7.5 billion ordinary shares of N0.50 each. The ownership structure of the company as at the end of 2007
comprised
� Heineken Brouwerijen B.V -37.74% � Distilled Trading International B.V-16.36% � Others-45.9%
Business Overview
Nigerian Breweries has enjoyed an over 60 year brewing experience with the Nigerian brewing industry with a resulting bouquet of tested and trusted brands. These brands include: Star Lager beer (launched in 1949); Gulder Lager Beer (1970); Maltina (1976), which now has three varieties, namely Maltina Classic, Maltina Strawberry, and Maltina with Pineapple; Maltina Sip it (2005); Legend Extra Stout (1992); and Amstel Malta (1994), Fayrouz (2006).
The Company re-launched Heineken Lager in June 1998 and Legend
Foreign Extra Stout in 2008. In line with its ongoing brand development, NB fortified Maltina with Calcium in 2008 and successfully completed the canning of all its products. The Company accounts for majority sales of beverage in the Nigerian brewery industry and has maintained the lead consistency over time.
Nigerian Breweries
Heineken
Brouwerjen B.V
37.74%Others
45.9%
Distilled Trading International B.V
16.36%
Summary
Current Price (N) 55.00
Fair Value Range(N) 57.00-65.00
Market Cap (N) Billion 459.047
Free Float (%) 30.00
Share Price Performance
6 Months (%) 68.25
12 Months (%) 31.61
Financials 2008A 2009F 2010F
EPS 3.40 4.08 4.75
DPS 3.40 4.08 4.28
BVPS (N) 4.26 4.99 5.83
EBITDA margin 25.30 25.30 25.30
Financial Summary 2008A 2009F 2010F
Turnover (Nm) 145,462 174,084 203,678
EBITDA 36,778 43,862 51,105
PAT 25,651 30,382 35,949
ROA(%) 26.3 25.7 25.7
EV/EBITDA (x) 7.62 8.02 7.38
P/BV(x) 14.11 12.04 10.31
P/E(x) 17.68 14.73 12.65
31
The Company’s stake in the brewed products market has continued to grow, largely due to consistent product quality, improved product packaging and the launch of all its products in cans. The canning of its products range which began in early 2008, propelled NB further ahead
in the market, as the Company gained significant market share. NB recently embarked on an aggressive expansion plan designed to strengthen its current market position and support the Federal Government’s vision of promoting investment in the country. This has led to multi million naira investments in the new malting plant and lager production line in Aba, a new canning facility and bottling line for Fayrouz in Ibadan, new brew houses in Lagos and Kaduna as well as a
new bottling line in Aba. INVESTMENT HIGHLIGHTS
� Nigerian Breweries stands out on account of its strong market presence. Its long standing presence in the Nigerian market has seen it evolve into a responsive brewer with a deep understanding of the Nigerian consumer. We believe the brewer presents a
commendable and sustainable business model with its strategically located breweries and distribution centres across the country.
� Nigerian Breweries is the bigger of the two leaders in the breweries industry, with leading market share in the lager market, ownership of premium brands and strong market presence.
� As regards its recently released Q2’09 results, the Company grew top and bottom lines by 22% and 37% respectively, relative to the same period last year. The results reflected the success of the company at strengthening its internal processes for greater
efficiency, a process which it had earlier embarked upon. PBT Margin improved by over 300 bps relative to Q2’08, from 26.67% to 29.79%. It also showed a QoQ improvement of 0.54%.
� NB has an enviable distribution network, comprising 147 key distributors and wholesalers across Nigeria, with its sales regions
classified into divisions namely, Lagos, Central, East, West, North, and South. The company has also showed strong commitment to constant innovation completing in Q1 2009, the rollout of cans for its Gulder, Fayrouz and Maltina brands, and marking the successful completion of the canning of all its products.
� The Company’s production process is largely dependent on raw materials such as sorghum and barley (especially since the ban of barley was lifted). Thus, the upswing in barley prices in Q2’09 was fully shielded by the full integration of malted sorghum into NB’s production process as well as the recent commissioning of the malted sorghum plant in Aba. (The price of barley appreciated 34.5% between April and June 2009 alone).
� The MD of Nigerian Breweries had earlier disclosed that the company’s
commendable 8.40 million hectoliters production level (for the 2008 full year), had proven inadequate to meet the existing demand for the company’s products. And so, we expect recent capacity additions across the value chain to help improve subsisting production capacity in order to close the demand/ supply mismatch identified by the company.
32
� The company’s performance has showed strong growth in margins,
QoQ, since the start of the 2009 financial year, an improvement we have partially attributed to the numerous operating and distribution
enhancement strategies effected in different areas of the company’s operations since 2008. Although, the Company’s Management has again expressed its cautionary stance as regards its ability to continue to exhibit this positive trend, highlighting the likely impact of factors such as deteriorating security concerns, the current global situation and the devaluation of the Naira; beyond the absolute figures, we premise our optimism that NB can continue to maintain its current
margins on its strong operating leverage and focused management.
Earnings Forecast and Valuation
� It is our expectation that the Company will record a turnover of N174.08 billion and After Tax Earnings of N30.38 billion in FY’09. This translates to an EPS and DPS of N4.08, which yields an attractive forward dividend yield of 6.8%
� It is also our expectation after due consideration of prior performance that, earnings will grow at a compounded rate of 21% over the next 5 years to N57.9 billion by 2011.
� Although we believe that at its current price, NB is approaching full value in the near term, we also believe that on the back of current expansion plans and anticipated volume additions, subsequently
impressive scorecards will justify the upward increases in investor’s pricing of the stock.
0%
10%
20%
30%
40%
50%
60%
2006 2007 2008 2009F 2010F 2011F
Gross Margin EBITDA Margin PAT
NB PROFITABILITY MARGINS(%)
Source: Company Financials
33
FINANCIAL REVIEW Nigerian Breweries (NB) has proven largely resilient to recent multifaceted challenges prevalent in the real sector ranging from
tightening credit lines, to widespread increases in the cost of raw material inputs, both challenges reflective of the worldwide economic slowdown. FY’08 and subsequent quarterly scorecards released amidst the challenging environment have served to reiterate our opinion on this resilience. Despite the harshness of the immediate operating environment, NB has
successfully mitigated against this by reason of its strong presence across the value chain (it is involved in all the stages from cultivating sorghum to distribution, enabling it attain significant operating leverage) and in the Nigerian market.
Margins have continued to show marked improvement, despite increases in raw material inputs and energy costs over time (energy costs stood at 7% of sales as at FY’08), indicative of the success of the Company’s improved cost management. The Company’s most recent scorecard (Q2’09) showed PBT growing at a more rapid growth rate relative to previous comparable period and immediate past period, than
previously. Highlights of the company’s most recent scorecard (Q2’09) are presented below. � Despite the highly challenging environment and higher input costs,
PBT grew at a faster 36.8% to N24.6bn relative to a 21.5% growth in turnover. In our opinion, several factors are responsible for this feat, including the recent commissioning of an ultra modern
sorghum malting plant located in Aba, a strategic production and distribution hub for the company. This acquisition we believe was made, to ensure the steady supply of malted sorghum for the company’s operations. This enabled the Company access its primary raw material input at reduced costs, positively yielding decreased production costs. Operating profit advanced 39% to
N24.59 billion from N17.69 billion in Q2’08.
� In direct contrast with the aforementioned performance measures (PBT and PAT), turnover growth recorded a slight decline relative to our expectation. It recorded a 21.51% growth which represents the lowest growth in turnover q-o-q since FY’06. We adduce to rapid volumes growth by the Company in recent times sequel to
the commissioning of the Ama factory, thus, the decline in turnover growth may be as a result of comparison with the most recent year’s volumes and reflective of the slight threats posed by consumers’ more circumspect spending in the light of the challenged disposable income levels.
� Continued expansion of turnover by volume as against price driven
growth which has been consistent with the Company over time.
BREWERY PROCESS
CULTIVATION OF SORGHUM ON SORGHUM FARMS
MARKETING AND DISTRIBUTION OF FINAL PRODUCTS
NB: PRESENCE ACROSS THE VALUE CHAIN
Q2’09
Turnover Net Income
Q2’08
68,053
12,337
82,691
16,855
TURNOVER AND NET INCOMENaira Million
Source: Vetiva Research & NSE
34
Ratio Analysis
1. Liquidity
The Company has previously displayed an above average management of its liquidity position, and has consistently
demonstrated its ability to meet short term obligations when they fall due. However, in the year under review, the Current Ratio declined steeply from 1.36 times in FY’07 to 0.74 times in FY’08, representing a negative working capital position. Although this represents a departure from the typically upward incline, recorded in the previous years, we adduce this decline to a reduction in the Company’s cash and bank balances, relative to previous periods as
well as a 44% increase in creditors and accruals, also relative to FY’07. This combination, also precipitated a decline in Quick and Cash Ratios respectively, from 0.79 times and 0.54 times respectively in FY’07 to 0.08 times and 0.01 times in FY’08, representing a negative working capital position.
2. Profitability Analysis
In terms of profitability, NB has maintained a highly profitable business with its Gross Margin hovering around the 50 percent mark between 2003 and 2007. In 2008 however, there was a marked increase in Cost of Sales as a percentage of sales from 47.04% to 51.3%, impacting the Gross Margin to 48.7 percent. However, this was mitigated by the reduction in distribution and
administrative costs. The company has shown sustained growth in its profit margins between 2003 and 2007; growing PBT margins from 13.2 percent in 2003 to 25.8 percent in 2007 and PAT margins from 7.4 percent in 2003 to 17 percent in 2007. In the immediate past year, the Profitability margins improved from 24.9% and 16.9% to 25.8% and 17.7% respectively for PBT and PAT.
This is in spite of the competition from Guinness and other fringe players in the industry. The company has taken advantage of its
market leadership position to increase profit made significant returns on its shareholders funds. Operating margin improved to 25.2% relative to 24.3% in 2008, premised on a 300 bps reduction
in distribution and administrative costs relative to 2007. 3. Activity/Asset Utilisation
NB’s utilisation ratios show the company’s improving position over time. Inventory turnover increased from 6.90 times in 2006 to 7.88 times in 2008, resulting in a commensurate decline in turnover days from 52 days to 46 days, reflecting the company’s ability to effectively convert its inventory to sales. The Company’s receivable days has declined from 20 days in 2006 to 10 days in 2008, while
Payable Days has increased from 59 days to 65 days, indicating better management of creditors and simultaneous reduction in debts outstanding during the period. Overall, it is indicative of improving working capital management. The Total Assets turnover grew from 1.08 times in 2006 to 1.15 times in 2008, reflective of the ability of the company to harness sales through its fixed assets.
4. Leverage
NB remains fully equity financed sequel to the full repayment of the loan obtained for the construction of the Ama Brewery. Repayment for the loan which secured in xxx, was fully repaid in 2007.
35
Our assumptions as regards expectations for NB’s operations
and performance are stated below. These assumptions provide
guidance for our forecast from 2009 – 2011.
The Company has maintained a Gross Profit Margin slightly over 50% over the past two historical years, Whilst we have identified the rising costs of prime raw materials such as barley, we also look to the malting of sorghum and the commissioning of the new malting plant to improve supply of malted sorghum and mitigate against aforementioned exorbitant barley costs and inspire the Gross Profit Margin at 50% through to 2012. We also estimate slightly stable EBITDA margins in
excess of 30% going forward. The unavailability of an expense and cost breakdown curtails our cost by cost justification. Nonetheless, we expect the Company to retain its current pricing policy and pass on the incidence of any increased costs to its consumer, especially taking advantage of the inelastic demand profile of its products, further justifying our assumption of constant
gross margins. We have also assumed an effective taxation of 31%. Our financial forecast assumes a 5 year CAGR of 20% from N111.75 billion in 2007 to N232.19 billion in 2011; We estimate a 24% CAGR for growth in Before Tax Earnings, from N27.82 billion to N66.18 billion and a 25% CAGR in After Tax Earnings, inspiring a leap from N18.89
billion in 2007 to N40.79 billion in 2011. It is our opinion that NB is currently running at 96% of capacity (approximately 9 million hectolitres installed capacity) and we anticipate a further increase, on account of the recent commissioning of a new line for Star in Aba and a new 1 million hectolitre line in Lagos due for commissioning in September. We expect NB to continue to grow
its capacity, especially in the light of threats from new players. We hold this responsible for our current growth assumptions until 2011. In arriving at a fair value for Nigerian Breweries Plc we estimated Free Cash Flow (FCF) and PAT for the period between 2008 and 2012. We project FCF to grow from N20.1 bn in 2008 to N73.5 bn in 2012. We also estimate PAT to grow from N25.6bn in 2008 to N45.9bn at the end
of 2012 at a 5 year CAGR of 25.0%. In our DCF valuation, we assumed a terminal growth rate of 3.5%. Our valuation employs a Weighted Average Cost of Capital, WACC of 16.0%, which is estimated using a beta value of 0.9 based on the 5-year historical returns on the company share price and the Nigerian
Stock Exchange All Share Index (NSE-ALSI), coupon rate of 11.33% on the 10-year Federal Government (FGN) Bond in the month of August 2009 as our risk free rate. We assumed a market risk premium of 5%. Our Discounted Cash Flow model values NB at a fair value range of N54.14-N66.25 per share while the Price to Earnings multiple generates a N61.11 per share. A weighted average of the two valuation model
indicates an average fair value of N65.00 for NB. Our forecast DPS for the forecast period 2009 to 2011 are N4.08, N4.75 and N5.39 respectively. We therefore place an ACCUMULATE recommendation on Nigerian Breweries with a 15% upside potential from its current price of N57.
36
INCOME STATEMENT (N'Mill) 2006 2007 2008 2009 F 2010 F 2011 F
Turnover 86,322.1 111,748.3 145,461.8 174,084.0 203,678.0 232,193.0
Cost of Sales (41,990.0) (52,563.9) (74,561.9) (88,782.8) (103,875.8) (118,418.4)
Gross Profit 44,332.1 59,184.4 70,899.8 85,301.2 99,802.2 113,774.6
Distribution& Adminsitrative Charges (27,506.6) (32,076.8) (34,314.2) (41,641.0) (48,907.2) (56,074.5)
Core Operating Profit 16,825.5 27,107.6 36,585.8 43,660.1 50,895.0 57,700.1
Other Income 123.0 249.5 192.3 201.9 209.9 220.4
EBITDA 16,948.4 27,357.0 36,778.1 43,862.0 51,105.0 57,920.6
Depreciation & Amortisation - - - - - -
EBIT 16,948.4 27,357.0 36,778.1 43,862.0 51,105.0 57,920.6
Interest (Paid) &Similar Charges (512.2) 519.3 741.3 822.8 995.6 1,204.6
Profit Before Taxation and Exceptional Income 16,469.3 27,823.7 37,469.5 44,684.6 52,100.5 59,125.2
Exceptional Income - - - - - -
Profit Before Taxation 16,469.3 27,823.7 37,469.5 44,684.6 52,100.5 59,125.2
Taxation (5,535.7) (8,933.5) (11,818.0) (13,852.2) (16,151.2) (18,328.8)
PAT 10,933.6 18,890.2 25,651.5 30,832.4 35,949.4 40,796.4
Dividend (9,075.1) (18,942.9) (25,651.5) (30,832.4) (35,949.4) (40,796.4)
NOPAT 11,412.7 18,423.6 24,959.9 30,009.6 34,953.8 39,591.7
Retained Earnings 1,858.5 - - - - -
BALANCE SHEET (N'Mill) 2006 2007 2008 2009 F 2010 F 2011 F
Assets
Fixed assets 49,677.9 50,194.6 63,557.7 67,091.6 70,117.0 76,791.0
Investments - - - - - -
Long Term Debtors and Prepayments 1,222.8 422.4 229.6 172.2 180.8 189.8
50,900.7 50,617.0 63,787.2 67,263.8 70,297.8 76,980.8
Current Assets
Stocks 12,671.8 16,156.8 20,741.5 25,304.6 30,871.6 37,663.3
Debtors & Prepayments 4,772.2 7,585.8 3,850.0 4,234.9 4,658.4 6,124.3
Deposits for Imports 150.3 393.0 15,613.3 4,053.0 2,703.0 5,405.8
Investments in Commercial Papers - - - - - -
Cash and Bank balances 7,162.0 15,795.8 420.7 12,445.5 16,443.0 23,457.0
24,756.3 39,931.3 40,625.4 46,037.9 54,676.0 72,650.5
Total Assets 75,657 90,548 104,413 113,302 124,974 149,631
Liabilities
Creditors &Accruals 16,345.2 17,946.2 25,863.0 20,718.5 22,168.8 23,720.6
Taxation 4,288.1 7,297.6 9,245.5 9,707.8 10,193.2 10,702.9
Bank Overdrafts - - - - - -
Dividend 3,242.1 4,169.7 19,667.0 27,533.7 30,310.0 34,892.9
Total Current Liabilities 23,875.5 29,413.5 54,775.5 57,960.0 62,672.0 69,316.3
Long Term Liabilities
Deferred Tax Liability 8,785 11,360 14,110 14,223 14,336 14,451
Gratuity 6,747 6,591 3,298 3,562 3,847 4,155
Total Liabilities 30,623 36,005 58,074 61,522 66,519 73,471
Net Assets 36,249 43,183 32,229 37,708 44,118 51,618
Unsecured convertible loan stock - - - - - -
Deferred taxation 8,785 11,360 14,110 14,223 14,336 14,451
Gratuity 6,747 6,591 3,298 3,562 3,847 4,155
Total Long term liabilities 15,532 17,952 17,408 17,785 18,184 18,606
Current Asset less cash 17,594 24,135 40,205 29,540 35,530 43,788
Capital and Reserves
Share capital 3,781 3,781 3,781 3,781 3,781 3,781
Share premium 4,568 4,568 4,568 4,568 4,568 4,568
Bonus issue reserve - - - - - -
Capital Reserves 7,354 7,325 7,240 7,312 7,386 7,459
General Reserve 20,546 27,509 16,639 23,295 27,954 33,544
Shareholders' Equity 36,249 43,183 32,229 37,708 44,118 51,618
Total Liabilities & Equity 75,657 90,548 104,412 113,453 124,974 145,444
37
HOLDING FORT: GUINNESS NIGERIA PLC Guinness Nigeria Plc (“Guinness) was incorporated in Nigeria on 29 April 1950 and commenced operations in 1962 marking the opening of
Guinness’s first brewery outside the United Kingdom and Ireland. It was licensed to operate as a brewery carrying out the business of brewing, bottling and marketing of Guinness products and was subsequently listed on the Nigerian Stock Exchange in November 1985 under the Breweries Sector. The company built its first brewery in Ikeja in 1962, a second in Benin in 1974 which was expanded further to accommodate a
brewery for stout products in 1978. The fourth Nigerian brewery was built in Ogba in Lagos in 1982 to brew Harp Lager Beer and was also expanded to include Guinness Stout while the final one was built in Aba, in the Eastern part of the country in 2004 to meet the growing demand for the company’s products. Guinness Nigeria Plc operates under the Diageo Group, a multinational
beer, wine and spirits company, trading in over 180 markets around the world with operations in 7 key markets across the continents. Diageo’s top markets for the Guinness brand are Great Britain, Nigeria, United States and Cameroun. The Guinness factory located in Nigeria was the first Guinness brewery to be located outside the United Kingdom. The ownership structure of the company as at the end of 2008
comprised:
� Guinness Overseas Limited (Foreign)-46.03% � Atalantaf Limited (Foreign) -7.77% � Others (Nigerian) -46.2%
Operations
Although with significant roots in Ireland, which is reputed as the place of its birth, Guinness has enjoyed a commendable patronage and still enjoys significant market share in the Nigerian brewery sector. Nigeria recently overtook Ireland as the world’s second largest Guinness market after Great Britain.
The Company produces five major brands: Guinness Extra Smooth, Gordon’s Spark and Harp Lager, Malta Guinness as well as Smirnoff. Sequel to the 16% growth in sales recorded in 2007, Nigeria attained the position of second largest Guinness market accounting for about 41% of Guinness Stout sales worldwide. The Company is investing huge
resources into growing production and sales volume as well as into the continued improvement of its operations. Guinness has consistently won international recognition for its top performance in the Brewery industry.
Guinness
Guinness
46.03%
Others
46.2%
Atlantaf Ltd.
7.77%
Summary
Current Price (N) 144.00
Fair Value Range(N) 135.58-149.39
Market Cap (N) Billion 213.200
Free Float (%) 25.00
Share Price Performance
6 Months (%) 63.08
12 Months (%) 24.04
Financials 2008A 2009A 2010F
EPS 8.04 9.18 10.84
DPS 6.00 7.50 8.14
BVPS (N) 25.299 21.37 23.51
EBITDA margin 25.30 28.30 28.30
Financial Summary 2008A 2009A 2010F
Turnover (Nm) 69,173 89,148 101,629
EBITDA 20,168 26,745 30,489
PAT 11,861 13,541 16,007
ROA(%) 17.20 14.90 16.10
EV/EBITDA (x) 9.72 6.73 5.94
P/BV(x) 6.74 6.74 5.40
P/E(x) 17.97 15.69 13.28
38
INVESTMENT HIGHLIGHTS � Guinness is a premium brewer of alcoholic and non alcoholic drinks and
proudly holds the strategic position as second largest brewer in Nigeria
by reason of its market share. A subsidiary of the Diageo Group, Nigeria represents a key Diageo market, recently overtaking Ireland to emerge second largest Guinness market worldwide.
� Strong earnings and dividend yield; very much in line with the tradition
of the Brewery Sector leaders, Guinness has succeeded in defending its income from the threats of a highly volatile operating environment .
� Guinness Nigeria Plc is the second largest brewer in the Nigerian brewery industry and is a clear leader in the stout market. In confirmation of its premier status, the company recently overtook its
Irish counterpart to emerge the second largest market for Guinness products worldwide.
� Guinness’s brand portfolio includes Guinness Foreign Extra Stout, Harp Lager, Guinness Extra smooth, Malta Guinness and Smirnoff Ice amongst others.
� The Company recently shut down operations at its Aba plant; we
believe this is in line with its intentions to achieve an efficient asset portfolio and expansions are currently ongoing at the Benin and Ogba plants.
� The Company has made concerted efforts to achieve operational efficiency by implementing stringent waste reduction strategies, optimizing resource utilization and improving its Procurement functions.
� The Company’s stock has received considerable and sustained investor following in recent times, gaining over 80% from its Year Low Value, and consequently showing a positive, noteworthy divergence from the Broader Market.
Earnings Forecast and Valuation
� Our FY’10 forecast for Turnover and PAT stands at N101.63 billion and N16.00 billion respectively and we estimate EPS and DPS for FY’10 of N10.86 and N8.14 respectively.
� It is also our expectation after due consideration of prior performance that, earnings will grow at a compounded rate of 15% over the next 5 years to N35.3 billion by 2013.
� We believe though, that in the light of previous positive investor sentiments, Guinness is approaching full value in the near term. However, current expansion plans slated for deployment in Benin and Lagos in 2010 through to 2011, (an additional million litres) and subsequent encouraging scorecards, we believe will justify the upward increase in investor’s pricing of the stock.
� We acknowledge the ongoing deployment of gas plants at both the
Benin and Lagos plants as well as the attendant potential reduction in power costs. We expect a stronger earnings profile in the medium to longer term, on the back of these improvements
� We remain optimistic in the performance of the Company going forward, infrastructural challenges notwithstanding. We also lend our optimism to the bottom heavy and growing demographics of the country, which we believe would continue to inspire sustained
demand relative to the declining demand being reported in developed economies.
39
FINANCIAL REVIEW
Quite contrary to what was reflected in the Q3’09 results, the Company’s most recent scorecard (FY’08/9) showed PBT growing at
slower rate relative to Turnover, reflecting some pressure on the company’s costs. Highlights of the company’s most recent scorecard (FY’08/9) are presented below � In congruence with its Q3’08/9 performance, the Company grew its
top line by 28.9%, however, Before and After Tax Earnings grew by a much slower 11.1% and 14.7% respectively. Relative to the
performance all through the 2008/9 financial year where Earnings growth exceeded growth in Turnover owing to operational efficiency flowing from stringent waste reduction strategies and optimal resource utilization, this performance seemed rather extraneous.
� In a departure from the defensive tradition of the brewers, Before
Tax and After Tax Margins both declined YoY from, 24.11% (PBT) and 17.15% (PAT) to 21.30% and 15.18% respectively in FY’08/09, QoQ, PBT and PAT margins also recorded declined from 25.03% and 17.17% respectively.
� The Company has recently faced challenges with staffing costs and is reported to have increased salaries by 14% and has plans to implement a subsequent pay increase. This impacted the
Company’s administrative costs negatively and lowered profit margins as is reflected in the above text.
� We believe the recent shut down of operations at its Aba plant and the successful deployment of resources to the Lagos and Benin breweries respectively in line with the Company’s intentions to achieve an efficient asset portfolio may have resulted in additional distribution costs from Lagos and Benin to the Eastern hub further
depressing previous margins.
0%
10%
20%
30%
40%
50%
60%
2006 2007 2008 2009F 2010F 2011F
Gross Margin EBITDA Margin PAT
GUINNESS PROFITABILITY MARGINS(%)
Source: Company Financials
FY’09
Turnover Net Income
FY’08
69,172
11,861
89,148
13,541
TURNOVER AND NET INCOMENaira Million
Source: Vetiva Research & NSE
40
� In the period under review, the Company’s cash and bank balances recorded a significant decline of 61.5% from N15.1 billion to N5.1 billion as at FY’09, while trade Debtors doubled from N3.2 billion to
N6.3 billion reflecting a less stringent debt collection policy and an increase in the debtors’ collection period. However, the increase in debtors outstanding could not offset the significant increase in short term borrowings, inspiring the massive erosion of the firm’s working capital position.
� We acknowledge the ongoing deployment of gas plants at both the Benin and Lagos plants and the attendant potential reduction in
power costs. We expect the Company’s performance to improve in future years on the back of ongoing expansions, which we opine would impact turnover growth. We also lend our optimism to the bottom heavy and growing demographics. We remain optimistic in the performance of the Company going forward, infrastructural challenges notwithstanding.
� The aforementioned challenges notwithstanding, we expect
Guinness to continue to post steady Top and Bottom line growth and sustain current margins on the back of its strong brand portfolio and aggressive marketing drive, as well as increased operational efficiency.
41
Ratio Analysis
1. Liquidity
Guinness has maintained an enviable liquidity position growing
its liquidity position year on year and increasingly showing its ability to meet short term obligations when they occur. Relative to its liquidity position in 2006, the company’s Current Ratio decreased slightly from 1.46x to 1.42x. The Quick and Cash ratios also decreased marginally from 1.30 times and 0.67 times to 1.10x times and 0.50 times respectively. Highly commendable is the trend in the Quick Ratio as it has remained
above the theoretical safe benchmark of 1.00x.
2. Solvency
Guinness has reduced its Debt to Equity ratio from 12 % in 2003 to Nil in 2007. Thus, the Company has no long term liability in its books. However, in terms of its short term liabilities, the Company has reduced them significantly
(measure d as a percentage of total liabilities and equity), from 30.2% in 2006 to 23.0% in 2007. This is further substantiated by the Times Interest Cover which also recorded a leap from 7.8x in 2006 to 39.0x in 2008. Given the Company’s reliance on equity and short term financing rather than long term debt, and in due consideration of its interest cover, we consider the
company highly solvent and conservative in terms of its financing strategy.
3. Profitability Analysis
A diagnosis of Guinness profitability shows an appreciable performance in cost control. Despite the onset of an unfavourable economic and operating environment in 2008, GP
margin improved slightly from 48.1% in 2006 to 48.5% in 2008. Operating Ratio also improved from 27.85% in 2006 to 29.2% in 2008. PBT and PAT margins grew rapidly from 21.3% and 13.9% respectively in 2006 to 24.8% and 17.1% in 2008 on the back of effective cost management. However, on a comparative analysis of the past five years, Guinness’ performance has beat that of NB to second place
4. Asset Utilisation and Activity
The Asset Utilisation and Activity ratios show commendable and efficient utilization of its assets. The company recorded effective working capital management as well as growing profit margins which led to the growth in ROE from 24.3% in 2006 to 25.5%
in 2008. However, a more effective working capital management and greater margin improvement could serve as key drivers of ROE. On the other hand, we further decomposed Guinness’s 5-year average Return On Assets (ROA) of 17.1% to reveal an increasing fixed asset turnover and declining current asset turnover. This implies that more potential exists for efficient asset utilisation so as to precipitate increased ROA.
42
Our assumptions as regards expectations for Guinness’s
operations and performance are stated below. These
assumptions provide guidance for our forecast from 2010 –
2012.
Assumptions
The Company has maintained a Gross Profit Margin slightly exceeding 50% over the past two historical years, and whilst we have identified the rising costs of prime raw materials such as barely, and likely increases in power costs, we readily admit efforts of the Company at
improving margins. The recent deployment of gas powered generating plants at the Benin and Lagos brewing plants should lend to decreased production costs. It is our expectation that in spite of raw material costs on the increase, the Company would maintain Gross Margins in the range of 50%. We also estimate slightly stable EBITDA margins of about 28-30% going forward.
Our financial forecast assumes a 5 year Turnover CAGR of 17% from N69.2 billion in 2008 to N127.5 billion in 2012; we estimate a 12% CAGR for growth in Before Tax Earnings, from N14.8 billion to N29.6 billion and a 15% CAGR in After Tax Earnings, inspiring a leap from N11.9 billion in 2008 to N20.7 billion in 2012.
It is our opinion that Guinness is currently running at 85% of capacity (approximately 5 million hectolitres installed capacity) and we anticipate a further increase, on account of the ongoing capacity expansion at the Lagos and Benin breweries. It is our expectation that Guinness will continue to grow its capacity, especially in the light of threats from new players. We also lend some of our credence to the recent defensiveness of the Sector and the strength of Guinness’
brands. We hold this responsible for our current growth assumptions until 2012. In arriving at a fair value for Guinness Plc, we estimated Free Cash Flow (FCF) and PAT for the period between 2010 and 2013. We project FCF to grow from N16.59 bn in 2010 to N29.27 bn in 2013. In our DCF valuation, we assumed a terminal growth rate of 3.5%.
Our valuation employs a Weighted Average Cost of Capital, WACC of 16.0%, which is estimated using a beta value of 0.9 based on the 5-year historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE-ALSI), coupon rate of 11.33% on the 10-year Federal Government (FGN) Bond in the month of August
2009 as our risk free rate. We assumed a market risk premium of 5%. Our Discounted Cash Flow model values Guinness at a fair value range of N135.59-N149.39 per share while the Price to Earnings multiple generates a N154.04 per share. A weighted average of the two valuation model indicates an average fair value of N148.50 for Guinness. Our forecast DPS for the forecast period 2010 to 2012 are
N8.14, N9.52 , N10.53 and N12.20 respectively. We therefore place a NEUTRAL recommendation on Guinness at its current price of N144.50.
43
INCOME STATEMENT (N'Mill) 2006 2007 2008 2009 F 2010 F 2011 F
Income
Turnover 53,652 62,265 69,173 90,591 104,180 119,807
Cost of Sales (27,845) (34,144) (35,611) (47,107) (54,173) (62,299)
Gross Profit 25,807 28,121 33,562 43,484 50,006 57,507
Distribution& Adminsitrative Charges (6,834) (5,781) (7,230) (11,224) (13,502) (14,952)
Advertising& Promotion Expenses (4,072) (5,349) (6,164) (7,247) (8,334) (9,585)
Core Operating Profit 14,901 16,991 20,168 25,013 28,170 32,971
Other Income - - - - -
EBITDA 14,901 16,991 20,168 25,013 28,170 32,971
Depreciation & Amortisation (2,677) (2,764) (3,126) (4,064) (4,876) (5,852)
EBIT 12,224 14,227 17,042 20,949 23,294 27,119
Interest (Paid) &Similar Charges (1,551) (1,540) (437) (1,540) (1,617) (1,633)
Interest Received 764 2,197 1,730 1,500 2,198 2,462
Profit Before Taxation and Exceptional Income 11,437 14,884 18,336 20,909 23,875 27,948
Exceptional Income - - (1,243) - - -
Profit Before Taxation 11,437 14,884 17,093 20,909 23,875 27,948
Taxation (3,997) (4,193) (5,232) (6,273) (7,163) (8,385)
PAT 7,440 10,691 11,861 14,637 16,713 19,564
Dividend (4,720) (6,637) (8,856) (10,977) (12,535) (14,673)
BALANCE SHEET (N'Mill) 2,006 2,007 2,008 2009 F 2010 F 2011 F
Assets
Fixed assets 29,532 30,125 38,045 42,610 47,723 53,450
Investments - - - - - -
Long Term Debtors and Prepayments 182 268 211 201 191 450
29,714 30,393 38,256 42,811 47,914 53,900
Current Assets
Stocks 12,933 12,721 12,867 14,495 16,669 16,773
Debtors & Prepayments 3,231 6,662 8,316 8,324 8,337 8,354
Deposits for Imports 51 26 108 110 110 371
Investments in Commercial Papers - - - - - -
Cash and Bank balances 13,921 22,007 12,867 14,495 16,669 16,773
30,136 41,416 36,400 40,303 45,965 49,774
Total Assets 59,850 71,809 74,656 83,114 93,878 103,674
Liabilities
Creditors &Accruals 18,090 15,745 17,156 20,587 21,410 22,481
Taxation 2,580 5,021 3,981 7,000 9,533 11,123
Bank Overdrafts - - 3,705 5,558 5,280 5,016
Current Portion of Term Loan - 5,000 798 - - -
Total Current Liabilities 20,670 21,568 25,640 33,145 36,223 38,620
Long Term Liabilities
Deferred Tax Liability - 6,647 7,886 3,722 6,758 8,758
Term Loan - 3,500 - - - -
Provision for liabilities &charges 18,232 3,455 4,266 4,480 4,704 4,939
Total Long Term Liabilities 38,902 13,602 12,153 8,202 11,462 13,697
Net Assets 20,948 29,581 34,818 39,577 49,167 55,036
Capital and Reserves
Share Capital 590 737 737 737 737 737
Share Premium 1,546 1,546 1,546 1,546 1,546 1,546
Bonus Issue Reserves 147 147 147 147 147 147
Revaluation Reserves 3,790 1,546 1,546 1,546 1,546 1,546
Revenue Reserve 14,874 25,605 30,842 35,600 45,190 51,060
Shareholders' Equity 20,948 29,581 34,818 39,577 49,167 55,036
Total Liabilities& Equity 59,850 71,809 74,656 83,114 93,878 103,674
44
SUMMARY We expect a highly active Brewery Sector going forward especially on the back of the growing presence of new entrants SABMiller and Castel.
We also expect ongoing expansion programmes by NB and Guinness to yield strong volumes and increased profitability. Despite the economic challenges, we look to commendable quarterly result declarations from NB as well as Guinness. It is our expectation that this, as well as impressive dividend declarations from these two will further spur increased demand for Brewery stocks.
Having identified the latent challenges militating against the real sector, such as tight liquidity, further heightened by current reforms ongoing in the Banking Sector and expectations of a stricter risk management structure within the Sector, we opine that expected funding for some of these new entrants might be respectively affected. However, we look to see the effects if any, of the incursion of foreign brewers such as SAB
Miller on the present configuration of the Brewery Sector. We expect the Big 2 to continue to increase their market share on the back of product diversification and proven expertise in the face of strengthening competition. We also anticipate that the brewery majors would be able to sustain existing profit margins, on the back of established operating leverage. We also look to the release into the
market of the smaller sized bottles of Turbo King (a stout brand produced by Consolidated Breweries, currently the country’s third largest brewer). The recent launch of the brand’s bigger stout bottle was reported as largely successful. In summary, having identified the present forces impacting on the
Brewery Sector, it is our expectation, that the current picture of the industry, with respect to market share, profit margins and customer brand loyalty would change somewhat . In terms of stock market activity as regards equities within the Sector, we expect that the ‘flight to safety’ will prevail until much of the uncertainty currently pervading the Financial Sector fades. We believe
that investors would continue to seek value in the Breweries Sector and other FMCG stocks on the back of sustained demand and growth. Thus, we are strongly optimistic in the Brewers and their ability to weather the storm. Demand is set to grow as population is also on the increase and penetration levels remain low. We foresee that the incursion of foreign brewers may in the medium to longer term, bring
about changes in the current structure of the Sector.
45
INVESTMENT RECOMMENDATIONS Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell.
Buy/Overweight ≥ +20% expected absolute price performance Accumulate +10% to +20% expected absolute price performance Neutral/Hold +/-10% range expected absolute price performance
Reduce -10% to -20% expected absolute price performance Sell/Underweight ≥ -20% expected absolute price performance Definition of Ratings Buy/Overweight recommendation refers to stocks that are highly
undervalued but with strong fundamentals and where potential return in excess of or equal to 20% is expected to be realized between the current price and analysts’ target price. Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential return of between 10%
and 20% is expected to be realized between the current price and analysts’ target price. Neutral/Hold recommendation refers to stocks that are correctly valued with little upside or downside where potential return of between +/- 10% is expected to be realized between current price and analysts’ target price.
Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where potential return of between -10% and -20% is expected to be realized between current price and analysts’ target price. Sell/Underweight recommendation refers to stocks that are highly
overvalued but with weak fundamentals and where potential return in
excess of or equal to -20% is expected to be realized between current
price and analysts’ target price.,
46
Disclosures Section
Analyst Certification All of the views expressed in this report articulate the research analyst(s) opinions/views regarding the companies, securities, industries or markets discussed in this report. The analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report.
Other Disclosures A reference to a particular investment or security in this report should not be deemed an investment proposition nor should it be interpreted as a recommendation to buy, sell or hold such an instrument. It is noteworthy to mention that Vetiva Capital Management Limited does and seeks to do business with companies covered in its research reports. Consequently, a conflict of interest may arise that could affect the objectivity of this report.
Disclaimer Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein. No reliance should be placed on the accuracy, fairness or completeness of the information contained in this report as it has not been verified by the research analyst(s) involved or the companies whose securities have been referred to except as otherwise disclosed. Any ratings, forecasts, estimates and opinions set forth in this document constitute the analyst(s) position as at the date of the report and may not necessarily be so after the report date as they are subject to change without notice. It is also instructive to note that a Company’s past performance is not necessarily indicative of its future performance as estimates are based on assumptions that may or may not be realized. The value, price or income from investments mentioned in this report may fall as well as rise due to economic conditions, industry cycles, market indices, operational or financial conditions of companies or other factors. Thus, Vetiva Capital Management Limited and its employees shall not accept liability for any loss arising from the use of this document or its contents in making investment decisions or recommendations. All investors are solely responsible for their investment decisions. Any investments discussed may not be suitable for all investors and the reader(s) should independently determine their suitability and evaluate the investment risks associated with such investments. Vetiva Capital Management Limited is a Dealing Member of the Nigerian Stock Exchange and is registered with the Securities & Exchange Commission to conduct Financial Advisory, Fund/Portfolio Management, Brokerage & Dealing and Trusteeship business in Nigeria. This document is for information purposes only and for private circulation. No portion of this document may be reprinted, sold or redistributed without the written consent of Vetiva Capital Management Limited. Vetiva Research is disseminated and available primarily electronically, and, in some cases, in printed form.
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is available on request. © 2009 Vetiva Capital Management Limited. All rights reserved.