fbnquest nigerian brewers sector update 2016due to the prevailing macro-economic headwinds, we...

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Stock (rating)*

Price (N)

Price Target

(N) Potnl.

Gain/loss

Guinness Nigeria (UP) 98.0 80.1 -18.2%

International Breweries (UP) 20.0 14.2 -28.9%

Nigerian Breweries (UP) 145.8 92.2 -36.7%

Source: Bloomberg, FBNQuest Research *OP: Outperform, N: Neutral: UP: Underperform

EQUITY RESEARCH Nigeria | Brewers | Sector update | 6 October 2016

Nigerian Brewers Value brands now in the front line

Macro headwinds impeding growth Nigerian brewers have had a challenging H1 2016 (end-June). Although we estimate that the sector’s unit volume grew by mid-single digits y/y over this period, most of the growth was driven by the value segment. For the mainstream category, beer consumption contracted in response to macro headwinds, including the persistent depreciation of the naira and inflationarypressures. The resulting squeeze on household wallets ultimately led toconsumers down-trading to cheaper products and a re-categorisation of the beer market. Given a volume price mix tilting towards value brands, Guinness Nigeria, International Breweries and Nigerian Breweries reportedaverage sales growth of 5% y/y in the January to June period.

Fx challenges weighed on performance The brewers are heavily dependent on imported raw materials. Due to high production costs and the inability of manufacturers to successfully pass oncost increases to customers, Nigerian brewers reported an average grossmargin contraction of -150bps y/y during the January to June period. In addition, Guinness Nigeria and International Breweries booked fx translation losses of N3.5bn and N2.7bn respectively in the end-June quarter. These losses were on the back of the adoption by the CBN of a new flexibleexchange rate regime and the naira’s downward move to c.N280 per US$ (as of end-June) from N199 previously. Both firms have US$ denominatedloans of around US$25m.

Looking inwards to protect margins Given the continued naira depreciation, the high dependency of externally sourced raw materials (c. 70%) and the inability of brewers to successfully pass on cost increases to consumers, the brewers are beginning to look inwards (domestic sourcing) for raw materials. While sorghum, a locallysourced crop, is already being substituted for barley, other locally sourced grains (like cassava) and packaging materials are being considered assubstitutes. Nigerian Breweries has already set a target of purchasing 60%of its raw material from the local market by 2020.

Volume growth to be driven by value segment

Due to the prevailing macro-economic headwinds, we expect growth to continue to be driven by the value segment in the near-to-medium term. Furthermore, we do not see significant improvements in gross margin orreversals in finance costs (especially for Guinness Nigeria and International Breweries), and have therefore taken a conservative outlook as far as our forecasts on these lines are concerned. For 2017E (end June), while we seeEPS declining by -81.4% y/y for Guinness Nigeria, we expect International Breweries’ EPS to grow by 11% y/y (adjusting for the fx loss in Q1). For Nigerian Breweries, we forecast EPS growth of 31% y/y in 2016E due to a 37% y/y reduction in interest expense.

Valuation still challenging Nigerian Breweries and International Breweries have gained +16% ytd on average and are currently trading on an average P/E multiple of 27.8x, vsthe 25.0x and 25.9x multiples that their global and emerging market peers are trading on. We rate all three brewers Underperform.

Nigeria | Equities | Brewers | Sector update | Value brands now in the front line

6 October 2016 2

[Notes]


6 October 2016 3

Contents Sector valuation and recommendation 4

H1 2016 scorecard 7

Earnings declines largely driven by fx-related losses 7

Slowdown in growth 9

Sub-Sahara Africa still fastest growing region 9

Low per capita consumption 10

Unsupportive macroeconomic indicators/fundamentals 11

Recent developments 14

Visible mix shift towards value brands 14

Margins under pressure; NB resilient 16

Outlook 19

Company financials (FBNQuest Coverage universe) 21

Valuation methodology 24

Analyst(s) certification and disclosures 24

Prices of securities and index levels in this report are as of close of business on Wednesday, 05 October 2016 unless otherwise stated. N/US$ conversions are based on a rate of 315.25.


6 October 2016 4

Sector valuation and recommendation On average, our universe of brewers has outperformed the broad index this year (+4.5% ytd vs -2.2% for the ASI). However, on a stock-by-stock basis, the performances are varied. While both Nigerian Breweries (NB) and International Breweries are up by 7.2% and 24.8% ytd, Guinness Nigeria (GN) shares have underperformed the index, shedding -18.6% ytd. The variation in the performances is primarily due to the degree of negative earnings surprise over the January to June period and earnings outlook.

3-year share price performance

Share price performance vs. ASI (rebased to 100)

Source: Bloomberg, FBNQuest Research estimates Source: Bloomberg; FBNQuest Research estimates For its H2 FY 2016 (end-June 2016), Guinness Nigeria reported pretax and post-tax losses of -N4.0bn and -N3.2bn respectively. The losses were on the back of a -17.5% y/y decline in sales, an -851bp y/y gross margin contraction and a 97.5% y/y rise in net finance costs. The company booked an fx translation loss of N3.5bn in FY 2016. We believe the bulk of the loss was due to the company’s decision to take a loan of US$26m in the last quarter. On its part, Nigerian Breweries reported a H1 2016 PBT decline of -17.6% y/y. For International Breweries, despite reporting a loss of -N1.3bn in its Q1 2017E (end-June) results on the back of fx losses, the stellar PBT growth of 119.6% y/y delivered by the company in the Q4 2016 (end-March) quarter has been supportive of its share price. In addition, its average sales growth of 29.6% y/y over the Jan-Jun period is stronger than the low-to-mid single y/y growth delivered by the sector. In terms of outlook, we see 2016E EPS growth of 30.9% for Nigerian Breweries, largely driven by an expected 37% y/y reduction in interest expense. We also expect International Breweries’ adjusted FY 2017E (end-March) EPS to grow by 11% y/y (having adjusted for the fx loss in Q1), mainly driven by sales growth of 11% y/y. The company operates in the value segment; given the growing demand for cheaper beer, we expect the firm to grow unit volumes by mid-to-high single digits y/y this year. For Guinness Nigeria, we expect an adj. EPS decline of -81.4% y/y for FY 2017E (end-June). This comes mainly on the back of our expectation that its net interest expense will outweigh any improvement in gross margins (which may result from the company’s focus on the spirits business).

-40%

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80%

100%

2013 2014 2015 2016 YTD

International Breweries Nigerian Breweries

Guinness Nigeria NSE ASI

0

50

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200

Sep-

13

Mar

-14

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14

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-15

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15

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-16

Sep-

16

Guinness Nigeria NSE ASI

International Breweries Nigerian Breweries


6 October 2016 5

Guinness Nigeria announced that Diageo (its parent company) would no longer proceed with its tender offer to minorities which would have raised its equity stake to 70% from 54.3%. Our view is that the tender offer was very unlikely, given the soft market conditions. Additionally, the stock had sold off by around 42% since the proposal was first muted in September 2015. GN shares have hovered around N100 per share for months now, implying a marked discount to the proposed tender offer price of N175. We had also reckoned that the only other possibility open for Diageo was to review the tender offer price downwards to reflect market realities.

5-year historical P/E multiple trend; peak, average, trough and current P/E

Source: Bloomberg, FBNQuest Research estimates While Nigerian Breweries’ 2016E P/E multiple of 33.2x is in line with its 5-year peak multiple of around 31.9x, International Breweries’ 2017E P/E multiple of 22.3x (adjusted for the fx loss in Q1 2017) is close to its trough P/E multiple of 25.1x. Due to the substantial spike in interest expense, Guinness Nigeria is trading at a substantial premium to its peak multiple of 31.0x. At an average P/E multiple (ex-Guinness Nigeria) of 27.8x, Nigerian brewers are trading at a premium to the 25.0x and 25.9x multiples that their global and emerging market peers are trading on respectively.

10.0

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Guinness Nigeria International Breweries Nigerian Breweries

Trough P/E Peak P/E Average P/E Current P/E


6 October 2016 6

Relative valuation Nigerian companies vs. overseas peers

Source: Bloomberg, FBNQuest Research estimates

Country NamePrice

Currency PriceMkt Cap

(USD, m) Current PE (x)

1 yr fwd P/E (x)

Current EPS growth (%)

1 yr fwd EV/EBITDA (x)

1 yr fwd EV/SALES (x)

NIGERIA GUINNESS NIGERIA PLC NGN 98.0 467.7 819.9 527.1 n/a 14.5 1.6NIGERIA NIGERIAN BREWERIES PLC NGN 145.8 3,664.2 33.2 25.4 -14.0 13.2 3.9NIGERIA INTERNATIONAL BREWERIES NGN 20.0 208.3 22.3 23.3 36.3 8.5 2.8

Average 1,446.7 291.8 191.9 11.1 12.1 2.8

BRITAIN DIAGEO PLC GBP 2,232.5 71,519.1 21.6 20.1 -5.8 15.8 5.4NETHERLANDS HEINEKEN NV EUR 79.9 51,508.5 21.7 20.1 25.4 11.5 2.8

BRITAIN SABMILLER PLC GBP 4,494.5 92,967.8 24.9 22.8 -18.4 15.6 5.0BELGIUM ANHEUSER-BUSCH INBEV SA/NV EUR 115.7 208,163.6 31.8 25.2 -10.5 12.3 4.8

Average 106,039.7 25.0 22.0 -2.3 13.8 4.5

KENYA EAST AFRICAN BREWERIES LTD KES 280.0 2,186.8 20.8 18.4 -16.9 9.5 3.0GHANA GUINNESS GHANA BREWERIES GHS 1.8 135.2 n/a 12.5 -424.4 5.4 1.2

MAURITIUS PHOENIX BEVERAGES LTD MUR 420.0 195.2 14.0 12.5 9.4 7.6 1.1TURKEY ANADOLU EFES BIRACILIK VE TRY 18.6 3,599.8 23.2 18.7 61.4 9.6 1.6KENYA EAST AFRICAN BREWERIES LTD KES 280.0 2,186.8 20.8 18.4 -16.9 9.5 3.0CHILE CIA CERVECERIAS UNIDAS SA CLP 6,600.0 3,667.6 20.8 17.6 1.0 8.2 1.6

TANZANIA TANZANIA BREWERIES LTD TZS 13,000.0 1,755.5 14.5 13.1 7.4 8.1 2.7SOUTH AFRICA DISTELL GROUP LTD ZAr 16,665.0 2,691.8 20.4 17.5 6.4 11.6 1.6SOUTH AFRICA CAPEVIN HOLDINGS LTD ZAr 968.0 618.8 16.7 15.1 6.4 n/a n/aIVORY COAST SOC DE LIMONADERIES ET BRASS XOF 187,995.0 520.7 n/a n/a 1.5 n/a n/a

THAILAND THAI BEVERAGE PCL SGD 1.0 18,039.1 23.9 21.6 22.1 18.5 3.3CHINA TSINGTAO BREWERY CO LTD-A CNY 31.8 6,045.7 28.8 26.9 -13.9 12.8 1.1INDIA UNITED BREWERIES LTD INR 951.8 3,781.1 68.5 56.1 14.7 26.8 4.1

CHINA BEIJING YANJING BREWERY CO-A CNY 7.8 3,295.4 44.9 38.5 -19.3 13.3 1.8MALAYSIA GUINNESS ANCHOR BHD MYR n/a n/a n/a n/a 24.0 n/a n/a

MOROCCO SOCIETE DES BRASSERIES DU MA MAD 1,900.0 551.5 19.1 17.7 5.4 7.3 2.1

Average 3,284.7 25.9 21.8 -20.7 11.41 2.16

NIGERIAN BREWERS

GLOBAL COMPARABLES

OTHER EMERGING MARKETS


6 October 2016 7

H1 2016 scorecard

Earnings declines largely driven by fx-related losses The general trend in the brewers’ H1 2016 (January to June) results was low-to-mid y/y growth in the topline and declines in earnings. During the period, NB and International Breweries reported sales growth of 4% y/y and 30% y/y respectively while GN’s sales declined by -18% y/y. We attribute the topline growth for NB and International Breweries to stronger volumes, mainly in the value category as opposed to pricing. During the period, we estimate Nigerian Breweries’ volume growth was in the low-to-mid single-digit range y/y and that International Breweries grew volumes by over 20% y/y. In contrast, we believe that Guinness Nigeria’s unit volumes declined by mid-to-high teens y/y. Recently, Heineken (NB’s parent company) management disclosed that growth in its value brands – Goldberg, 33 export and Life – have been responsible for topline growth for NB in recent quarters. In the past, unit volumes for the value segment grew by around 12% y/y on average. The companies also recorded gross margin contractions, mainly due to a spike in imported raw material costs arising from the unfavourable fx rate. However, International Breweries recorded a modest -28bp y/y gross margin contraction in Q1 2017 (end-June). Given that a significant (we estimate around 70%) portion of its raw materials are sourced externally, we believe that the full pass-through from fx was not reflected in its Q1 2017 results. As such, we expect to see contractions in gross margins over the next few quarters. NB on the other hand reported gross margin contractions in Q1 and Q2 2016 of -43bps y/y and -333bps y/y respectively. Similar to the trend seen in Nigerian Breweries, Guinness Nigeria also reported an average gross margin contraction of -851bps y/y over the Jan-Jun 2016 period. The contraction in the Apr-Jun period was greater at -939bps y/y versus -260bps y/y in the Jan-Mar period. We believe the greater contraction in Q2 was due to the increased scarcity of fx and the intensified downward movement in the value of the naira.

Jan-Jun 2016 headline P&L items: Y/y changes

Sales GPM Net finance costs PBT PAT

Guinness Nigeria -17.5% -851bps 97.5% n/a n/a

International Breweries 29.6% 603bps 314.5% n/a n/a

Nigerian Breweries 3.8% -193bps 187.7% -17.6% -11.2%

Average 5.3% -147bps 199.9% -17.6% -11.2%

Source: Company data; FBNQuest Research estimates The poor results were magnified further down the P&L. While GN and International Breweries recorded pretax and post-tax losses, NB recorded PBT and PAT declines of -17.6% y/y and -11.2% y/y respectively in the first half of the year. In the end-Jun


6 October 2016 8

quarter, NB’s finance charge grew by over 400% y/y and opex grew by 5% y/y, leading to the y/y decline in PBT. The significant spike in interest expense was due to an fx loss of around -N5.0bn in Q2 2016 (related to foreign currency denominated payables). In Q1 2017 (end-Jun), International Breweries reported pre-tax and post-tax losses of –N1.3bn and –N1.7bn respectively. The losses were mostly due to a finance charge of N2.9bn (vs. N251m in Q1 2016 and N598m in Q4 2016). For GN, the company reported a pre-tax loss of –N3.6bn in Q4 2016 (end-Mar). Although a combination of factors including a decline in sales, a gross margin contraction and a 6% y/y rise in opex all contributed to the pre-tax loss, a 3.1x spike in net interest expense was the major driver. The spikes in net interest expense for all the brewers were due to fx challenges following the adoption of the CBN’s new flexible exchange rate regime and the naira’s downward move to c.N280 (as at reporting date) per US$ from around N199 previously. We highlight that International Breweries has a US$ denominated loan of US$25m on its books which is due in February 2017 while GN incurred a loan of US$26m in the last quarter.

Jan-Jun 2016 headline P&L items: Actual vs. FBNQuest estimates

Sales GPM Net finance costs PBT PAT

Guinness Nigeria -5.7% -457bps 246.1% n/a n/a

International Breweries 18.7% -383bps 328.9% n/a n/a

Nigerian Breweries* -5.1% 31bps 71.5% -24.5% -19.3%

Average 2.6% -269bps 200.2% -24.5% -19.3%

Source: Company data; FBNQuest Research estimates, *H1 estimates include Q1 actual Compared with our estimates, sales came in 5-6% behind what we expected for NB and GN while International Breweries beat our estimate by 19%. We believe that the weaker-than-expected topline for NB and GN is reflective of the slowdown in the level of economic activity during the quarter. While Q1 2016 GDP contracted by -0.4%, fuel supply issues, industrial strikes, lower crude oil output, disruptions to gas supply following the pipeline vandalism and a reduction in government revenue all combined to constrain demand during the quarter. PBT and PAT reported by all three companies were significantly behind our estimates. NB’s PBT and PAT missed our estimates by -24.5% and -19.3% respectively. The variance versus our estimates was mainly due to negative surprises on the net interest expense lines, and to a lesser extent gross margin.


6 October 2016 9

Slowdown in growth

Sub-Sahara Africa still fastest growing region Compared with other regions, beer consumption and production in Africa has seen the fastest growth in the last five years. The annual growth rate in Africa was 6% between 2011 and 2015, compared with the -8.1% and -0.7% declines for Europe and North America over the same period. Growth in Africa has however slowed to 1.6% y/y in 2015 versus 7.2% y/y and 11.3% y/y in 2011 and 2012 respectively. This compares with a -1.7% y/y contraction in 2015 for Asia – the largest beer producing continent – versus growth rates of 7.7% y/y and 1.8% y/y respectively in 2011 and 2012. We attribute the slowdown in production for the larger producers to general economic slowdown. Global GDP grew by 1.9% in 2014 vs. 4.1% in 2006. Notwithstanding, sub-Sahara Africa (SSA) remains the leader in expansion. The region has been growing by around 2% faster than Europe, Central Asia and the rest of the world since 2006.

Global 5-year beer production CAGR to 2015

Trend in GDP growth rates

Source: Barth Haas, FBNQuest Research estimates Source: World Bank; FBNQuest Research estimates

GDP per capita (US$)

Source: World Bank; FBNQuest Research estimates

0.4% -8.1% -0.7% 0.1%

6.0%

2.5%

-1.6%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Asia

Euro

pe

N. A

mer

ica

S. A

mer

ica

Afric

a

C. A

mer

ica

Aust

ralia

/Oce

ania

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2005

2006

2007

2008

2009

2010

2011

2012

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2014

SSA Europe & C. Asia World

0

2,000

4,000

6,000

8,000

10,000

2010 2011 2012 2013 2014 2015

South Africa Nigeria Angola


6 October 2016 10

Focusing on the largest beer producers in Africa - South Africa, Angola and Nigeria, they have also seen a slowdown in beer production in the last two years. For these countries, beer production expanded by an average of 1%, 2% and 1% respectively during the period. For Nigeria, slower economic growth and the depreciation of the naira have resulted in its GDP per capita – a key metric utilised by fast moving consumer goods companies to judge consumer spending potential - declining to around US$1,172.8 (using the current fx rate) compared with US$3,200 in 2014. The situation in Nigeria was worsened by the security challenges in north-east of the country and the floods which affected about two-thirds of the states.

Low per capita consumption Despite increasing production and consumption in Africa, per capita consumption still remains relatively low. In 2014, consumption in Africa averaged around 11 litres. This compares with the 70litres and 65 litres in North America and West Europe respectively. As such, there is still ample room for growth in the sector on the continent. According to Diageo, beer production in Africa and the Middle East is expected to grow at a CAGR of 5.2% between 2016 and 2020 versus 0.3% in Europe and 2.3% for the rest of the world on the premise that the African market is less mature than the other parts of the world.

Forecast of world beer market growth, CAGR 2016-2020

Source: Diageo; FBNQuest Research estimates Broadly speaking, production in Nigeria increased in the last decade by around 9% on average – owing to faster growth in the earlier part of the decade. The sector’s faster growth over the last decade relative to flattish growth in the rest of the world can be attributed to economic growth – between 2011 and 2014, GDP growth averaged around 6% y/y, thanks to an emerging middle class and a population growth of around 3% between 2010 and 2015. The average population growth in North America was 1% over this period; in Europe it was flattish. Of recent, lower disposable household income following the partial removal of fuel subsidies in 2012, the partial deregulation of the downstream oil and gas sector in 2016 and hikes in electricity tariffs have begun to weigh on the sector’s growth.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

World Europe Americas Asia Pacific Africa/MiddleEast


6 October 2016 11

Unsupportive macroeconomic indicators/fundamentals Nigeria’s GDP growth exceeded 4% each year from 2000 through to 2014 but slumped to just 2.8% last year under the many pressures created by the oil price slide. It contracted in Q1 2016 by -0.4% y/y and by -2.1% y/y in Q2 2016. Population growth slowed to 2.3% in 2012 according to CBN data. The historical solid GDP growth has been driven by the non-oil sector. It stems from reforms introduced by the second Obasanjo administration (2003-07) and in some sectors such as agriculture by the Jonathan presidency (2011-15), favourable weather conditions, the trickle-down from high oil prices (until June 2014) and low interest rates in developed economies. Before Q2 2016, non-oil growth averaged 4.4% y/y over eight successive quarters, admittedly on a downward trend due to pressures on household budgets. The falling oil price, the squeezing of government spending and the emergence of public salary arrears have together taken the shine off the story of robust private demand. In Q2 2016, non-oil growth contracted by -0.4% y/y. In contrast to the non-oil economy, before Q2 2016, oil GDP contracted by an average of -2.6% y/y over eight successive quarters. However, the sector shrank by a staggering -17.5% y/y in Q2 2016. Oil output was estimated at 1.69 mbpd, down from 2.1 mbpd in Q1 2016. Underinvestment by the unincorporated joint-ventures (of the NNPC and the oil majors), the vacuum created by the non-passage of the PIB, a steep increase in production leakages and, recently, pipeline vandalism all contributed to this disappointing performance.

GDP, oil and non-oil growth (Y/y growth)

Central economic indicators

2014 2015 2016E 2017E

Real growth (%) 6.2 2.8 -1.2 2.5

CPI (%; y/y Dec) 8.0 9.6 18.0 10.0

Monetary policy rate (%, yr-end) 13.0 11.0 15.0 11.0

Current account/GDP (%) 0.1 -3.2 -4.9 -6.1

Bonny Light (end-yr spot; US$/b) 65 35 55 65

Bonny Light (average spot; US$/b) 100 53 50 60

Official fx reserves (US$bn) 34 29 20 20

N/US$ (end-period) 185 197 325 355

N/US$ (average) 165 196 260 340

Source: NBS, FBNQuest Research Source: CBN, NBS, Bloomberg, FBNQuest Research estimates Consumption growth, a key driver of GDP growth, has slowed as a result of insecurity in the north east, fiscal pressures arising from the slide in the oil price, currency devaluations (in November 2014, February 2015 and June 2016), and dull global growth. Unfortunately for Nigeria, the developed economy with the best growth prospects is the US, which has become self-sufficient in oil production.

-20%

-15%

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-5%

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10%

15%

20%

Q1

2012

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Q3

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Q4 2

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Q4 2

014

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Q3

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Q4 2

015

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2016

GDP Non-oil Oil


6 October 2016 12

Perhaps the best evidence of the weakness of the non-oil economy is that trade, the second largest sector of the economy, was flat in Q2 and declined by -2.6% q/q. Trade is the most reliable measure of demand across all income levels. The manufacturing sector contraction slowed from -7.0% y/y to -3.4%. For the largest segment of the sector (food, beverages and tobacco), it slowed from -11.1% y/y to -5.5%. Its underperformance relative to most other segments may be traced to its high import requirement. The data for the diverse services sector do not send any clear signals. Financial and insurance posted double-digit contraction y/y for the second successive quarter. Public administration, transport and storage, and real estate all shrank by more than -5.0% y/y. The performance of these sectors more than outweighed the modest growth y/y posted by education, information and communications, and professional and technical services. Going forward, we give the Buhari administration the benefit of the doubt, and recognise that the pace of reform has been slowed by virtue of the ruling party (APC) being a coalition and by institutional and other vested interests. Expectations are high and many of the plans will only have an impact over time, which together reinforce the need of the FGN to communicate better its policies and its successes. There are some achievements to trumpet. We note therefore the recapture of almost all territory held by Boko Haram, changes at the top of the NNPC, the corporation’s greater transparency, its planned experiment with self-financing JVs in the oil industry, the fuel price reform in May and the exchange-rate reform in June. The administration will be judged on its fiscal policy because it has pushed an expansionary agenda with ambitious capital spending plans (when governments in Ghana, Angola and elsewhere in similar circumstances have opted for austerity). The 2016 budget assumes an average oil price of US$38/b, which now appears sound. We cannot say the same for the output assumption, given the pick-up in sabotage. To make good the fall in revenues from the oil industry, and to attain its capital spending plans without a soaring deficit, the FGN has to come close to hitting its aggressive target for its tax take from the non-oil economy. Since oil provides about 65% of gross federally collected revenues, it is clear that the government will have little room for manoeuvre. We see an average price for this year for spot Bonny Light of US$50/b, with US$55/b at end-year. The price was below US$30/b as recently as January. Our take is that the market had oversold following the international deal with Iran. The pick-up can only be gradual since the global supply and demand dynamics will not be supportive until late 2017. For next year, therefore, we project Bonny Light at US$60/b (average) and US$65/b (end-year). The Saudi-led OPEC decision in November 2014 to leave its production quotas unchanged is having some impact. Some shale oil producers in the US are going out of business because they cannot compete at the lower prices, and many US banks have become less free with their credit. The picture is uneven, however, and some companies have stronger balance sheets than others in the fracking industry in North America.


6 October 2016 13

Nigeria is, of course, a member of the global village, and vulnerable to negative movements in world financial and trade flows. Its credit event in 2009 was, however, home-grown and caused by the failings of its own banks rather than borrowings from foreign banks. It also enjoys some insulation from those movements by virtue of its low external indebtedness, both public and private sector. For these reasons and because in production terms Nigeria is a non-oil economy, the damage from the slide in the oil price has been less acute than in, say, Angola or Russia. For the year as a whole, we see contraction of -1.2% y/y. Fiscal policy, as we have noted, will be decisive, and we are confident in this respect. Sectoral reforms and the dramatic move on the exchange rate in June should also underpin an economic recovery. We forecast growth of 2.5% for next year, and a robust turnaround thereafter.


6 October 2016 14

Recent developments Visible mix shift towards value brands The ongoing macroeconomic challenges have not only resulted in a slowdown in volume growth, they have also impacted the segment mix for the industry. The general trend is an increase in demand for value/discount brands and a slowdown in demand for the premium brands. Guinness Nigeria’s value-for-money brand, “Orijin”, which was introduced in late 2013, has begun to experience a slowdown in sales. Although management did not disclose y/y growth figures for Orijin, it confirmed the brand is beginning to experience a decline in volumes. This compares with the double-digit y/y growth the brand recorded in 2014 after its introduction to the market. We believe that growth in the product has been held back partly due to increased competition in the market and consumers’ continued demand for much cheaper products. The company has also shifted focus to other brands in this segment such as Dubic and Satzenbrau. In a bid to increase its market share, Guinness cut its price for Satzenbrau by around 20% to N100 per 45cl bottle this year. More recently, it introduced Orijin Zero as a brand innovation strategy. NB has also capitalised on consumers’ decision to down-trade to the value segment and has expanded its value segment portfolio. Over the last two years, it has added a few key products to this portfolio - Star Radler, Star Triple-X and Strongbow. The latter was launched (with a fruity flavor) to appeal to the average non-beer drinker. These launches came after the introduction of Ace Roots in late 2014. According to NB management, the down-trading from mainstream brands to value brands over the last few years has resulted in strong volume growth in this segment and the displacement of mainstream brands as the largest category in terms of volumes. As such, the firm has embarked on a redefinition of the different segments within the lager market. The categorisations are now International Premium, National Premium, Mainstream and Discount segments.


6 October 2016 15

Nigerian beer market segment re-classification Segment (price point range per 60cl bottle) Nigerian Breweries Guinness Nigeria International Breweries

International Premium (N260)

n/a

National Premium (previously mainstream) (N200-N220)

n/a

Mainstream (previously value) (N150 – N200)

Discount (N130 – N140)

n/a n/a

Source: Company dat, FBNQuest estimates


6 October 2016 16

The former value segment is now the new Mainstream segment. In volume terms, the Goldberg and Life brands are now the number 1 and 2 brands nationally. The lager segment is now categorised as Premium (20%), Mainstream (60%), and Discount (20%). We believe the reclassifying is appropriate because the volume-mix is skewed in the favour of value brands. Historically, Star used to be the largest lager beer in term of volumes. However, Life and Goldberg are now the market leaders in volume terms.

Beer market split by value (2012)

Beer market split by value (H1 2016*)

Source: NB, FBNQuest Research; prior to reclassification Source: NB, FBNQuest Research estimates; * post reclassification

International Breweries on the other hand operates in the value segment. Its flagship brand, Trophy, has gained traction in the last few years in the South-West of the country (ex-Lagos). As such, the down-trading by consumers has been a positive for the company. Between 2014 and 2016, International Breweries recorded average annual sales growth of 17%. We attribute the sales growth more to volume than pricing. Due to the increase in demand for its products, International Breweries has undergone a series of expansions. We estimate that the company now operates at a capacity of about 1.5m hectoliters (hl), up from around 1.2m hl in 2013-14. More recently, International Breweries has expanded its distribution reach for Trophy to Lagos, in order to cater to the growing demand for cheaper brands. Margins under pressure; NB resilient Over the last five years, the general trend for the brewers has been a downward movement in profit margins. Notwithstanding, broadly speaking, Nigerian Breweries has shown the most stability in terms of profitability margins and ratios of all the brewers we cover. Although operating expenses relative to sales increased between 2010 and 2015, the company has managed to curb its expenses this year. We attribute the subdued opex-to-sales ratio partly to economies of scale advantages.

Mainstream68%

Discount21%

Premium11%

Mainstream60%

Premium20%

Discount20%


6 October 2016 17

Margins and opex-to-sales trends Guinness Nigeria International Breweries Nigerian Breweries

Source: Company data; FBNQuest estimates

Gross margins have been fairly flattish for all three brewers since 2010 – averaging 44%, 43% and 48% for Guinness, International Breweries and Nigerian Breweries respectively over the period. We attribute the modest variance in gross margins to relatively flattish prices for barley – the most significant raw material for the brewers - over the period. Sugar prices however declined between 2010 and 2015 but have been recovering steadily since the beginning of 2016. Given the enormous reliance on imported inputs, we expect the unfavorable fx rates to negatively impact gross margins in the near to medium term.

Barley and sugar prices (US$/te)

Source: Index Mundi; FBNQuest Research estimates While PBT margins for Guinness Nigeria have weakened from 18% in 2010 to -2.3% in 2016, International Breweries recorded a marked expansion over the same period – from 4% to 16%, despite a N1bn charge in finance cost in 2014 (PBT margin expanded by only 78bps y/y that year). We recall that International Breweries successfully raised N7.5bn via a rights issue in 2010 as part of a turnaround plan by SAB Miller which bought a 60% stake in the company. Since 2010, gross margins have expanded by almost 200bps on average, peaking at 50% in Q1 2017, up from

-10%

0%

10%

20%

30%

40%

50%

2010

2011

2012

2013

2014

2015

2016

Gross Margin Opex-to-Sales

EBIT Margin PBT Margin

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2010

2011

15M

to

2013

*

2014

2015

2016

Q1

'17



15%

20%

25%

30%

35%

40%

45%

50%

55%

2010

2011

2012

2013

2014

2015

Q1

'16

Q2

'16



0

100

200

300

400

500

600

700

Jan-

10

Jul-

10

Jan-

11

Jul-

11

Jan-

12

Jul-

12

Jan-

13

Jul-

13

Jan-

14

Jul-

14

Jan-

15

Jul-

15

Jan-

16

Jul-

16

Barley Sugar


6 October 2016 18

32% in 2010. The opex-to-sales ratio has also declined over the period, broadly speaking. In Q1 2017, International Breweries’ PBT margin moved to negative territory due to a N2.9bn finance charge arising from foreign currency translation differences on a US$25m loan. Given the new floating exchange rate regime, we expect this line to remain elevated until the company repays the loan in February 2017 and/or restructures its loan book favorably. As for Guinness Nigeria, in the most recent quarter, its weak profit margins were driven by fx related challenges which negatively impacted gross margins and net interest expense. We recall that the company reported an fx translation loss of N3.5bn in Q4 2016. To put that into context, the company’s interest expense for the 9M period was N3.3bn. Until the company is able to pay down its US$-denominated loan and/or refinance, we do not expect any meaningful easing up on finance charges in the near term. In May, NB implemented price increases of around N10 (c.8%) on average across its portfolio. Being the first to implement a price increase, we estimate that its market share shrunk by less than 1%. A further average price increase of around N10 took effect on September 1, 2016. The latest round of price increases implies average price increases of around 11-12% across the portfolio this year. GN also followed the footsteps of its rivals and increased prices by around 7-10%. The products that saw the most price increases were those with a higher percentage of raw materials in their input, i.e. mostly can products. Owing to the persistent scarcity of fx, the brewers are being forced to look inwards (domestically) for sourcing of raw materials. NB indicated on its last conference call that it has a target of sourcing 60% of its raw materials locally by 2020. The company seeks to consider alternative local raw materials such as cassava and sorghum. Guinness Nigerian on the other hand plans to seek local and cost effective packaging materials and grains to mitigate the unfavorable fx effects.


6 October 2016 19

Outlook The African market has high growth potential. We believe that a growing middle class and a higher working age population would lead to increased demand in alcoholic beverages in the medium to long term. Consequently, we see opportunities for growth for the sector in Africa. In October 2015, Anheuser-Busch InBev (AB InBev) proposed to take over SAB Miller. The offer is due to close in the middle of October 2016 following the approval by shareholders of both companies. The merger will produce the world’s largest brewer – controlling about a third of the world beer market. Whilst the merger would have a significant impact on the SAB Miller Group, we do not believe there would be any meaningful operational changes in the Nigerian businesses which comprise International Breweries, Intafact Breweries and Pabod Breweries. We estimate that the three SABMiller subsidiaries in Nigeria account for less than 1% of the group’s revenue. Narrowing down to Nigeria, the current macroeconomic challenges are impeding growth for the consumer good names in the near term. However, the value segment is growing strongly due to lower disposable incomes and the difficulty in passing on cost increases to consumers. From a revenue perspective, growth is slowing down due to weaker pricing. As such, the cheaper, more economical brands are taking the spotlight. Given the strain the fx scarcity has placed on the sector, the CBN recently directed commercial banks to allocate 60% of their fx sales to manufacturers. Ordinarily, this should help alleviate some of the pressure.

Nigerian Brewers: FBNQuest y/y growth forecasts

Guinness Nigeria Nigerian Breweries International Breweries

Year end 2017E 2016E 2017E

Sales 5% 3% 11%

Gross margin 120bps -97bps -252bps

PBT n/a -8% -97%

EPS (adj) -81% -6% 11%

Source: Company data. FBNQuest Research estimates In the near term, we see modest sales growth for the brewers – driven by volumes rather than pricing. For the next financial year, we expect International Breweries to grow it sales by 11% y/y, while we see sales growth for GN and NB at 5% y/y and 3% y/y respectively. The stronger sales growth forecast for International Breweries is on the back of its product niche – the value segment. In addition, the company still has room for expansion and has begun to gain traction in its non-core regions such as Lagos State. We believe that GN and NB are operating at optimal capacity and expect growth to come from their value brands.


6 October 2016 20

Nigerian Brewers national footprint

Source: Company data. FBNQuest Research estimates

Given the challenges surrounding fx and the inability of the consumer goods names to successfully pass on cost increases to consumers, we expect gross margin contractions, except for Guinness Nigeria. We see a glimmer of hope in the company’s strategy to increase its focus on the spirits business, which ordinarily attracts higher margins than the mainstream beer segment. Locally sourcing raw materials should also help. Nigeria is the largest producer of cassava and the second largest producer of sorghum in the world. However, using cassava as a substitute comes with the risk of changing the taste of lager. Due to the continued naira depreciation, we expect to see further fx translation losses weighing on the PBT line. For GN, we forecast PBT and PAT of N257m and N180m respectively for FY 2017E compared with the losses reported in FY 2016. For International Breweries, while we see PBT declining by -97% y/y, if we adjust for the fx loss in Q1, the implied EPS growth forecast is 11.1% y/y. For Nigerian Breweries, given the limited exposure it has to foreign currency compared with GN and International Breweries, we see modest PBT and EPS y/y declines in the mid-to-high single digit range.


6 October 2016 21

Guinness Nigeria Financials (Jun YE): N millions, except per share data

Source: Company data, FBNQuest Research estimates

INCOME STATEMENT 2016 2017E 2018E 2019E CASHFLOW STATEMENT 2016E 2017E 2018E 2019E

Turnover 101,973 107,072 112,425 120,295 Profit pre WC. chngs. 14,432 13,373 13,336 14,725

Gross profit 41,810 45,184 48,568 53,170 Working capital changes -8,723 1,019 -1,729 -1,702

Total opex -37,895 -40,794 -43,733 -46,915 Gratuity paid -849 -272 -273 -272

Other income 501 500 550 605 Long service awards paid -127 -84 -87 -89

Exceptional item -3,476 - - - Tax paid -6,053 -742 -565 -605

EBIT 940 4,890 5,384 6,860 Cash flow from operations -1,320 13,293 10,682 12,056

EBITDA 9,591 11,869 11,965 13,437 Interest received 925 1,363 1,295 1,165

Interest received 1,185 1,363 1,295 1,165 Purchase of fixed assets -8,504 -7,495 -6,521 -6,616

Interest paid -4,472 -5,996 -6,279 -6,479 Acquisition of intangibles -1,038 -1,059 -1,080 -1,101

PBT -2,347 257 400 1,547 Proceeds from sale of F.A. 84.70 - - -

Taxation 331 -77 -120 -464 Cash flow from invst -8,532 -7,191 -6,306 -6,552

PAT -2,016 180 280 1,083 Net cash flow after invst -9,852 6,102 4,377 5,503

Interest paid -4,288 -5,996 -6,279 -6,479

BALANCE SHEET 2016E 2017E 2018E 2019E Dividend paid -2,244 -4,819 -144 -196

Fixed assets 87,233 87,749 87,689 87,728 Term loan & fin. Lease 14,958 1,426 1,566 1,720

Intangible assets 1,709 2,467 3,347 4,349 Bank overdraft 0 0 0 0

long term debtors 181 130 135 140 Cash flow from financing 8,426 -9,389 -4,857 -4,954

Non current assets 89,123 90,347 91,171 92,217 Cash at start 4,333 2,906 -380 -861

Stocks 13,021 13,672 14,356 15,074 Net incr. (decr.) in cash -1,426 -3,287 -480 549

Trade debtors 26,510 26,775 27,043 27,313 Closing cash bal 2,906 -380 -861 -312

Other debtors 2,494 2,521 2,548 2,575

Deposits for imports - - - - PROFITABILITY RATIOS 2016E 2017E 2018E 2019E

Cash & bank balances 5,845 2,565 2,092 2,651 Gross margin 41.0% 42.2% 43.2% 44.2%

Current assets 47,870 45,533 46,038 47,613 EBITDA margin 9.4% 11.1% 10.6% 11.2%

Total assets 136,992 135,880 137,209 139,830 EBIT margin 0.9% 4.6% 4.8% 5.7%

Deferred tax liability 12,941 12,553 12,176 11,811 PBT margin -2.3% 0.2% 0.4% 1.3%

Provision for gratuity 1,247 2,044 2,860 3,691 Net profit margin -2.0% 0.2% 0.2% 0.9%

Loans/ lease obligations 14,035 15,438 16,982 18,680 ROCE av. 1.4% 7.9% 8.6% 10.7%

Non current liabilities 28,222 30,035 32,018 34,182 ROCE / WACC 0.1x 0.6x 0.6x 0.8x

Creditors & accruals 18,168 19,076 19,081 19,088 Opex/sales 37.2% 38.1% 38.9% 39.0%

Other creditors 8,441 9,482 8,715 8,010

Taxation 586 309 240 464 ACTIVITY RATIOS 2016E 2017E 2018E 2019E

Amount due to rel coy 10,921 10,933 10,944 10,956 Inventory turnover 5.1x 4.6x 4.6x 4.6x

Other current liab 3,860 3,860 3,860 3,860 Days of inventory on hand 72.1x 78.7x 80.1x 80.0x

Bank overdraft 2,938 2,945 2,953 2,963 Receivables turnover 4.9x 4.0x 4.2x 4.4x

Current portion of term loan 22,195 22,218 22,240 22,262 Days of sales outstanding 75.2x 90.8x 87.4x 82.5x

Current liabilities 67,110 68,823 68,033 67,603 Payables turnover 3.5x 3.4x 3.4x 3.6x

Called up share capital 753 753 753 753 No. of payable days 104.8x 108.7x 107.9x 102.7x

Bonus issue reserve 0 0 0 0 Cash conversion cycle 42.5x 60.9x 59.6x 59.8x

Share premium account 8,961 8,961 8,961 8,961 Working capital turnover -4.7x -4.2x -4.5x -5.1x

Fixed assets reval. res. 0 0 0 0 Fixed asset turnover 1.2x 1.2x 1.3x 1.4x

Revenue reserve 31,946 27,307 27,443 28,330 Capital employed turnover 1.6x 1.7x 1.8x 1.9x

Shareholders' funds 41,661 37,022 37,158 38,045 Total asset turnover 0.8x 0.8x 0.8x 0.9x

Total liab. & SH funds 136,992 135,880 137,209 139,830

Per share data 2016E 2017E 2018E 2018E LIQUIDITY & SOLVENCY 2016E 2017E 2018E 2019E

Ave. shares ranking (m) 1,506 1,506 1,506 1,506 Current ratio 0.7x 0.7x 0.7x 0.7x

EPS (adjusted) (N) 0.64 0.12 0.19 0.72 Quick ratio 0.5x 0.5x 0.5x 0.5x

CFPS -0.9 8.8 7.1 8.0 Cash ratio 0.1x 0.0x 0.0x 0.0x

FCF per share (N) -6.5 4.1 2.9 3.7 Debt-to-capital ratio 54.6% 58.2% 58.8% 59.1%

Net dividend (N) 3.2 0.1 0.1 0.5 Debt-to-equity ratio 120.2% 139.2% 143.0% 144.2%

Payout ratio (%) 497% 80% 70% 65% Financial leverage 3.3x 3.7x 3.7x 3.7x

NAVPS (N) 27.7 24.6 24.7 25.3

VALUATION 2016E 2017E 2018E 2019E Y/y growth 2016E 2017E 2018E 2019E

Price to earnings 152.2x 819.9x 527.1x 136.3x Turnover -13.9% 5.0% 5.0% 7.0%

Dividend yield 3.3% 0.1% 0.1% 0.5% Gross profit -25.2% 8.1% 7.5% 9.5%

Price to free cash flow -15.0x 25.5x 35.5x 27.1x Total opex -7.5% 7.7% 7.2% 7.3%

EV / sales 1.6x 1.6x 1.5x 1.4x Operating profit (EBIT) -94.0% 420.4% 10.1% 27.4%

EV / EBITDA 17.5x 14.5x 14.5x 12.9x PBT -121.7% -111.0% 55.5% 286.8%

EV / EBIT 178.9x 35.2x 32.2x 25.3x PAT -125.9% -108.9% 55.5% 286.8%

EV / CE 2.7x 2.8x 2.7x 2.7x EPS (adjusted) (N) -87.6% -81.4% 55.5% 286.8%

Free cash flow yield -6.7% 3.9% 2.8% 3.7% DPS (N) 0.0% -97.0% 36.1% 259.2%

Price to book value 3.5x 4.0x 4.0x 3.9x


6 October 2016 22

International Breweries Financials (Mar YE): N millions, except per share data


INCOME STATEMENT 2016A 2017E 2018E 2019E CASHFLOW STATEMENT 2016A 2017E 2018E 2019ETurnover 23,269 25,736 28,414 30,292 PAT 2,653 87 2,824 2,025Gross profit 10,709 11,195 12,502 13,510 Non cash items 3,447 3,828 4,051 4,131Total opex -5,613 -6,434 -7,530 -8,179 Operating profit after NCC adjustments 8,588 4,504 9,043 9,512Other Income 45 0 20 50 Cash flow from operations 7,902 4,947 5,304 8,192Exceptional item - - - - Purchase of fixed assets -4,177 -5,276 -4,546 -4,847EBIT 5,141 4,761 4,992 5,381 Proceeds from sale of F.A. 14.53 - - - EBITDA 8,548 8,549 9,003 9,472 Cash flow from invstmt -3,947 -5,146 -4,486 -4,687Interest received 225 120 50 150 Interest paid -1,690 -673 -1,008 -2,638Interest paid -1,709 -673 -1,008 -2,638 Long term loan received 0 7,992 799 440FX translation difference 0 -4,085 0 0 Prior year dividend paid -824 -1,153 -173 -1,200PBT 3,657 124 4,034 2,893 Cash flow from financing -3,707 290 -115 -3,325Taxation -1,004 -37 -1,210 -868 Net incr. (decr.) in cash 248 92 704 180PAT 2,653 87 2,824 2,025 Cash at start 854 1,102 1,193 1,897

Closing cash balance 1,102 1,194 1,897 2,077BALANCE SHEET 2016A 2017E 2018E 2019EFixed assets 25,216 26,704 27,238 27,993Non current assets 25,399 26,889 27,416 28,163Stocks 2,909 3,218 3,908 3,750 PROFITABILITY RATIOS 2016A 2017E 2018E 2019ETrade debtors 4,072 3,378 4,662 4,870 Gross margin 46.0% 43.5% 44.0% 44.6%Cash & bank balances 1,102 1,193 1,897 2,077 EBITDA margin 36.7% 33.2% 31.7% 31.3%Current assets 8,083 7,789 10,466 10,697 EBIT margin 22.1% 18.5% 17.6% 17.8%Total assets 33,482 34,678 37,882 38,859 PBT margin 15.7% 0.5% 14.2% 9.6%Deferred tax liability 3,119 2,495 2,745 2,772 Net profit margin 11.4% 0.3% 9.9% 6.7%Provisions 0 0 0 0 ROCE av. 21.1% 19.0% 18.6% 18.5%Financial liabilities 8,552 2,676 2,943 3,017 ROCE / WACC 0.8x 0.7x 0.6x 0.7xNon current liabilities 3,544 10,998 12,048 12,517 Opex/sales -24.1% -25.0% -26.5% -27.0%Creditors & accruals 6,573 7,614 6,808 6,330Taxation 677 400 440 528 ACTIVITY RATIOS 2016A 2017E 2018E 2019ECurrent liabilities 15,941 10,750 10,252 9,935 Inventory turnover 4.4x 4.7x 4.5x 4.4xShare capital 1,647 1,647 1,647 1,647 Days of inventory on hand 83 77 82 83Share premium account 6,161 6,161 6,161 6,161 Receivables turnover 6.0x 6.9x 7.1x 6.4xRevenue reserve 1,361 1,361 1,361 1,361 Days of sales outstanding 60.8x 52.8x 51.6x 57.4xShareholders' funds 13,997 12,931 15,582 16,407 Payables turnover 2.3x 2.1x 2.3x 2.5xTotal liab. & SH funds 33,482 34,678 37,882 38,859 No. of payable days 162.0x 174.4x 158.6x 144.3x

Cash conversion cycle -18 -45 -25 -4Working capital turnover 49.6x -27.3x -261.2x 20.5xFixed asset turnover 1.0x 1.0x 1.1x 1.1x

Per share data 2016A 2017E 2018E 2019E Capital employed turnover 1.0x 1.0x 1.1x 1.0xAve. shares ranking (m) 3,294 3,294 3,294 3,294 Total asset turnover 0.7x 0.8x 0.8x 0.8xEPS (reported) (N) 0.81 0.03 0.86 0.61EPS (adjusted) (N) 0.81 0.89 0.86 0.61 LIQUIDITY & SOLVENCY 2016A 2017E 2018E 2019ECFPS 2.4 1.5 1.6 0.0 Current ratio 0.5x 0.7x 1.0x 1.1xFCF per share (N) 1.2 -0.1 0.2 0.0 Quick ratio 0.3x 0.4x 0.6x 0.7xDPS (N) 0.4 0.1 0.4 0.3 Cash ratio 0.1x 0.1x 0.2x 0.2xPayout ratio (%) 43% 200% 43% 43% Debt-to-assets ratio 26% 31% 31% 32%NAVPS (N) 4.2 3.9 4.7 5.0 Debt-to-capital ratio 38% 45% 43% 43%

Debt-to-equity ratio 61% 82% 75% 75%VALUATION 2016A 2017E 2018E 2019E Financial leverage 2.4x 2.7x 2.4x 2.4xPrice to earnings (P/E) 24.8x 22.3x 23.3x 32.4xDividend yield 1.8% 0.3% 1.8% 1.3% Y/y growth 2016A 2017E 2018E 2019EEV / sales 2.8x 2.8x 2.6x 2.4x Turnover 12.7% 10.6% 10.4% 6.6%EV / EBITDA 7.6x 8.5x 8.1x 7.7x Gross profit 18.2% 4.5% 11.7% 8.1%EV / EBIT 12.6x 15.2x 14.5x 13.5x Total opex 21.6% 14.6% 17.0% 8.6%EV / CE 2.6x 2.9x 2.5x 2.5x Operating profit (EBIT) 10.9% -7.4% 4.9% 7.8%Free cash flow yield 5.7% -0.5% 1.2% 5.1% PBT 29.9% -96.6% 3159.5% -28.3%Price to book value 4.7x 5.1x 4.2x 4.0x PAT 36.3% -96.7% 3159.5% -28.3%Dividend Sum 1,153 173 1,200 861 EPS (adjusted) (N) 36.3% 11.1% -4.1% -28.3%WASC 3,294 3,294 3,294 3,294 DPS (N) 40.0% -85.0% 592.6% -28.3%


6 October 2016 23

Nigerian Breweries Financials (Dec YE): N millions, except per share data

Income statement 2015A 2016E 2017E 2018E Cash flow statement 2015A 2016E 2017E 2018E

Turnover 293,906 302,723 326,941 353,096 Operating profit pre W.C. chgs 90,663 93,159 101,270 107,058

Gross profit 142,462 143,794 158,566 171,252 Working capital changes 16,102 -9,733 -8,558 -23,008

Total opex -80,717 -80,524 -85,005 -90,746 Income tax paid -18,923 -13,945 -18,965 -28,969

Other income 484 581 581 581 Gratuity and VAT paid -15,215 -1,082 -1,165 -1,241

Operating profit (EBIT) 62,229 63,850 74,143 81,087 Cash flow from operations 72,627 68,399 72,582 53,841

EBITDA 89,125 89,499 98,110 103,893 Purchase of fixed assets -28,628 -12,714 -15,039 -15,889

Net interest -7,714 -13,536 -8,447 -7,766 Acquisition of subsidiary - - - -

PBT 54,515 50,314 65,695 73,321 Invstmt. & asset disposal 111 -150 -1,050 -1,045

Taxation -16,459 -15,094 -19,709 -21,996 interest received & others -3,843 509 470 1,050

PAT 37,218 35,219 45,986 51,323 Cash flow from investing -32,360 -12,356 -15,620 -15,885

Net cash flow after invstmt. 40,267 56,043 56,962 37,956

Balance sheet 2015A 2016E 2017E 2018E loans - 8,000 - -

Property plant & equipment 197,298 184,364 175,436 168,518 Dividend paid -32,149 -35,677 -33,545 -39,581

Investment 150 150 150 150 Interest paid -6,026 -14,046 -8,917 -8,816

Other non-current assets 101,289 99,939 99,989 100,029 Inc/(dec) in bank overdraft -2,685 -7,686 0 -576

Non-current assets 298,737 284,453 275,575 268,697 Cash flow from financing -40,860 -49,409 -42,462 -48,973

Stocks 28,410 29,433 32,965 35,602 Cash at start 5,701 5,108 11,742 26,243

Trade debtors 16,512 17,750 21,726 26,941 Net incr. (decr.) in cash -593 6,634 14,501 -11,017

Other debtors 1,042 1,073 1,288 3,220 Closing cash bal. 5,108 11,742 26,243 15,225

FX purchased & other assets 6,411 4,177 5,012 6,015

Bank & cash balances 5,107 11,742 26,242 15,225 Profitability ratios 2015A 2016E 2017E 2018E

Current assets 57,482 64,175 87,234 87,003 Gross margin 48.5% 47.5% 48.5% 48.5%

Total assets 356,218 348,628 362,809 355,700 EBITDA margin 30.3% 29.6% 30.0% 29.4%

Deferred taxation 31,915 36,594 36,594 36,594 Operating profit margin 21.2% 21.1% 22.7% 23.0%

Gratuity at year end 11,904 12,982 13,977 14,896 PBT margin 18.5% 16.6% 20.1% 20.8%

Term loan - 11,000 11,000 11,000 Net profit margin 12.7% 11.6% 14.1% 14.5%

Non-current liabilities 43,819 60,577 61,572 62,490 ROCE av. 12.3% 12.7% 14.6% 15.8%

Creditors and accruals 92,724 84,153 84,153 76,314 ROCE / WACC 1.6x 1.7x 1.9x 1.9x

Tax payable 20,218 16,687 17,431 10,459 Opex/Sales 27.5% 26.6% 26.0% 25.7%

Dividend payable 12,399 12,399 12,399 7,439

Due to group co 14,737 2,947 2,947 2,947 Activity ratios 2015A 2016E 2017E 2018E

Current Liabilities 140,078 116,187 116,931 97,160 Inventory turnover 5.3x 5.5x 5.4x 5.3x

Share capital 3,965 3,965 3,965 3,965 Days of inventory on hand 68.6 66.4 67.6 68.8

Capital reserves - - - - Receivables turnover 17.9x 17.7x 16.6x 14.5x

Share premium 64,950 64,950 64,950 64,950 Days of sales outstanding 20.4 20.7 22.0 25.2

Reserve for bonus 365.00 365.00 365.00 365.00 Payables turnover 2.1x 2.2x 2.4x 2.7x

General reserve 102,959 102,502 114,943 126,685 No. of payable days 175.1 163.3 154.2 136.5

Total capital & reserves 172,239 171,782 184,223 195,965 Cash conversion cycle -86.1 -76.2 -64.5 -42.5

Minority interest 82 83 83 84 Working capital turnover -3.9x -4.0x -5.5x -8.7x

Total liabilies & SHF 356,218 348,628 362,809 355,700 Fixed asset turnover 1.0x 1.0x 1.2x 1.3x

Capital employed turnover 1.3x 1.4x 1.5x 1.5x

Per share data 2015A 2016E 2017E 2018E Total asset turnover 0.8x 0.9x 0.9x 1.0x

Ave. shares ranking (m) 7,929 7,929 7,929 7,929

EPS (adjusted) (N) 4.65 4.39 5.75 6.42 Liquidity ratios 2015A 2016E 2017E 2018E

CFPS 9.2 8.6 9.2 0.0 Current ratio 0.41 0.55 0.75 0.90

Free cash flow per share 5.1 7.1 7.2 0.0 Quick ratio 0.21 0.30 0.46 0.53

Net dividend (N) 4.7 4.0 4.9 5.2 Cash ratio 0.05 0.10 0.22 0.16

Payout ratio (%) 100% 90% 85% 80% Debt-to-capital ratio 16.5% 12.9% 12.1% 11.3%

NAVPS (N) 21.7 21.7 23.2 24.7 Debt-to-equity ratio 19.7% 14.8% 13.8% 12.7%

Financial leverage 2.1x 2.0x 2.0x 1.8x

Valuation 2015A 2016E 2017E 2018E

Price to earnings 31.3x 33.2x 25.4x 22.7x Growth y/y 2015A 2016E 2017E 2018E

Dividend yield 3.2% 2.7% 3.4% 3.6% Turnover 10.3% 3.0% 8.0% 8.0%

Price to free cash flow 26.1x 20.8x 20.1x 30.5x Gross profit 5.1% 0.9% 10.3% 8.0%

EV / Sales 4.0x 3.9x 3.6x 3.3x Total opex 14.6% -0.2% 5.6% 6.8%

EV / EBITDA 13.3x 13.2x 11.9x 11.3x Operating profit (EBIT) -6.9% 2.6% 16.1% 9.4%

EV / EBIT 19.0x 18.5x 15.7x 14.5x PBT -11.3% -7.7% 30.6% 11.6%

EV / CE 5.6x 5.3x 5.3x 4.8x PAT -11.6% -5.4% 30.6% 11.6%

Free cash flow yield 3.8% 4.8% 5.0% 3.3% EPS (adjusted) (N) -14.0% -5.6% 30.9% 11.7%

Price to book value 6.7x 6.7x 6.3x 5.9x DPS (N) -18.3% -14.9% 23.3% 5.0%



6 October 2016 24

Valuation methodology Guinness Nigeria: Our N80.1 price target is derived using a DCF model over the 2017-2027E period. We assume that our terminal sales growth rate of 6% and operating profit margin of 14.0% are reached in 2027 after declining linearly from our 2019E estimates. Our DCF model is based on a WACC of 14.8%. The components driving our WACC include a risk free rate of 14.21%, a beta of 0.9, an equity risk premium of 6.5% and an after tax cost of debt of 9.8%. International Breweries: Our N14.18 price target for International Breweries is derived using a DCF model over the 2017-2027 period. Our model assumes a long-term sales growth of 7% and a terminal EBIT margin of 25%. We assume both will be reached largely in a linear trajectory from our 2019 estimates by 2027. Our DCF model makes use of a WACC of 14.8%. Our WACC is driven by a beta of 0.5 and a risk free rate of 14.5%. Other components driving our WACC include an equity risk premium of 6.5% and an after-tax cost of debt of 11.2%. Nigerian Breweries: Our N92.2 price target is derived using a DCF model over the 2017-2027E period. Our model assumes a long-term sales growth of 8% and a terminal. EBIT margin of 22.5% both of which we assume are reached in a linear trajectory from our 2019 estimates. Our DCF model makes use of a WACC of 18.04. Our WACC is driven by a beta of 0.9, a risk free rate of 14.5% and an equity risk premium of 6.5%.

Research analyst certification Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. Recommendations and movements in price target Guinness Nigeria

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation

20-Feb-2012 220.0 n/a 215.9 n/a Neutral 7-May-2012 240.0 215.9 192.7 Neutral Underperform

19-Sept-2012 260.0 192.7 219.9 Underperform Underperform

22-Nov-2012 239.3 219.9 186.0 Underperform Underperform

14-Jan-13 290.0 186.0 254.0 Underperform Underperform

13-Feb-13 296.5 254.0 303.1 Underperform Underperform

17-May-13 275.0 303.1 268.9 Underperform Underperform

19-Sep-13 248.0 268.9 203.6 Underperform Underperform

5-Dec-13 260.0 203.6 193.9 Underperform Underperform

20-Jan-14 238.0 203.6 193.9 Underperform Underperform

19-Feb-14 182.4 193.9 186.5 Underperform Underperform

12-May-14 180.0 186.5 191.0 Underperform Neutral 12-Sep-14 168.0 191.0 197.2 Neutral Neutral 14-Sep-14 160.0 197.2 200.5 Neutral Neutral 23-Jan-15 130.0 200.5 135.9 Neutral Neutral 06-Feb-15 129.0 135.9 107.9 Neutral Underperform

30-Apr-15 164.0 107.9 137.0 Underperform Underperform

09-Sep-15 125.2 137.0 144.3 Underperform Neutral 29-Sep-15 155.0 144.3 136.5 Neutral Neutral 25-Jan-16 101.9 115.9 117.4 Underperform Neutral 03-Feb-16 111.2 117.4 110.5 Neutral Neutral 04-Jul-16 105.0 110.5 87.5 Neutral Underperform

23-Sep-16 80.1 87.5 80.1 Underperform Underperform

5-Oct-16 98.0 80.1 80.1 Underperform Underperform

International Breweries


23-Jan-15 21.9 n/a 24.4 n/a Neutral 26-Mar-15 18.0 24.4 23.9 Neutral Neutral 20-Aug-15 18.5 23.9 17.8 Neutral Neutral 29-Sep-15 17.9 17.8 16.7 Neutral Neutral 23-Nov-15 16.5 16.7 16.4 Neutral Neutral 25-Jan-16 15.9 16.4 14.3 Neutral Neutral

08-Feb-16 20.5 14.3 21.0 Neutral Neutral 17-May-16 20.0 21.0 21.6 Neutral Neutral


6 October 2016 25

15-Aug-16 20.0 21.6 14.2 Neutral Underperform

5-Oct-16 20.0 14.2 14.2 Underperform Underperform Nigerian Breweries


20-Feb-12 96.2 n/a 106.4 n/a Neutral 12-Mar-12 98.0 106.4 112.4 Neutral Neutral 25-Apr-12 110.1 112.4 112.9 Neutral Neutral 27-Jul-12 117.0 112.9 117.2 Neutral Neutral

01-Nov-12 128.0 117.2 116.5 Neutral Neutral 14-Jan-13 150.4 116.5 146.6 Neutral Neutral

27-Feb-13 164.0 146.6 139.5 Neutral Underperform 10-May-13 173.5 139.5 155.3 Underperform Underperform 2-Aug-13 177.9 155.3 117.2 Underperform Underperform

24-Oct-13 174.0 117.2 111.8 Underperform Underperform 20-Jan-14 166.0 111.8 111.8 Underperform Underperform 21-Feb-14 146.6 111.8 118.2 Underperform Underperform 29-Apr-14 148.0 118.2 131.1 Underperform Underperform 22-Aug-14 179.0 131.1 153.7 Underperform Underperform 30-Oct-14 163.0 153.7 141.0 Underperform Underperform 23-Jan-15 145.5 141.0 117.3 Underperform Underperform 15-May-15 154.0 117.3 105.6 Underperform Underperform 26-Aug-15 112.1 105.6 115.2 Underperform Neutral 29-Sep-15 146.0 115.2 106.4 Neutral Neutral 23-Nov-15 120.0 106.4 122.9 Neutral Neutral 25-Jan-16 108.0 122.9 106.9 Neutral Neutral 26-Apr-16 106.1 106.9 123.5 Neutral Neutral 20-July-16 135.0 123.5 92.2 Neutral Underperform 5-Oct-16 145.8 123.5 92.2 Underperform Underperform

FBNQuest Research’s recommendation distribution

Outperform Neutral Underperform Total Stocks covered 7 11 11 29

% of total stocks covered 24.1% 37.9% 37.9% 100%

Investment banking clients 4 4 2 10 % of investment banking clients 40.0% 40.0% 20.0% 100.0%

FBNQuest Equity Research recommendation definitions

Outperform The analyst expects the stock to outperform the Nigerian Stock Exchange (NSE) All Share Index over the next 12 months or the specified investment horizon.

Neutral The analyst expects the stock to perform in line with the NSE All Share Index over the next 12 months or the specified investment horizon.

Underperform The analyst expects the stock to underperform the NSE All Share Index over the next 12 months or the specified investment horizon.

Not Rated The rating and price target are currently suspended to comply with regulations or firm policies such as when FBN Capital is acting as an adviser in a merger or transaction which involves the company whose rating has been suspended or due to reasons that limit the ability of the analysts to provide forecasts for the company in question.

Benchmark The Nigerian Stock Exchange All Share Index

Price targets Price targets reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings fall short of estimates.


6 October 2016 26

Asset allocation The recommended weighting for equities, cash and fixed income instrument is based on a number of metrics and does not relate to a particular size change in one variable. Companies from which FBN Capital has received compensation in the last 12 months

Outperform Neutral Underperform Total

4 4 2 10

% distribution 40.0% 40.0% 20.0% 100.0%


6 October 2016 27

Important US Regulatory Disclosures on Subject Companies This material was produced by FBN Capital Limited solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by LXM LLP USA and elsewhere in the world by FBN Capital Limited or an authorized affiliate of FBN Capital Limited. This document does not constitute an offer of, or an invitation by or on behalf of FBN Capital Limited or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which FBN Capital Limited or its Affiliates consider to be reliable. None of FBN Capital Limited or its affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions. LXM LLP USA assumes responsibility for the research reports content in regards to research distributed in the U.S. LXM LLP USA or its affiliates has not managed or co-managed a public offering of securities for the subject company in the past 12 months, has not received compensation for investment banking services from the subject company in the past 12 months, does not expect to receive and does not intend to seek compensation for investment banking services from the subject company in the next 3 months. LXM LLP USA has never owned any class of equity securities of the subject company. There are not any other actual, material conflicts of interest of LXM LLP USA at the time of the publication of this research report. As of the publication of this report LXM LLP USA, does not make a market in the subject securities. Please bear in mind that FBN Capital is the employer of the research analyst(s) responsible for the content of this report and (ii) research analysts preparing this report are resident outside the United States and are not associated persons of any US regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a US broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with US rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

I. The analyst(s) responsible for the preparation and content of this report (as shown on the front page of this report) holds personal positions in a class of common equity securities of the company to which this report relates.

II. FBN Capital Limited or its Affiliates have recently been the beneficial owners of 1% or more of the securities mentioned in this report.

III. FBN Capital Limited or its affiliates have managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.

IV. FBN Capital Limited or its affiliates have received compensation for investment banking services from the issuer of these securities in the past 12

months.

V. FBN Capital Limited expects to receive compensation for investment banking services from the issuer of these securities within the next three months.

VI. FBN Capital or FBN Holdings is a market maker in the subject securities.

VII. The company is a client of FBN Capital.

Subject Company Price (N) Rating Applicable disclosures Anheuser-Busch InBev EUR115.7 n/a n/aGuinness Nigeria 98.0 Underperform n/a Intafact Breweries n/a n/a n/aInternational Breweries 20.0 Underperform n/aNigerian Breweries 145.8 Underperform VIIPabod Breweries n/a n/a n/aSAB Miller GBP 4,494.5 n/a n/a


6 October 2016 28

Important Risk Warnings and Disclaimers This report was prepared, approved, published and distributed by FBN Capital Limited (“FBN Capital”), operating under the brand name FBNQuest, a company located outside of the United States (a “non-US Group Company”). FBNQuest is the brand name of the Investment Banking and Asset Management businesses of FBN Holdings Plc, which comprises FBN Capital Limited, FBN Securities Limited, FBN Capital Asset Management Limited, FBN Trustees Limited, FBN Funds Limited and FBN Capital Partners Limited. FBN Capital Limited is regulated by the Securities and Exchange Commission in Nigeria (SEC). This report is distributed in the U.S. by LXM LLP USA, a U.S. registered broker dealer, on behalf of on behalf of FBN Securities Limited, a wholly owned subsidiary of FBN Capital Limited only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through LXM LLP USA. Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory requirements pertaining to research reports or research analysts. No non-US Group Company is registered as a broker-dealer under the Exchange Act or is a member of the Financial Industry Regulatory Authority, Inc. or any other U.S. self-regulatory organisation. The information has been compiled or arrived from sources believed to be reliable and in good faith, but no representation or warranty, express or implied is made as to their accuracy, completeness or correctness. FBN Capital Limited has not verified the factual accuracy, assumptions, calculations or completeness of the information. Accordingly, FBN Capital Limited accepts no liability whatsoever for any direct or consequential loss or damage arising from (i) the use of this communication (ii) reliance of any information contained herein, (iii) any error, omission or inaccuracy in any such Information or (iv) any action resulting there from. FBN Capital Limited provides the information for the purpose of the intended recipient’s analysis and review. Accordingly you are advised to verify the factual accuracy, assumptions, calculations or completeness of the information. FBN Capital is a subsidiary of FBN Holdings Plc. FBN Capital or any other subsidiary of FBN Holdings may make market or deal in the shares mentioned in this report. One or more persons of FBN Capital Limited or its affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon either for their own account or on behalf of their clients. FBN Capital or other subsidiaries of FBN Holdings may also take proprietary trading positions in the shares of companies discussed in this publication, and may receive remuneration for the publication of its research and for other services. FBN Capital Limited or its affiliates may, to the extent permitted by law, act upon, or use the above material or the conclusions stated above or the research or analysis on which they are based before the material is published to recipients and from time to time provide investment banking, investment management or other services for, or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report. Accordingly, this document may not be considered as free from bias. Additional information may be available to FBN Capital or FBN Holdings which is not discussed in this report. Further disclosure regarding FBN Capital’s policy regarding potential conflicts of interest in the context of investment research and FBN Capital’s policy on disclosure and conflicts in general are available on request. © FBNQuest 2016. All rights reserved. A part of the FBN Holdings Group 16 Keffi Street, Off Awolowo Road S.W. Ikoyi Lagos Nigeria

fbnquest nigerian brewers sector update 2016due to the prevailing macro-economic headwinds, we...

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