CHAMPION BREWERIES PLC - Meristem Securities Limited Research Report/Special... · CHAMPION BREWERIES PLC ... Product Portfolio: Notable amongst the product portfolio includes

Important Disclosure: Kindly refer to pages 9-11 for Analyst Certification & full disclosure.

Breweries I CHAMPION

CHAMPION BREWERIES PLC

SPECIAL REPORT ON CHAMPION

BREWERIES RIGHT OFFER

AUG 2014

January, 2013

2

NSE: CHAMPION I Bloomberg: CHAMPION: NL I Reuters: CHAMPION.LG

www.meristemng.com

Special Report | CHAMPION | Aug, 2014

Recommendation Summary

Champion Breweries Plc. (CHAMPION) recently announced its intention to

recapitalize its operations by a way of NGN11.65bn right issue (6.3bn ordinary

share at NGN1.85 per share) to fund its huge financial obligation and optimize its

operating capacity. The offer was scheduled to commence on 4th August, 2014

and close on 10th September 2014. Stanbic-IBTC Capital Ltd has been named as

the lead issuing house.

Prior to now, CHAMPION was majorly owned by consolidated breweries Plc. via a

57% shareholding but is now to be managed and controlled by HENEIKEN, the

global brewing giant whose operations in Nigeria include majority stake in

Nigerian Breweries and Consolidated Breweries Plc. This report highlights our

view on the right issue as proposed by the company.

We noted that CHAMPION has a sustained history of negative earnings

performance due to huge cost of production (3years average cost to sales ratio of

115%), hence sustained negative margins.

We adopted relative valuation multiples to rate the offer price of NGN1.85 as

proposed by the company. At current price the stock trades at a price to sale ratio

of 3x and Price to free cash flow of 7.07x which in our opinion is not justified.

However, offer price to sales ratio of 0.75x and offer price to cash flow ratio of

1.57x appears fair to us as it implies a significant upside relative to current price

and as such rate the recommendation a BUY.

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Champion Breweries Plc.

Company Profile: Champion Breweries Limited was changed to Champion

Breweries Plc. on the 1st of September, 1992 after going through series of

name changes between 1974 (year of incorporation) and 1992. At inception,

the Uyo based beer producer had a total installed capacity of 0.15mhl per

annum. Given demand pressures, the capacity of the company was

expanded to 0.5mhl and then to 1mhl. However, the CAPEX for this new

capacity hurt the brewer’s performance in the years between 1990 and 1991

which caused a shut-down of the company. However, the advent of

democracy in Nigeria brought about state government and private sector

partnership which led to the revamping and rejuvenation of the plant for

brewing 100% locally sourced raw materials in 2001. The company currently

operates 0.5mhl per annum.

Product Portfolio: Notable amongst the product portfolio includes

Champion Lager and Champ Malta (to be reintroduced into the market). By

market capitalization, the company is worth NGN7.48bn which makes the

beer maker the 4th most capitalized brewer in the country.

Key Stakeholders: Consolidated Breweries Plc. held 57% equity stake in

Champion Breweries Plc. prior to 23rd of August, 2013. This was however

transferred to Raysun Nigeria Limited, a wholly owned subsidiary of

Heineken B V (“Heineken”), in a bid to provide CHAMPION with its financing

and restructuring requirements. According to the management of

CONSBREW, Champion Breweries has recorded losses over the years, and

has relied on financing from Consolidated Breweries in the form of inter-

company debt. Other key stake others in the company include, Asset

management nominees with 13.36%, Union trustees (9.04%) and Akwa Ibom

Investment (8.39%), while 12% holding is held by others. The implication of

the above is that at least 88% of the company’s share outstanding is held by

long term institutional investors.

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-25%

-5%

15%

35%

55%

75%

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14f FY15f FY16f

Revenue Growth Rate [RHS]

-100%

-80%

-60%

-40%

-20%

0%

20%

-1,500

-1,000

-500

0

500

FY08 FY09 FY10 FY11 FY12 FY13 FY14f FY15f FY16f

Earnings Net Margin [RHS]

Recapitalizing: In line with the above, the company is currently in the

process of recapitalizing by way of NGN11.65bn right issue to finance its

huge financial obligation and to optimize its operating capacity. This was

issued at a discount of NGN1.85 per share compared to a market price of

NGN8.31.

Performance: CHAMPION’s performance for the last five year has not been

impressive, in terms of revenue growth the company has recorded a five

year top-line expansion of 12.74% CAGR however earnings growth remain

depressed by huge cost of production. Average cost to sales ratio stays at

115% for the last three years, however recent performance has improved

significantly as 2014Q2 cost to sale is currently pegged at 71% (vs.94.25% in

2013Q2). Consequent on this the company has sustained negative bottom-

line (losses) for more than five years now.

Raysun Ltd. (Heineken)

57%Asset Mgt Nominee13.36%

Union Trustees9.04%

Akwa Ibom Investment

8.39%

Others12%

Revenue and Earnings Performance (Historical + Forecast) Revenue and Earnings Performance (Historical + Forecast)

Shareholding structure

Source: Company Fillings.

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40%

60%

80%

100%

120%

FY10 FY11 FY12 FY13 FY14f FY15f FY16f

FY10 FY11 FY12 FY13 FY14f FY15f FY16f

-200%

-150%

-100%

-50%

0%

FY08 FY09 FY10 FY11 FY12 FY13 FY14f FY15f

ROE Linear (ROE)

0

5

10

15

20

Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14

CHAMPION NL EQUITY

Share price performance: Market sentiment on CHAMPION pegged the

beer maker’s price at an average of NGN3.6 over the last five years. However,

the stock price of the company surged 234% between June and November

2013 as the information about Heineken’s proposed stake filtered into the

market. Nevertheless, the price has since moderated to NGN8.31 as the

market await the turnaround initiative from Heineken.

Valuation and Outlook: Based on fundamental metrics, the fair price of

Source: Company Fillings, Bloomberg.

Cost to Sale Ratio Historical+ Forecast Return on Equity Historical and Forecast

Share Price Performance

Source: NSE

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CHAMPION is just at NGN0.50k, given that the company has a sustained

years of historical loses, negative return on equity and return on asset. Using

relative valuation metrics however, only price to sale ratio (PS ratio) and

price to cash flow ratio (PCF ratio) were meaningful as other metrics (PE

ratio and PBV) returned negative value which are not meaningful. By PS ratio,

CHAMPION is currently trading at a trailing PS ratio of 3.00x, while PCF ratio

stays at 7.07 both of which are less than sub-sector average 3.9x and 11.34x

accordingly.

On the Back of the above, the right offer at NGN1.85 translates into 0.75x

offer PS ratio and 1.57x offer PCF ratio. Hence we believe the offer price is

fair, even as it implies a market return of 350% (compared to market price of

NGN8.31).

Outlook is positive for the brewer, as we strongly think Heineken’s recent

interest in the operations and management of the company and the move to

recapitalize its’ finances is a great development. This opinion is backed by

our belief of the expertise and experience Heineken is expected to put into

the operations and management of the company as seen in Nigerian

breweries and Consolidated Breweries Plc. According to the management of

the company, CHAMPION has entered into a long term contract with Nigeria

Breweries Plc. in respect of ‘contract production’ and this is expected to

drive revenue going forward. We see a significant potential for growth in

Champion Breweries post recapitalization and restructuring, hence, we

recommend a BUY.

Relative Valuation

METRICS CHAMPION IND. AVRG

P/E nm 35.61x

P/BV nm 9.62x

P/S 3.00x 3.9x

P/CF 7.07 11.34x

Current Price (N') 8.31

Offer Price (N') 1.85

Offer P/S 0.75x

Offer P/CF 1.57x

Share/outs(unit ‘mn) 900

Market Cap (N' bn) 7.48

Fundamental Metrics Trailing EPS -1.45 BVPS -6.10 Cash Flow per share 0.15 Div. Payout 0.00% RoAE -26.95% RoAA -17.06% Financial Leverage -1.5 Cost of Sales Margin 71.00% Gross Profit Margin 29.00% OPEX Margin 46.05% Operating Profit Margin -15.89% Net margin -62.42%

Source: Company fillings, Bloomberg, Meristem Research.

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Key Performance Metrics (NGN million) FY08 FY09 FY10 FY11 FY12 FY13 FY14f FY15f FY16f

Revenue 1,495 1,226 1,874 1,791 1,785 2,233 2,725 3,215 3,794

Cost of Sales -- -- 1,592 2,169 2,252 2,207 1,907 2,090 2,314

Profit After Tax -851 -1,015 -1,237 -1,194 -1,337 -1,178 136 161 190

Net Asset 66 -1,075 -3,477 -2,092 -3,430 -4,608 9228 9389 9578

Current Liabilities 259.76 275 6,246 8,740 10166.205 13,683

12,446 2678.4 3153.6

Total Liabilities 4199.76 4,801 6,279 9,051 10229.2 13,746

13,829 2976 3504

Total Asset 4,266 3,726 2,802 6,958 6,799 9,138 11,352 12,365 13082

SHO 900 900 900 900 900 900 900 7,200 7,200

EPS -0.95 -1.13 -1.37 -1.33 -1.49 -1.31 0.15 0.02 0.03

DPS 0 0 0 0 0 0 0 0 0

BVPS 0.07 -1.19 -3.86 -2.32 -3.81 -5.12 -4.97 -0.6 -0.57

ROE -52% -201% -54% -43% -48% -29% -3% -4% -4%

ROA -15% -25% -38% -24% -19% -15% 1% 1% 1%

Leverage 64.7x -3.5x -0.8x -3.3x -2.0x -2.0x -2.5x -2.9x -3.2x

Asset Turnover 0.35 0.33 0.67 0.26 0.26 0.24 0.24 0.26 0.29

Cost to Sales 85% 121% 126% 99% 70% 65% 61%

Revenue Growth

-18% 53% -4% 0% 25% 22% 18% 18%

Net Margin -57% -83% -66% -67% -75% -53% 5% 5% 5%

Source: Company fillings, Bloomberg, Meristem Research.

January, 2013

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Financial Highlights (NGN billion) CHAMPION BREWERIES PLC Q2:2014 results

Profit & Loss Account Q2:2014 Q2:2013 y/y Growth

Turnover 1.417 1.161 22.12%

Cost of Sales 1.006 1.094 -8.00%

Gross Profit 0.411 0.067 515.28%

OPEX 0.653 0.437 49.30%

Other Income 0.016 0.016 0.98%

Operating Profit -0.225 -0.354 36.38%

Finance Costs 0.659 0.404 63.27%

PBT -0.885 -0.758 -16.72%

PAT -0.885 -0.758 -16.72%

Balance Sheet

Fixed Assets 7.047 5.557 26.82%

Inventories 0.385 0.289 33.51%

Debtors and Prepayments 0.490 0.522 -5.98%

Cash and Cash equivalents 0.247 0.275 -10.05%

Other Assets 0.167 0.322 -48.31%

Total Assets 8.336 6.964 19.71%

Trade and other payables 0.238 0.346 -31.16%

Total Liabilities 13.829 11.152 24.01%

Shareholders' funds -5.493 -4.188 -31.16%

Per share data CHAMPION

Current Price 8.31 Trailing EPS -1.45 BVPS -6.10 Price multiples/ratios

Shares Outstanding 0.90 P/S 3.00x P/BV nm RoAE -26.95% RoAA -17.06%

Financial Leverage -1.5

Cost of Sales Margin 71.00% 94.25%

Gross Profit Margin 29.00% 5.75% OPEX Margin 46.05% 37.66% Operating Profit Margin -15.89% -30.51% Net margin -62.42% -65.31%

Source: Company fillings, Meristem Research.

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Analyst’s Certification and Disclaimer

This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the cover of

this report. Each research analyst hereby certifies, with respect to each security or issuer covers in this

research that:

(1) all of the views expressed in this report accurately reflect his or her personal views about any and all of

the subject securities or issuers (the Issuer); and

(2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to

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analysts’ compensation is determined based upon activities and services intended to benefit the investor

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(3) each research analyst and/or persons connected with any research analyst may have interacted with

sales and trading personnel, or similar, for the purpose of gathering, synthesizing and interpreting non-

material non-public or material public market information.

As at the date of this report, any ratings, forecasts, estimates, opinions or views herein constitute a

judgment, and are not connected to research analysts’ compensations. In the case of non-currency of the

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Company disclosures

Meristem or the analyst(s) responsible for the coverage may have financial or beneficial interest in

securities or related investments discussed in this report, which could, unintentionally, affect the

objectivity of this report. Material interests, which Meristem or the analyst(s) have with companies or in

securities discussed in this report, are disclosed below:

a. The analyst(s) hold(s) personal positions (directly or indirectly) in a class of the common equity

securities of the company.

b. The analyst responsible for this report, as indicated on the front page, is a board member, officer or

director of the company

c. Meristem beneficially owns 1% or more of the equity securities of the company

d. Meristem has been the lead manager or co-lead manager of any publicly disclosed offer of securities of

the company over the past 12 months.

e. Meristem beneficially holds a major interest in the debt of the company

f. Meristem has received compensation for investment banking activities from the company within the

last 12 months

g. Meristem intends to seek, or anticipates receipt of compensation for investment banking services from

the company in the next 3 months

h. The content of this research report has been communicated with the company, following which this

research has been materially amended before its distribution

i. The company is a client of the stock broking division of the Meristem group.

j. The company is a client of the investment banking division of the Meristem group.

k. The company owns more than 5% of the issued share capital of Meristem

l. Meristem has other financial or other material interest in the company.

.

Company Disclosure

CHAMPION

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CHAMPION BREWERIES PLC - Meristem Securities Limited Research Report/Special... · CHAMPION BREWERIES PLC ... Product Portfolio: Notable amongst the product portfolio includes