NIGERIAN BREWERIES PLC - Arthur Steven · 2020. 3. 5. · NIGERIAN BREWERIES PLC. leads the Nigeria brewing industry with c.55% of the market share with 11 breweries, 2 malting plants

3/2/2020

NIGERIAN BREWERIES PLC VALUATION REPORT

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Equity Valuation FY 2019 Earnings Update

Overview

NIGERIAN BREWERIES PLC. leads the Nigeria brewing industry with c.55% of

the market share with 11 breweries, 2 malting plants and 26 sales depots it has been

able to offer high quality product distributed to all parts of Nigeria.

In this report, we present our views on NIGERIAN BREWERIES PLC. following

the Full Year (FY 2019) report recently released. We are inclined to place a HOLD

rating on NB with a target price of N41.03 Using Dividend Discount Model 10.08%

downside to current price of N46.00 (at the time of writing this report), please find

below our 2020 outlook of the company and an analysis of its FY 2019 performance.

The Global Brewing Industry.

The global brewing industry is the group of companies that produce beer and operate

on a national or a global scale. Beer is currently the highest consumed alcoholic

beverage and even one of the most commonly consumed beverages in the world.

Competitively, there has been an uneasy quiet in the global beer market for a long

time. The industry's main markets are Western Europe, Eastern Europe, America

including North and South America, Africa and Asia including China and India. In

each of those regions the industry is in a completely different stage of the industry

lifecycle.

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Moreover, population and per capita consumption indicate growth opportunities

and hence potential attractiveness of the respective markets.

The global beer market size is anticipated to reach US$ 692.1 Billion by 2024,

exhibiting at a CAGR of around 2.7% during 2019-2024. (source: IMARC

Group)

ABOUT NIGERIAN BREWERIES PLC.

NIGERIAN BREWERIES (NB) was established in 1946 and it is the Nigeria

pioneer and largest brewing firm. In June 1949, it recorded a landmark when the

first bottle of STAR lager beer rolled off in its Lagos brewery bottling lines.

Nigerian Breweries over the years as grown into a brewing company with Eleven

(11) breweries, two (2) malting plants, and twenty- six (26) sales depots. With a

market share of over 50% Nigerian Breweries as being able to maintain its status

as the pioneer brewing industry in Nigeria.

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Trend in Revenue Growth.

NIGERIAN BREWRIES has maintained a good positive turnover growth

momentum in the last five (5) years up until 2018. In 2018 revenue declined by

5.8% from N344.56bn in 2017 to N324.39bn in 2018 impacted by increased

excise duty paid of about 7% of the gross revenue reflecting seven (7) month of

higher excise, mid-single digit volume decline, inability to pass cost to the

customer due to intense competition in the breweries industry. In 2019 net

revenue printed at N323.01bn resulting in a marginal decline of 0.43% from

N324.39bn in 2018. According to management, gross revenue rose YOY on the

back of strong growth in Heineken and better mix of malt but offset by the impact

of excise duties.

Though Cost of Sales (CS) declined by 2.90% year- on- year from N197.49 in 2018

to N191.76 in 2019 mainly driven by reduction in the price of raw materials

specifically the price of sorghum. Cost of Raw material declined YOY by 4% to

N122.55bn from N127.77bn, due to the cost leadership strategy employed in

2019. Therefore, gross profit margin inched up by 3.43% from N131.25 to

N126.90.

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However, OPEX (including depreciation and amortization) inched up YOY in 2019

by 6.84% printing at N97.05bn from N90.84bn as a result of increase in marketing

and distribution expenses by 10.91% YOY from N77.70bn to N70.05bn. This was

mainly driven by increase in promotion of brands to push volume growth and

sustain market share, we foresee this might continue into 2020.This resulted in

decline in PBIT YOY to N35.21bn as against N36.95bn in 2019.

Profitability

The Company’s bottom line growth has witnessed a steady decline over the past

five (5) years, with a CAGR Of -14.7%. In 2018 PBT and PAT dropped sharply by

36.91% and 41.19% y-o-y from N46.63bn to N29.42bn in 2018 and N33.05bn in

2017 to N19.44 in 2018bn respectively. Mainly as a result of the increase in excise

duty in the last half of the year witnessed by all the players in the industry and

inability to pass the increase in excise duty as a result of intense competition

impacted greatly on revenue. We saw this trend continue into 2019 as PBT and

PAT declined by 20.63% and 17.14% from N29.42bn to N23.35bn N19.44bn in

2018 to N16.11bn 2019 respectively, as excise duty increased from an average price

of N0.30 in 2018 to N0.35 in 2019.

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Return on Capital Employed (ROCE) declined over the years from 57.00% in

2013 to 17.64% in 2018. In 2019 the ROCE dropped by 1.95% YOY to 15.70% this

was as a result of decline in profit and low asset utilization.

Liquidity

The Company’s liquidity trend in the last five years has not being impressive. The

level of current assets maintained in 2013 could cover only 45% of its current

obligations and this as seen a fluctuation over the years, in 2018 the current asset

could only cover 62% its short-term obligation. In 2019, it dropped further to

52%, going further we foresee current ratio around 0.50 in 2020. Without taking

the inventories into consideration, NB current assets were only 22% of its

current liabilities in 2019 compared to 2018 which was 38% this is because of

reduced short- term borrowings.

The Company’s cash and bank deposits balances dropped in 2019 by 56.99% to

N6.36bn from N14.79bn in 2018. In summary, it indicates that NIGERIAN

BREWERIES has low liquidity and inability to meet up with short-term

obligation and this might be of adverse effect in operating activities, however we

foresee that this might be curtailed in 2020 as NIGERIAN BREWERIES seeks to

optimize financing cost coupled with the current low-yield environment.

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Capital Structure

NIGERIAN BREWERIES Shareholders’ funds has declined from

N171.88bn in 2014 to N168.46bn in 2019, representing a CAGR of -0.40%,

however, Total Assets grew by 1.85% from N349.23bn in 2014 to N382.78bn

in 2019. The Company’s level of efficiency in its asset utilization has declined

over the years. Total Assets Turnover ratio declined from 0.88x in 2014 to

0.84x in 2019, however Fixed Assets Turnover ratio improved marginally

over the years from 1.53x in 2014 to 1.64x in 2019. This implies that the

Company has been fairly efficient in its use of its assets.

Outlook: 2020

Despite the harsh 2019, as a result of increased excise duty, intense

competition, high liquidity risk, we expect a moderate positive outlook in NB

performance with a revenue of N329.47bn which is an expected growth rate

of 2%, cost to sales ratio of 58.03% OPEX inching up to N98.40bn to combat

intense competition and volume growth. Therefore, we forecast Operating

Profit to grow by 4% and PBT by 8% owing to low financing cost environment.

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VALUATION, ASSUMPTIONS AND RATINGS

We valued NIGERIAN BREWERIES shares using the Dividend Discount Model

(DDM) for our valuation. On our revised numbers, we have a fair value of ₦41.03

per share DDM relative to the last closing price of N46.00 (at the time of writing this

report), this translates to 10.08% downside and a HOLD rating on the shares is

recommended. The company currently trades at a P/E of 22.89x (at the time of

writing this report)

We therefore place a HOLD recommendation on NIGERIAN BREWERIES PLC

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Analyst Certification, Important Disclosure and Disclaimer Analyst Certification The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the

companies, securities, industries or markets discussed in this report. 2. That the research 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.

Investment Rating Criteria and Disclosure Arthur Steven Asset Management adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below; Buy: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is greater than our

estimated cost of equity. Hold: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is less than the cost

of equity, however, the expected total return on the stock is greater than or equal to the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR – 200bps; i.e 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.

Sell: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is less than the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR – 200bps; i.e. 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity, especially as we consider the average 4.5% total transaction cost for an average retail investor.

Disclaimer Arthur Steven Asset Management (ASAM) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets and companies covered; albeit ASAM neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither ASAM nor any of its associate or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell securities herein discussed.

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Arthur Stevens Asset Management Ltd.

(MEMBER OF THE NIGERIAN STOCK EXCHANGE)

… Succeeding Together

Address:

86 Raymond Njoku Street,

SW Ikoyi, Lagos, Nigeria.

Telephone:

+234 9036881136

+234 9035996606

+234 8091054142

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NIGERIAN BREWERIES PLC - Arthur Steven · 2020. 3. 5. · NIGERIAN BREWERIES PLC. leads the Nigeria brewing industry with c.55% of the market share with 11 breweries, 2 malting plants