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October 2010
Investment Summary
We update our view on Nigerian brewery sector with NEUTRAL ratings Analyst
on the 2 biggest players - Nigerian Breweries Plc and Guinness Nigeria Ahmed Razaq
a.razaq@vetiva.com
Plc with pooled market share of c.80%.
Volume drivers still at work. With a 15m hectolitres (mhl), (2009 est.)
according it the second largest in SSA, the Nigerian brewery market, in our
estimate, will grow to 23mhl by 2015 premised on the combined impact of beer NEUTRAL
per capita consumption (PCC) growth (13litres expected vs. 10litres currently),
population build-up (2.8% p.a.) and nominal per capita income growth (8.3%
Market Cap: N855bn (US$5.7bn)
p.a.). Consumption of brewed products is intrinsically linked to GDP growth
which is rising across SSA economies, with Nigeria expected to deliver above- % of NSE: 14.3%
average growth performance, based on IMF and World Bank forecasts.
Forward P/E: 17.1x
Eyed by the bigwigs… Nigerian brewery sector is increasingly attracting
EV/2010 EBITDA: 9.8x
the attention of global majors: SAB Miller, Carlsberg and Castel. These interests
re-affirm the growth opportunities embedded in the sector and we expect it to 2010 Div Yield: 5.2%
generate a positive development for the sector in terms of volume growth and
deeper market penetration. 52-week perf: 40.9%
…in view of robust investment thesis. The investment case for the Upside potential: 2.1%
notably at low levels with PCC of 10litres, which is a 56% discount to 1.6
Credible route to economic growth potential… Nigerian brewers are S-09 D-09 M-10 J-10 S-10
valuation standpoint, the shares of quoted brewers offer a long-term attractive Tel: +234-1-46175213
proposition but, on a 12-month horizon we find the risk-reward profile limited, Fax: +234-1-4617524
as the shares have performed strongly (41% in 12 months) and trade at Email: research@vetiva.com
forward P/E multiple of 17.1x and EV/2010e EBITDA of 9.8x. We are on the
sidelines to make an inroad into the sector’s long-term growth prospect on
better valuation attraction. At this point, we think direct acquisition and
repositioning of fringe players is a potent source of alpha.
Please see the last page of this report for important disclosures and analyst certification
Nigeria I Breweries I Equities
Table of Contents
Disclosures ................... 44
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The table below gives the evolution of Africa’s beer market share on a global
scale.
Fig 1: Global beer market
Share of production by continent
2003 – 2008
Continents 2003 2004 2005 2006 2007 2008
Europe 34.9% 34.1% 34.1% 33.4% 33.1% 32.2%
Asia/Middle East 26.9% 28.5% 28.5% 30.0% 31.2% 31.7%
North America 22.2% 21.4% 20.9% 20.0% 19.4% 19.0%
South America 10.2% 10.2% 10.7% 10.6% 10.5% 11.0%
Africa 4.4% 4.4% 4.5% 4.6% 4.7% 5.0%
Australia/Oceania 1.4% 1.3% 1.3% 1.3% 1.2% 1.2%
4.4% 5.0%
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Over the past 9 years, beer volume growth in Africa has outpaced global Nigeria’s volume growth has
level by an average of 1.5x, making the region an emerging beer market in outpaced global level due to
the world. While global volume growth has been at 2.96% CAGR since 2000 powerful base effects…
(rising from 1.40bn hl to 1.8b hl in 2008), Africa’s beer volume grew by
4.48% CAGR from 62mhl in 2000 to 92mhl in 2008. This growth
performance gave uplift to Africa’s stake of global beer production to 5% and
further asserts the immense room for future growth.
Despite this growth, the current level still appears quite imbalanced putting
into perspective the geographic metric that shows Sub Saharan Africa (SSA) Further growth opportunities
controlling 11.5% of world population. This disparity in the distribution of abound
global beer consumption level is much more pronounced in the context of the
Nigerian market. This is premised on the fact that about 99% of the
production volume in Nigeria is used to meet domestic demand. Hence, the
level of beer production gives some estimate as to the level of domestic beer
consumption.
Hence, we argue that the Nigerian case presents an appealing growth theme
given that Nigeria controls 2.2% of global population base but controls barely
0.8% of global beer production. Asides the per capita income level, as we
demonstrate in the subsequent sections below, population level is another
strong intrinsic driver of beer volume growth.
Implied estimates
Potential beer volume share 3.8% 33.4% 1.2%
Implied beer production level (mhl) 68.1 601.1 21.2
Current beer production (mhl) 15.1 401.0 28.0
Production (deficit)/Surplus (mhl) (53.0) (200.1) 6.8
Implied beer PCC (litter) p.a. 45.4 45.4 45.2
Implied Growth 367.3% 46.7% -24.4%
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Spirits, the key strength of the Diageo Group (the parent Company of the
second largest Nigerian brewer - Guinness), is still a very shallow market in
Nigeria as it remains unappealing in aggregate consumption basket. However
its stout brand remains a market favorite, with Nigeria ranking as the second
largest market for the Guinness Stout brand world-wide.
In this report, we focus on the lion share of the Nigerian beverages market:
the beer segment; and analyze the key players in this market though
consolidating their non-beer production volume which we think will not
significantly change the substance of our opinion.
Fig 3:
Nigerian beverage market is dominated by beer and CSD (2009 est)
1% 1%
1%
Beer
10%
CSD
Juice
45%
Spirits
42% Wine
RTDs
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While the operations of Consolidated Breweries Limited and Nigerian Heineken and Diageo remain the
Breweries Plc are consolidated in the financials of the Heineken Group, the 2 ultimate players with controlling
subsidiaries continue to operate as separate entities, strategically focusing on stakes in NB and Guinness
respectively
different segments of the beer market. The former is Heineken’s route to the
low-end Nigerian market while NB operates in the premium and mainstream
markets.
Fig 4:
Beer market share estimate
8.5% NB Plc
9.5%
Guinness
57.0% ConsBrw
25.0%
Others
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However, the tune appears set to take a different gear as the brewer has
Global majors are coming; SAB
identified Nigeria as the next growth frontier and made a strategic entry in
Miller, Carlsberg and Castel are
2008 via the acquisition of 57% effective interest in Pabod Breweries Limited, already in the game, though mildly
80% effective interest in Voltic Nigeria Limited (a water business) and
Standard Breweries Limited as launching pads. We have observed that
SABMiller is attempting a gradual inroad into the broader Nigerian beverages
market to foster its time-tested full beverage portfolio strategy. While
SABMiller is yet to boil up competitive pressure, we are beginning to feel its
presence softly with the recent introduction of one of its international
premium brands, Castle Milk Stout (CMS), through its subsidiary, Pabod
Breweries.
Castel, another global brewery giant with rich African experience, has also
landed quietly in the Nigerian market with the acquisition of majority stake in
International Breweries Plc. International Breweries Plc is one of the fringe
players quoted on the Nigerian Stock Exchange (NSE) with an installed
capacity of about 500,000 hl. Historical performance has been troubled with
11 years of operating losses. It is expected that the coming on board of
Castel and the full optimisation of an on-going CAPEX programme should set
the stage for a turnaround. The recent performance of the company signals
this turnaround potential as Q2’10 scorecard reflects significant volume
growth and return to profitability.
In a similar dimension, Carlsberg, the 4th largest brewer in the world, is also
making a leveraged entry into the Nigerian market. The company just sealed
a partnership agreement with International Breweries Plc for the production
and commercialisation of its notable trademarks; Kronenbourg and Wilfort.
While the new entrants are yet to rile up the sector, we think these multiple
Ceding market share from NB and
entries will have a significant long-term implication on the sector’s economics. Guinness could be challenging
In our view, ceding of significant market share to the new entrants will be though doable
gradual as the volume share and brand positions of Guinness and NB are
strong hurdles to cross. The locals are no strangers to the thick brew;
Guinness has been in Africa since the early 19th century and has been
brewed in Lagos for more than 50 years. NB has a very rich Nigerian
experience with an extensively solid distribution platform and has successfully
built a strong customer base.
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Beer consumption at low ebb: The beer per capita consumption (PCC)
Beer PCC of 10litres is at a
in Nigeria, based on 2009 estimate, stands at 10litres p.a. While this appears
significant discount to key peers
quite low relative to African peers (14.6 litres) and global average (26.9
and global benchmarks
litres), it is crucial to stress that consumption growth over the past 10 years
has been robust at 10% CAGR from 5mhl in 1999 to 15mhl in 2009. The low
level of beer PCC is a function of many weaknesses amongst which are:
production constraint and infrastructural bottlenecks, both of which limit beer
availability and deeper penetration. While capacity expansion has constantly
been on the card for the existing players, current consumption level when
combined with expected growth in GDP per capita leaves ample headroom for
significant future investment in this sector if the growing beer demand must
be met.
Fig 6:
Low beer PCC: a fundamental pointer to long-term growth potential
45.0
40.0
35.0
Global average
30.0 26.88
25.0
5.0
Cost structure benefiting from backward integration strategy: Cost structure not materially
On the average, Nigerian brewers (which we have proxied by NB and different across key African brewers
Guinness Plc) expend half of their revenues on direct input cost leaving them
with an average gross profit margin of 50%. In the context of African brewery
sector, this is very much in line with the performance of their African peers.
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Following the ban on the importation of barley and barley malt in mid-1980s Nigerian brewers still import about
(which was later lifted in 1999 and currently attracts 5% import duty), 25%-35% of their input needs
industry majors have developed technical competence in their backward though local content strategy is
integration strategy by substituting locally-grown sorghum and corn grits for encouraging
imported inputs (e.g. barley). While the local content strategy is still a well-
articulated pursuit, brewers still import about 25%-35% of their input needs
predominantly through joint purchase agreements with their parent
companies. This range is still within band, for instance, given a minimum
target of 60% local content policy set by Nigerian Breweries Plc.
More recently, the local content strategy received further boost with the
commissioning in Lagos of the first can manufacturing plant in West Africa, Local sourcing of cans+ could be
GZ Industry Nigeria Limited which has Rexam Plc (a publicly traded company margin-supportive in the medium-
on the London Stock Exchange) as technical partner. Cans are gaining term…
significance as input component for brewers especially, as industry players
have over the years deliberately moved away from bottling their product
contents to the use of cans. Cans are a more efficient means of product
distribution for the brewers as it eliminates the logistics challenge of
retrieving empty bottles from consumers, as well as aids a deeper
penetration of consumer markets with brewed products. GZI has an installed
capacity of 600million cans p.a. and plans to double capacity to 1.2billion by
2011. While NB and Guinness have already placed a year’s demand on GZI’s
cans, we highlight that the efficiency gains from locally sourced cans will be
strongly reflective on margins over the medium-term as the proportion of …though brewers are still exposed
canned drinks expand from the current level of less than 10%. We also see to the volatility of global aluminum
efficiency gains creeping in from reduced lead time which currently stands at prices as GZI is 100% dependent
16-20 weeks for imported cans and the elimination of 20-25% damage rate on imported aluminum foils.
during shipment.
We highlight that the local content initiative could prove more value accretive
to the wider economy, given that Nigeria, as the second largest sorghum
producer globally (after the United States), is self-sufficient in sorghum
production with an estimated 2009 production volume of 11.0million tons.
The potential of the agricultural sector (40% of GDP) is immense and huge
costs could be saved if the on-going sorghum initiative is pursued
sustainably.
Cost structure not materially
In a similar dimension, we highlight another twist to brewers’ continued different across key African brewers
investment in the local raw material sourcing capability. For instance, in 2008
Nigerian Breweries acquired its 30,000 ton capacity Aba Malting Plant, which
is the largest in Africa. Our key attraction to this strategy is the potential
long-term margin impact and the resultant effect on value creation for the
brewers. The strategy is more instructive given our long-term view that the
sector will evolve to be more competitive as new entrants become more
aggressive. This will engender margin pressure stemming from weakening
pricing power. Hence, we continue to see strategies to improve margins now
as extremely positive from valuation standpoint.
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OPEX, made up of S & D and Administrative expenses, gulps about 25% of Brewers are intensifying on advert
turnover. In order to defend their market share, key players have grown their spend to ring-fence their market
marketing budgets, making the sector visibly advert-intensive. In shares against potential
2009FY, Guinness and NB respectively recorded 24% and 21% on this encroachments…
expense line (as a proportion of sales) with advertising expenditure
representing more than half of that make-up. In our view, this elevates the
entry barriers for new players as significant investment is warranted to cede
market share from existing players.
Fig 8:
Brewers OPEX to sales ratio has been declining
35%
32%
NB Guinness
30% 29%
26%
25% 24%
25% 21% 24% OPEX line has shown appreciable
24% 24%
20% 22% efficiency depicted by declining
OPEX-to-sales ratio
15%
10%
5%
0%
2006 2007 2008 2009 Average
Source: Companies’ financials, Vetiva estimate
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Competitive Strategies
Typical of a duopoly market, the competitive tools in the brewery industry are Both micro and major brewers are
wide-ranging. Industry majors have vied to defend their market share while exploring the full beverage portfolio
numerous ‘micro brewers’ and fringe players continuously craft competitive strategy
strategies to service their market niche. With the entrance of new global majors,
we expect the terrain to be challenging in the medium-term and even more so,
in the long-term. We highlight the following key strategies currently being
adopted by Nigerian brewers to service the beer population:
Product innovations: While taste may remain materially the same, the re-
New international brands are being
packaged products of brewers have consistently impressed a new look appeal
introduced in additional to re-
in the minds of consumers. Brewers have successfully deployed this “old-wine-
packaging of existing brands
in-a-new-skin strategy” to stimulate fresh demand for their products by
leveraging on its psychological impact on consumers. Nonetheless, we have
seen pockets of newly introduced global trademarks into the Nigerian market
and market acceptance has been quite encouraging. Canned products are
becoming an increasingly potent means to enhance beer availability and
acceptability, helping to secure a larger share of consumer spends. While this
has helped in boosting volume growth, it also exposes the brewers to the
vagaries of aluminium markets.
However, we could see some cost efficiency gain from local sourcing of cans
given the recent completion of GZ Industries Limited can manufacturing plant
which is the first of its kind in West Africa. The plant has an installed capacity
of 600 million cans per year and plans to double capacity to 1.2billion in 2011.
According to industry sources, can importation requires an average lead
time of 16-20 weeks and damage rate during shipment is put at about 20%-
25%. Substantial efficiency gains could accrue from this end in the medium-
term if cans are completely sourced domestically.
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Fig 9: Type
Harp (2)
Economy Goldberg (5) Champ Malta (4) Williams Dark Ale (5)
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Industry Outlook
In this section, we attempt to assess and provide an outlook for the Nigerian
brewery sector from a valuation perspective. In our 2009 brewery sector report
(Brewers on the Rise, published in September 2009), we detailed the
fundamental drivers of the sector, with a conclusion that the outlook for the
sector was positive. In this update, we test our assumptions against evolving
developments over the past year. Our long-term call on the sector remains
unchanged and is premised on our positive outlook for key growth drivers of the
sector. In this regards, we highlight the following:
Payout from demographic dividend: We approach this theme from the +150 million population base
angle of population size and structure. The catch to size of 150million people is provides huge potential demand
the share enormity of potential demand for brewery products and the catch
to structure lies in the sustainability of this demand. Nigeria has a very high
fertility rate of c.5 children per woman driving a population growth estimate of
2.8% p.a. based on IMF estimate. While growing population has engendered
significant challenges to the economic managers, we cannot take away the
inherent demand potential for consumer goods. This has been the key
attraction to the investment case in Nigeria.
100
80 0 - 14 years 42%
2010F
2011F
2012F
2013F
2014F
2015F
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(50.00) (40.00) (30.00) (20.00) (10.00) - 10.00 20.00 30.00 40.00 50.00
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 12
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Rising per capita GDP: Before we diagnose the potential beer volume
impact from this fundamental driver, we highlight that Nigeria per capita Nigeria GDP per capita has
income has shown significant growth over the past 10 years. Based on IMF delivered 13% CAGR in the past
figures, we estimate a 10 year CAGR of 13% with GDP per capita rising to decade. We expect 8.3% CAGR
over the next 5 years.
US$1,141 in 2009. This phenomenal growth has been fuelled by substantial
market-friendly macroeconomic reforms aimed at inducing a private-sector led
economic growth. However, growth slowed down significantly in 2009 on the
back of a global economic crunch. From this base, IMF estimated a per capita
income growth of 8.3% over the next 5 years with GDP per capita expected to
hit US$1,839 in 2015.
Fig 13:
Nigerian GDP per capita (current price)
1,141.91
1200
823.824
800
389.951
400
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F
Source: IMF
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 13
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Having reviewed historical GDP per capita performance and forecast over the Beer products are both income and
next 5 years, we now focus our attention on the intrinsic link between income price elastic, though the former is
and beer volume growth. stronger
Beer products are both income and price elastic as reflected in the charts
below. This implies that rising income level and price reduction could boost
volume growth significantly. We however observed that income-effect on
volume growth is twice as strong as price-effect. This position is further
strengthened when we consider the mild negative impact of recent economic
slowdown on beer consumption growth and the fact that previous price We do not expect material price
increases have had little or no pressure on volume sales. More so, we do not reduction given steady demand and
see the likelihood of significant price reduction playing out due to strong modest inflation
Using the hypothetical model below, we extrapolate that the expected GDP per Stylised model suggests a 25%
volume growth based on 8%
capita growth of 8% in Nigeria implies a potential beer volume growth of 25%
expected per capita GDP growth
p.a. We think this is quite bullish and is driven by the implicit assumption that
the beer consumption per capita in Nigeria will converge towards global
average of 27litres p.a. (from 10litres currently). While this argument sounds
plausible theoretically, we have some slight reservation with regards to how
quickly this can be achieved given the uniqueness of the Nigerian socio-
political/cultural make-up.
30% 50%
Beer volume growth
Beer volume growth
25%
40%
20%
30%
15%
20%
10%
10%
5%
0% 0%
0.0% 2.0% 3.5% 5.0% 6.5% 8.0% 10.0% 0% 5% 10% 15% 20% 25% 30%
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 14
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o Our base case assumption is that beer consumption per capita in Nigeria We expect beer PCC consumption
will grow to 13litre p.a. in 2015. This level represents about 30% growth to deepen to 13liters by 2015,
rising 30% from current level
over the current level, just half of global average of 27 litres p.a. and 11%
below the average for African peers. It is worth mentioning that
consumption peaked at 17 litres in 1983, before the ban on imported barley
severely constrained domestic production.
o Our expected beer PCC is driven by 8.3% growth in per capita GDP through Beer consumption is intrinsically
linked to income and population
2015 (based on IMF forecasts) as we have established a strong positive
levels
correlation between GDP and beer consumption per capita. Increasing
urbanisation rate should provide additional catalyst.
o We expect population growth rate of 2.8% p.a. through this period (based
on IMF forecast) translating to a population base of 179million in 2015.
Premised on the above, we expect beer demand growth to continue in the high
single digits over our forecast period. Our estimate puts it at 9.1% CAGR
through 2015 (vs. 9.6% actual performance over the past 5 years). Hence, the We forecast 9.1% CAGR in volume
combined impact of income and population growth is expected to push beer through 2015 (vs. 9.6% historical
demand to 23.1 mhl in 2015, representing 54.3% growth over 2009 level. Even performance)
at this growth estimate, Nigerian beer market still represents 83% of the
current size of South Africa (28 mhl). These fundamentals underlie our
positive outlook for the sector, in terms of potential volume growth.
Fig 16:
Base-case estimate of 2015 beer demand: 9.1% CAGR
25 23.1
20 5.3
15.0 2.8
15
Our forecast suggests that Nigerian
beer demand will hit 23mhl by
9.5
5.5 2015.
10
2005A 5-Year Growth Curent Level Population Effect GDP Effect 2015F Total
Volume
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That said, we highlight that current production capacity of local brewers cannot
meet up with this expected surge in demand. More importantly, brewers are
currently operating at close to full capacity utilisation rates due to steady
demand. Hence, supply must be boosted by significant CAPEX in capacity
expansion.
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Investment Thesis
Growth: Potential is enormous. Based on our estimate, the Nigerian Beer consumption growth will be
beer market currently sits on an unrealised volume potential of 40mhl, driven by population build-up
(2.8% p.a.) and rising GDP per
representing 170% growth over the current level of 15mhl. While this potential
capita (8.3%)
may not be realised in the short-term, we highlight that GDP per capita growth
and population build-up are proven fundamentals that we are convinced will
drive beer demand to 23mhl in 2015, representing 54% growth over 2009. The
market has delivered growth rates above this level over the past 5 years. We
leave early realisation of this potential growth as upside to our estimate.
Fig 17:
Return on Equity: Nigerian Breweries Plc Return on Equity: Guinness Nigeria Plc
50% 47%
80%
71%
68% 45%
70%
40% 36% 36%
60% 34%
35%
48%
50% 30%
40% 25%
30%
20%
30%
15%
20%
10%
10% 5%
0% 0%
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In terms of market returns, brewers have done pretty well outperforming BRIC
and Emerging markets basket by a wide margin over the past 10 years. NB and
Guinness market returns bear close semblance to their earnings growth
trajectory over the past decade. In the most recent 5 years, NB and Guinness
have delivered BRIC-like return profile buoyed largely by appealing growth
story in top and bottom lines. This, in our opinion, captures market’s validation
of the sector’s value propositions.
Fig 18:
10-Year CAGR in share price 5-Year CAGR in share price
9.9%
20.0% 10.0%
10.9% 10.7%
8.6%
10.0%
0.7%
0.0% 0.0%
Guiness Nigerian Nigeria (All BRIC Emerging Guiness Nigerian Nigeria (All BRIC Emerging
Nigeria Plc Breweries Share Index) Markets Nigeria Plc Breweries Share Index) Markets
Notes:
1. BRIC and Emerging Market returns are dollar-based, while NSE, NB and Guinness returns are based on domestic currency.
2. Returns are not inclusive of dividends
New entrants: A positive sum game, in our view. The value and
growth creating opportunities in the brewery sector are proven propositions.
This is affirmed by the increasing attention the market commands from global
brewery giants in their search for growth poles. Existing players are scaling up
CAPEX programmes while new entrants (like SAB Miller, Castel) are acquiring
fringe players with the strategic intent of building capacity in the medium-term.
In our view, the entry of equally-big players will only help to add to the size of
the industry pie in the long-term though we highlight that the medium-term
economics of the brewery market may be pressured. The key pressure points
include pricing power and margins.
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In view of the high market valuations of the sector’s key players, we think
direct acquisition and repositioning of fringe players is an attractive call option
to gain profitable exposure to the enormous growth and value opportunities in
the brewery sector. SAB Miller is already treading this path using the
acquisition of fringe players as launching pads. In our view, this is a cheap
means of gaining access to the second largest beer market in Africa, as
at now.
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Quoted Companies
Brewers Price (N) Shares Outst. Market Cap Market cap YtD share Analyst
(mn) (N'mn) (US$mn) share perf. rating
Nigerian Brew. Plc. 78.50 7,563 571,352 3,809 66.3% 42% Neutral
Guinness Nig Plc 185.13 1,475 273,053 1,820 31.7% 45% Neutral
Int'l Brew. Plc. 6.71 2,013 13,507 90.0 1.6% 196% Not rated
Champion Brew. Plc. 2.46 900 2,214 14.8 0.3% -22% Not rated
Jos Int. Brew. Plc. 3.36 562 1,888 12.6 0.2% -11% Not rated
Golden Guinea Brew. Plc. 0.68 251 171 1.1 0.0% 0% Not rated
Premier Brew. Plc 0.93 126 117 0.8 0.0% 0% Not rated
862,301 5,749 100.00%
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We expect this growth to come as Guinness leverages its coveted Fair value range 170 - 182
position as the second largest Nigerian brewer (27% market share and Rating NEUTRAL
4.5 mhl installed capacity) to tap into the brewery industry growth
opportunities. The brewer has operatin
operating footings in the premium,
mainstream, and economic segments of the beer market given its Price Perf. Guinness NB NSE
product portfolio a self-sustaining growth balancing behaviour through 12-month (%) 37.2 44.7 4.7
economic cycles. 6-month (%) 32.1 11.6 -12.5
3-month (%) 11.5 26.5 -0.8
Guinness key strength lies in its c.80% dominance of the stout market
where the Guinness brand (which commands 75% price premium over
mainstream lager brands) holds the ace. We view this undisputed Financials 2009A 2010A 2011F
leadership as a viable source of growth as the stout segment drives Turnover (N'bn) 89.1 109.4 122.6
14% of the Nigerian beer market. Modest incursion into the lager
EBITDA (N'bn) 24.4 24.4 28.9
segment
egment with strong performance from Harp, coupled with tthe capacity
PAT (N'bn) 13.5 13.7 17.2
expansion of 1.5mhl expected to come on stream by June 2011
2011, should
EBITDA Marg (%) 27.4 22.3 23.7
provide further headroom for our volume growth expectation.
PBT Margin (%) 21.3 18.3 20.7
Guinness shares currently trade at 2011E P/E multiple of 15.8x (driven PAT Margin (%) 15.2 12.6 14.1
by 27% 2011E EPS growth) and EV/2011 EBITDA of 9.0, driven by ROaE (%) 47.0 41.1 46.8
EBITDA margin of 25%. These compare well with NB’s (2011 P/E 16.6x;
EV/EBITDA 9.2x). While we expect 2011 margin performance to be sub sub-
2008, the market share gain (in terms of v volume) over the past year Valuation 2009A 2010A 2011F
will support strong EPS growth. We expect Guinness market share to P/E (x) 13.4 20.4 15.8
remain attractive at 25%-plus
plus through 2015. We are Neutral at current PBV (x) 2.7 8.0 7.4
price as we see mild discount to fair value estimate
estimate.
EV/EBITDA (x) 10.7 10.7 9.0
Fig 20: 52-week Share price performance Div. Yield (%) 4.1 3.5 4.3
NB
1.4 GUINNESS Guinness
NSE ASI Overseas
Nigerians Limited
46.2% 46.0%
1.2
1.0 Atalntaf
Limited
7.8%
0.8
S-09 D-09 M-10 J-10 S-10
Nigerian Brewery Sector Update: Brewing Growth;; Malting Value I October 2010 I 22
Nigeria I Breweries I Equities
Fig 20:
Turnover (in N’bn) PAT (in N’bn) and PBT margins
100 25%
89 25%
13
80
69 20%
21%
60 18%
12 15%
40
10%
11
20 5%
- 10 0%
2008 2009 2010 2008 2009 2010
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 23
Nigeria I Breweries I Equities
Company Overview
Guinness Nigeria Plc has about 50 years of operating experience in
Nigeria. The company was licensed to brew, bottle and market Guinness
products and was listed on the Nigerian Stock Excha
Exchange in November
1985 under the breweries sector.
ector. It is the second largest brewer in
Nigeria with a beer market et share (by volume) of about 27 27% and
capacity to produce 4.5 mhl per annum.
The company has four (4) brewing plants located in 3 states: Ikeja and
Ogba Breweries
ries in Lagos state, Benin brewery (Edo state) and Aba
brewery
rewery (Abia state). Much in line with the regional configurati
configuration of
brewery plants in Nigeria, all Guinness’ breweries are located in regions
south of the River Niger (South West and South
South-South Nigeria) where
beer market is predominantly unregulated by religi
religion consideration.
The Company produces five major brands: Guinne Guinness stout, Gordon’s
Spark, Harp lager, Malta Guinness and Smirnoff Ice. These products
have been promoted under the platform of various thematic campaigns
with music and reality shows as key selling attractions
attractions.
Fig 21:
Geographic foot print of Guinness; generates 99% of sales in Nigeria
Key
Brewery
Malting plant
National boundaries
Major cities
Federal capital
Nigerian Brewery Sector Update: Brewing Growth;; Malting Value I October 2010 I 24
Nigeria I Breweries I Equities
Forecasts
We are optimistic about Guinness growth prospects given our positive
outlook for the brewery industry and our view that Guinness is well
positioned to transform underlying growth potential in beer consumption
into value for shareholders. We are more positive on profitability stance
given our expectation that margin will rebound strongly in FY’11 as huge
marketing spend takes a breather. We believe capacity expansion will
continue as this could be done profitably given the current demand-supply
dynamics in the industry.
Our earnings outlook for 2011FY is very strong given our view that the
market share gain in the past year is yet to pass through to margins as
marketing spend outpaced turnover growth. We thus forecast a PBT
margin accretion of 200bps in 2010FY (PBT Margin: 20.6%). Our margin
expectation translates to post tax earnings of N17bn and EPS of N11.64
(EPS growth of 27%).
Over the next five years, we forecast a CAGR of 12% in turnover (vs.
18% in the last 5 years) to be driven by both price increase and volume
growth of 8%. Our turnover outlook is premised on Guinness’ flexibility
to play both the economy and mainstream segments of the beer market.
Fig 22:
Key income statement heads forecasts (in N’bn except stated)
20%
120
15%
80
10%
40
5%
- 0%
2009 2010 2011F 2012F 2013F
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 25
Nigeria I Breweries I Equities
We forecast a 16% CAGR in earnings over the next 5 years (vs. 23%
achieved previously). Our earnings outlook is premised on our view that
margin will rebound from the current trough: 2010 EBITDA margin of
22% vs. 28% historical average. We are looking for an average EBITDA
margin of 26%, which we believe is achievable given Guinness’ record of
operating efficiency.
Our fair valuation implies justified P/E multiple of 15.1x (on 2011F EPS)
and EV/EBITDA multiple of 8.3x.
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 26
Nigeria I Breweries I Equities
Fig 23:
Historical P/E multiple: 5-Y average of 18.6x
45.00
5-Y Avg. P/E + 1 SDEV 5-Y Avg. P/E = 18.6x Current P/E = 19.9x
40.00
35.00
30.00
25.00
20.00
15.00
10.00
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 27
Nigeria I Breweries I Equities
Financial Performance
Over the past years, Guinness Nigeria Plc has taken advantage of
favourable dynamics in the Nigerian beer market to deliver robust volume
and earnings growth. We x-ray this performance along key performance
indicators in this section as this provides a solid backgrond to our outlook
of the company as we have highlighed above.
Per share data 2006 2007 2008 2009 2010 2011 2012
EPS 6.31 7.19 8.04 9.18 9.31 11.68 13.79
DPS 4.00 4.50 6.00 7.50 8.25 9.93 11.72
NAPS 17.63 21.45 24.99 21.37 23.19 24.94 27.01
Sales/Share 45.47 42.22 46.90 60.44 74.15 83.10 93.42
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 28
Nigeria I Breweries I Equities
Appendix:
Income Statement (N’mn) 2006 2007 2008 2009 2010 2011F 2012F
Turnover 53,652 62,265 69,173 89,148 109,367 122,561 137,781
Cost of Sales (27,845) (34,144) (35,611) (46,510) (61,672) (66,551) (74,402)
Gross Profit 25,807 28,121 33,562 42,639 47,695 56,010 63,379
D & A Expenses (9,511) (8,545) (10,515) (14,000) (18,796) (20,835) (22,321)
A & P Expenses (4,072) (5,349) (6,164) (7,796) (8,568) (10,418) (11,849)
EBITDA 14,901 16,991 19,993 24,408 24,385 28,897 33,863
Depreciation 2,677 2,764 3,110 3,565 4,053 4,139 4,653
Operating profit 12,224 14,227 16,883 20,843 20,331 24,757 29,210
Other income - 159 227 780 - -
EBIT 12,224 14,227 17,042 21,069 21,111 24,757 29,210
Interest Paid (1,551) (1,540) (437) (2,026) (1,052) (946) (1,331)
Interest Received 764 2,197 1,730 1,212 254 1,525 2,024
Profit from operations 11,437 14,800 18,336 20,255 20,314 25,336 29,902
PBT & EI 11,437 14,800 18,336 20,255 20,314 25,336 29,902
Exceptional Income (1,243) (1,263) (325) - -
PBT 11,437 14,800 17,093 18,992 19,989 25,336 29,902
Taxation (3,997) (4,193) (5,232) (5,451) (6,252) (8,107) (9,569)
PAT 7,440 10,607 11,861 13,541 13,736 17,228 20,333
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 29
Nigeria I Breweries I Equities
13% 2010E EPS growth) and EV/2010 EBITDA of 10.7x, driven by ROaE (%) 70.8 67.2 76.4
EBITDA margin of 30%. %. These compare with Guinness’ (2011 P/E
15.8x; EV/EBITDA 9.0x). Unlike Guinness, we expect 2010 margin
performance to be at par with 2008 but expect slower growth than Valuation 2009A 2010F 2011F
Guinness. We remain Neutral at current price as we see mild discount P/E (x) 15.4 18.0 16.6
to fair value estimate of N175/share. PBV (x) 9.3 13.4 11.3
EV/EBITDA (x) 10.5 10.7 9.2
Fig 24: 52-week Share price performance Div. Yield (%) 6.5 5.6 6.0
NB
1.4 GUINNESS
NSE ASI
Others
1.2 Heineken
45.9%
N.V.
Group
54.1%
1.0
0.8
S-09 D-09 M-10 J-10 S-10
Source: NSE, Vetiva Research
Nigerian Brewery Sector Update: Brewing Growth;; Malting Value I October 2010 I 30
Nigeria I Breweries I Equities
Turnover grew by 7% YoY: During the half year ended June 2010, NB
reported a turnover level of N88.44bn, representing 7.0% growth over
H1’09. The growth in turnover is a remarkable slowdown when
benchmarked against the average of 20% delivered in the most recent 4
years. The slowdown was more pronounced in Q1’10 as turnover level
was rather flattish relative to corresponding period in 2009. In the first
quarter of 2010, brewer faced a very challenging macroeconomic
environment: tight credit cycle negatively affected key product
distributors, and rising job losses among the middle class hampered
aggregate consumer spending. However, we have noticed resumption in
volume growth in Q2 with a 20% sequential growth in turnover.
Fig 25:
Turnover (in N’bn) PAT (in N’bn) and Profit margin
17.0%
80.00
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 31
Nigeria I Breweries I Equities
Company Overview
Nigerian Breweries Plc, the largest brewer in Nigeria with production
capacity
apacity of 10mhl, commenced operation in Nigeria in 1949. The
company has about 60 years of operating experience in Nigeria and
represents
resents the largest quoted company in Nigeria by market value (as at
report date). In the beer market, NB Plc has a grip of about 60%.
Heineken N.V. Group holds 54.1% of the issued share capital of NB Plc
with the balance being held by Nigerian and foreign institutions and
indviduals.
Fig 26:
Geographic foot print of NB; generates 99% of sales in Nigeria
Key
Brewery
Malting plant
National boundaries
Major cities
Federal capital
Nigerian Brewery Sector Update: Brewing Growth;; Malting Value I October 2010 I 32
Nigeria I Breweries I Equities
Forecasts
Summarily, our outlook for Nigerian Breweries is broadly positive in terms
of volume growth and profitability. Our outlook is premised on our view
that NB’s market leadship is strong and the brewery sector provides ample
room for volume growth. We think capacity expansion is on the card as
demand surges and this could be done profitably given the current
demand-supply dynamics in the industry.
Our earnings outlook for 2010FY is a bit stronger at 13.9% YoY growth
premised on our view that margin will remain steady at 18% (vs. 18.0%
recorded in H1’10). NB’s net margin over the past 3 years has remained
in the 17%-mark and we do not see significant deviation in FY’10.
Hence, we forecast 2010FY earnings after tax of N31.8bn translating to
an EPS of N4.21.
Over the next five years, we forecast a CAGR of 13.4% in turnover (vs.
17.1% in the last 5 years) to be driven by both price increase and ramp
up in volume. Our modest outlook on this front is premised on the
expectation that despite the market dominance by NB, increasing
competitive pressure could slightly dilute it price-setting power. Hence,
we think volume growth is the key variable to watch.
Fig 27:
Turnover (in N’bn)
300 32%
30% 30% 30%
29% 30%
250 30%
200 28%
150 26%
100 24%
50 22%
- 20%
2008A 2009A 2010F 2011F 2012F
Turnover EBITDA
PAT EBITDA margin
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 33
Nigeria I Breweries I Equities
In line with our valuation approach for Guinness, we adopt a DCF valuation
methodology (DDM) in estimating the fair value of Nigerian Breweries Plc’s
shares premised on an obvious reason: visibility of the brewer’s dividend
policy. We have assumed an average dividend payout of 95% (vs. 85% for
Guinness) and discount our expected dividend streams by an estimated
cost of equity (COE) of 14.4%. Our COE is driven by a nominal risk free
rate of 10%, beta of 0.87 (relative to the NSE ASI) and an equity risk
premium of 5%, much in line with frontier market benchmark.
Our fair valuation implies justified P/E multiple of 17.1x (on 2010F EPS)
and EV/EBITDA multiple of 9.4x.
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 34
Nigeria I Breweries I Equities
Fig 28:
Historical P/E multiple: 5-Y average of 20.4x
50.00
5-Y Avg. P/E + 1 SDEV 5-Y Avg. P/E = 20.4x Current P/E = 21.9x
40.00
30.00
20.00
10.00
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 35
Nigeria I Breweries I Equities
Financial Performance
Over the past years, Nigerian Breweries Plc has taken strong advantage of
favourable dynamics in the Nigerian beer market to deliver robust growth
and value on the back of commendable operating efficiency. We x-ray this
performance along select KPIs in this section as this provides a
background to our outlook of the company as we have highlighed above.
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 36
Nigeria I Breweries I Equities
Appendix:
Income Statement (in N’mn) 2007 2008 2009 2010F 2011F 2012F
Turnover 111,748 145,462 164,207 182,905 212,233 244,478
Cost of Sales (52,564) (74,562) (88,734) (95,111) (109,724) (125,662)
Gross Profit 59,184 70,900 75,472 87,795 102,508 118,816
D&A (32,077) (34,314) (33,955) (40,239) (46,691) (54,030)
Core operating profit 27,108 36,586 41,517 47,555 55,817 64,787
Other income 249 192 145 159 191 220
EBITDA 32,587 42,543 48,457 54,788 63,616 73,375
Depreciation 5,230 5,765 6,795 7,073 7,608 8,368
EBIT 27,357 36,778 41,662 47,715 56,009 65,007
Net Interest 519 741 (263) (353) (141) 15
PBT & EI 27,876 37,519 41,400 47,362 55,867 65,022
Exceptional Items - - - - - -
PBT 27,876 37,519 41,400 47,362 55,867 65,022
Taxation (8,933) (11,818) (13,490) (15,156) (17,878) (20,807)
PAT 18,943 25,701 27,910 32,206 37,990 44,215
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 37
Nigeria I Breweries I Equities
IB Plc is the 3rd largest quoted brewer in Nigeria with a market cap of
N14bn (US$93mn). The share price has gained 207% YTD on the heels
of company-wide restructuring, capacity expansion and successful
turnaround in volume growth and profitability.
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 38
Nigeria I Breweries I Equities
Located in Uyo, Akwa Ibom State, it was incorporated in July, 1974 for
the purpose of brewing and bottling lager and Champ Malta drinks and
listed on the NSE in September 1983. The company has a running
partnership with InBev, a global player in the alcoholic drinks market,
in the domestic production of Beck’s in Nigeria. The Brewery has an
installed capacity is 500,000 hl of beer p.a.
JIB Plc has a market value of N1.9bn (US$13mn) and the stock has lost
11% YTD.
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 39
Nigeria I Breweries I Equities
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 40
Nigeria I Breweries I Equities
Un-quoted players
While we have a handful of fringe quoted players recording operating
losses, it is exciting to point out that the big unquoted players are faring
quite well with relatively good market shares in the upper single digits.
In a bid to further improve its current products mix, the Board recently
acquired 95.05% equity holding in Dumex Industries Limited/Maltex at
a cost of US$11.3 million following the divestment of CFAO Nigeria Plc.
The acquisition of DIL/Maltex will enable the company leverage on the
brand resilience of Maltex which is a mainstream malt drink.
Consolidated Breweries originally produces Hi-Malt, which serves the
low-income end of the malt segment.
This acquisition and the introduction of new products (Turbo King) are
already contributing to turnover as the company recorded 18% YoY
growth in turnover (FY’09: N20.7bn) though PAT dipped by 10.5% YoY
to N2.7bn, due to unfavourable increase in energy cost, finance charges
and higher effective tax rate.
The company paid final dividend of N3.52 per share for 2009FY, making
the total dividend paid N1.39 billion. This represents a payout of 52%.
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 41
Nigeria I Breweries I Equities
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 42
Nigeria I Breweries I Equities
Investment Recommendations
Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell.
Definition of Ratings
Buy/Overweight recommendation refers to stocks that are highly undervalued but with strong fundamentals and where
potential return in excess of or equal to 25% is expected to be realized between the current price and analysts’ target
price.
Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential
return of between 10% and 25% is expected to be realized between the current price and analysts’ target price.
Neutral/Hold recommendation refers to stocks that are correctly valued with little upside or downside where potential
return of between +/- 10% is expected to be realized between current price and analysts’ target price.
Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where
potential return of between -10% and -20% is expected to be realized between current price and analysts’ target price.
Sell/Underweight recommendation refers to stocks that are highly overvalued but with weak fundamentals and where
potential return in excess of or equal to -20% is expected to be realized between current price and analysts’ target price.
Other Disclosures
Vetiva Capital Management Limited or any of its affiliates (collectively “Vetiva”) may have financial or beneficial interest in
securities or related investments discussed in this report, potentially giving rise to a conflict of interest which could affect
the objectivity of this report. Material interests which Vetiva may have in companies or securities discussed in this report
are herein disclosed:
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report
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Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 43
Nigeria I Breweries I Equities
CONTACTS
Adedoyin Adelakun Analyst, FMCG (Food & Beverages, Health Care) a.adelakun@vetiva.com
sales@vetiva sales@vetiva.com
Tel: +234-1-4617521-3
Fax: +234-1-4617524
Email: research@vetiva.com, info@vetiva.com
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 44
Nigeria I Breweries I Equities
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Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 45