Brewery Sector Update - Tottering Momentum

Tuesday,February 26, 2019 09:30 AM / Afrinvest Research

Executive Summary

Our analysis of brewery sector notes the pressuredproduction volumes, dragged by the impact of stiff competition, lower consumerspending (induced by recessionary pressures) and elevated costs of production.Whilst some players, specifically Nigerian Breweries and InternationalBreweries, continue to expand production capacity, other players’ generalcompetitive strategy to retain market share has been through increases inproduct offerings to align with changing consumer tastes.

At a P/E ratio of 25.0x, we are not in doubt of theoverall attractiveness of Nigerian brewery sector. The sector offers anattractive pricing opportunity when compared with global peers across emergingand frontier markets - Kenya (148.8x), Turkey (100.6x), India (46.4x), China (44.6x),Malaysia (29.0x), Indonesia (28.5x), Brazil (26.4x) amongst others.

We rated NB a ‘SELL’, GUINNESS a ‘HOLD’ while INTBREWand CHAMPION are rated ‘BUY’. Our rating for NB is based on the company’scontinued and weak pace of revenue growth which we believe will remain, giventhe unabated competitive pressures within the sector. For GUINNESS, we believeexpected growth will also remain weak although we opine that revenues fromspirits will buoy topline performance while the impact of lower finance costpresents an outlook for improvement in bottom-lines. Also, we are convincedINTBREW’s performance will be backed by syndicated volume growth for the newlyconsolidated business, while we based CHAMPION’s rating on our anticipation ofsustained improvement in revenues and profit after tax.

Nigeria’s brewery sector has been plagued by theeffect of the economic recession between Q2:2016 & Q2:2017, induced by thedecline in global crude oil prices, which fell below US$30.0/barrel(15/01/2016). This resulted in A crunch in government revenues, which in turnled to a backlog of unpaid salaries by state governments, exchange ratedevaluation and a slowdown in private sector investments. Consequently, lowerdisposable incomes, higher unemployment rate (peaked at 23.1% as at Q3:2018)and ultimately a moderation in consumer spending, which moderated the earningsof brewing companies, resulted.

Additionally, the security situation in themiddle-belt of the country have been a significant pressure point for the sectorfollowing disruptions in supply of barley, sorghum, maize, rice and wheat whichare primarily sourced in the region. Furthermore, the sustained decline in theforeign reserves (September 2014 - December 2016) prompted FX rationing andrestricted capital outflows by the central bank as brewery companies had toimport crucial supplies at higher FX costs. However, the introduction of theI&E (Investors and Exporters’) FX window in April 2017, led to improved FXaccess for the sector which has resultantly impacted positively on industryrevenue (based on coverage companies), which is up 14.7% to N508.0bn in FY:2017relative to the meagre Y-o-Y growth of 1.4% recorded in FY:2016.

The industry is structured along oligopolistic lines.Hence, our analysis focuses on 4 listed brewers – Nigerian Breweries Plc (NB),Guinness Nigeria Plc (GUINNESS), International Breweries Plc (INTBREW) andChampion Breweries Plc (CHAMPION). As at FY:2017, Nigerian Breweries andGuinness dominated coverage market share, accounting for 67.8% and 24.8%respectively while International Breweries and Champion Breweries, accountedfor the remainder (7.4%). However, as Ab-InBev merged its three Nigeriancompanies (International Breweries Plc, Pabod Breweries Limited and IntafactBeverages Limited) into International Breweries Plc in December 2017, ourestimated market share for INTBREW in FY:2018 is 19.3%, reducing NB, GUINNESSand CHAMPION’s market share to 56.7%, 23.2% and 0.8% respectively.

We highlighted the likely impact of the latest fiscalregulation on the sector following the introduction of additional excise dutieson alcoholic beverages that came into effect on the 4th of June 2018. Followingthe introduction of the tax, listed players initially responded by increasingprices to reflect the additional taxes, however, competitive pressures forced areversal, with companies opting to bear the burden. Thus, our projections showthat average cost to sales ratio for the sector (Ex-CHAMPION) will settle at63.6% for FY:2018 compared with 57.9% in FY:2017. Further decomposed, weestimated that International Breweries’ cost to sales ratio will climb 7.5pptsto 61.1% (from 53.6% in FY:2017) while for Nigerian Breweries and Guinness, ourcomputations show a 5.4ppts rise to 63.8% (from 58.3% in FY:2017) and a 4.4pptsincrease to 66.0% (from 61.6% in FY:2017) respectively. Champion Breweries wasexcluded from sector average as cost to sales ratio (71.0%) in FY:2017 was anoutlier compared with peers.

For industry revenues in FY:2018, we estimated a 21.5%increase to N617.4bn, driven by marginal additional volumes from INTBREW postconsolidation as well as improvement in consumer spending during the year asthe country recorded a real GDP growth of 1.9%. Nevertheless, we expect costpressures which have increased based on new excise duties as directed by theFederal Ministry of Finance (FMoF) to impact industry profitability (PBT) whichwe anticipate will settle at N37.0bn, down 29.9%.

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