Monday, September 25, 2017/10:30 AM/ Vetiva Research

Nigerian Breweries held a 2017 Financial Market Forum on the 14th of September 2017, where the new CEO. Johan Doyer and the Finance Director Mark Rutten hosted a management presentation on the company’s operations and later treated analysts to a tour of the Iganmu-based Lagos Brewery. Whilst the event gave a fresh angle to the evolving dynamics in the beer market from NB’s perspective, the event did not produce any substantial changes in overall operations in the beer giants’ business. As such, we make no estimate changes in this note and we retain our 12-month Target Price of N120.72, SELL.

Facts behind the H1’17 figures: NB recorded 15% y/y growth in revenue in H1’17. This rise was solely driven by earlier price increases given that beer volumes in the period declined mid-single digit y/y. Despite this, the company has implemented further price increases across select brands at the start of Q3’17 in a bid to shore up margins amidst sustained local input cost pressures. With this, volumes and market share remain under pressure – a trend that has persisted for the last two years (volumes declined mid-single digit in 2016) amidst a shift in consumer demand to cheaper beers as well as a declining consumer participation in the Stout and Malt segments.

We are more bearish on volume performance for the rest of the year as price sensitive consumers feel an inflated pinch of the slow and steady rise in prices. Though the company did not guide on future price increases, we expect a more conservative stance till the end of the year amidst waning cost pressures (particularly FX related costs). We had highlighted the surge in Other Income (H1’17: N1.8 billion vs. H1’16: N0.3 billion) in our H1’17 earnings note “H1’17 EPS up 25% y/y as FX losses moderate”, management attributed this partly to the insurance compensation claims received following the fire incident at the empty crates storage facility of the Lagos brewery.



Cheaper beers take the lead, no plans to brew Spirits: With a more challenging economic landscape over the last two years, the Nigerian beer market has seen consumers down-trade i.e., shift demand towards cheaper priced propositions. For NB, the consumer switch has seen the economy lager beers - i.e., Goldberg and Life beer become the largest segment in terms of volumes. Meanwhile, the national premium brands like Star and Gulder have recorded significant volume rout. Notably, this trend has also slipped into the Stout and Malts market.

That said, given its more robust value beer portfolio, management did not indicate any intention to introduce new beer brands into this faster growing segment and believe the company is “well placed to capture growth when the market recovers”. Also, despite vast opportunity in the Spirits market and much stronger competitor participation in the space, management stated that it does not intend to extend its brand portfolio to this space. We note that parent company, Heineken International, also has a limited Spirits segment in its portfolio and plays more in the spirit-flavoured beers (“speers”) sub-sector.

That said, NB continues to innovate – introducing a new variant to the Readyto-Drink Ace line with “Ace Desire ZOBO”. The drink is targeted towards the health-conscious consumer albeit with the well-loved Nigerian hibiscus flower flavour and 5.5% ABV packaged in a 33cl glass bottle. A look into the Lagos Brewery: With a 3.5 million hectoliters capacity per annum, the Lagos brewery has one of the largest installed capacity of the 10 operational factories owned by Nigerian Breweries. The factory was established in 1949 as the first brewery in Lagos and has undergone series of renovations to improve efficiency over the years.

The brewery produces 13 brands (out of NB’s total 19 product portfolio) and about 30 SKUs. These brands are produced through a completely automated and meticulously monitored procedure. More striking in the production process were the special and distinct facilities used to produce NB’s sole International Premium brand, Heineken. For Head Brewer Chinedu Uwajeh, one of the most crucial points in the value chain is inspecting the raw materials brought in from the farms – Sorghum, Barley and Hops. NB currently sources 58% its raw materials local – with a target to raise this to 60% by 2020.

This ratio excludes packaging materials which are largely sourced locally. The company continues to invest in its agricultural programmes working with over 250,000 farmers and inputs like Sorghum, Cassava and prospectively Sugar. Conclusion: According to management the price increase taken on select brands at the start of Q3’17 was marginal (e.g. from N220 to N230). Despite this, we maintain our FY’17 revenue forecast at N346 billion as we expect the weaker volumes to offset the effects of the price increase.

We believe Nigerian Breweries remains well positioned to take advantage of the fast-evolving Nigerian consumer landscape with economies of scale keeping a lid on costs and innovative trademark producing a competitive edge. The biggest threat remains the volatile external environment – stubborn inflation, relatively stable but still uncertain foreign exchange market and persistent security concerns. Overall, we maintain our FY’17 PAT forecast of N45 billion (Previous: N28 billion). With this, we maintain our Target Price at N120.72.



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