Morgan Capital Equity Research Nigeria Breweries Plc

7/23/2019 Morgan Capital Equity Research Nigeria Breweries Plc

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July 22, 2013

NIGERIAN BREWERIESEQUITY NIGERIA BREWERIES

Investment Summary & Highlight

MorganCapital Research

African Frontier Market

LEAD AN

Chuks AnyanwuChuksA@morgancapitalg

+234-08

Julcit Hwandesales@morgancapitalgr

+234-8107596134 +234-1-

REGULATORY COMP

Taiwo Baloguncompliance@morgancapitalg

MAyoleke O Adu FCS, CFA ceo@morgancapitalg

Key Ratios & Statistics

Current Stock Price: N1

Fair Value: N1

Outlook: NEGMarket Capitalization: $8

Year End: De

Price-to-Earnings (PE)

2012Trailing: 33

2013 Forecast: 32

2014 Forecast: 30

Earnings-per-Share (EPS)

Current: (FY 2012): N

2013 Forecast: N

2014 Forecast: N

Dividend-per-Share: N

Return-on-Equity: 22

Return-on-Asset: 15

Outstanding Shares (mn) 7,5

Free Float: (mn) 2,400(

Year-to-Date: 19

Latest Result H

Dollar ($)

H1 -2013 Result @ a glance

N (mn) N (mn)

H1 -2013 H1 -2012

Gross Earnings 133,815 124,621

PBT 29,607 28,525

PAT 20,663 19,376

EPS 2.73 2.56

k Rating

stry View

ne

NB PLC: finding growth - is the glass

now half empty?

H1 -2013: Revenue and Net income improved by

7.4% and 6.6% respectively YoY.

Nigerian Breweries (NB or the Company) on

Wednesday 14th July 2013 released its unaudited H1 2013

result. Revenue rose by 7.4% to N133.81billion ($836.31M)

from N124.62billion ($778.87M) YoY, while net income rose

by 6.6% to N20.66billion ($129.12M) from N19.37billion

($121.06) YoY. The Companys gross profit rose by 7.6% to

N66.37billion ($414.81M) from N61.69billion ($385.56M),

boosted by the slightly slower growth in cost of sales which

rose by 7.16% compared to the faster growth in revenue.

Operating profit on the other hand was stable atN31.62billion ($197.62M) from N31.43billion ($196.43M),

managing a marginal growth of 0.6% YoY. Operating profit

growth was impaired by the surge in operating expenses

which rose by 14.85%, a lot faster than the growth in

revenue and gross profit. Consequently, operating margin

weakened to 23.6% from 25.2% YoY. We think that the

growth in revenue is sub-par, considering that the

Company only recently acquired some smaller brewers

from its parent company Heineken. We also think that

competition is clearly becoming a strong factor in the

Companys inability to grow sales, considering the

emergence of a low end Spirit/Gin market which isbecoming increasingly popular with middle income and

low income earners. Also worthy of note is that a lot of

people, particularly the high income earners are more

health conscious and consuming more health friendly

beverages which may also have a part to play in NBs sub

inflation revenue growth performance in both the first and

second quarter of fiscal year 2013. Given Nigerias annual

average growth rate of between 2-3% and inflation rate of

around 8%, we expect a consumer goods company to at

least match a growth rate of 10- 11% by our assessment,

for the companys growth to be sustainable going forward.

Bloomberg Ticker: NB:NL

NSE Symbol: NB

Listed on the Nigerian Stock Exchange

leading the Global Investment Path to AfricaTM
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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www.morgancapitalgroup.com Equity Research Nigeria

Nigerian Breweries traditionally posts its strongest quarterly

performance in the fourth quarter due to its associated festivities.We expect this trend to continue and expect management to be

more proactive in managing its controllable cost line which has

grown ahead of revenue in both first quarter and half year,

considering that it has not grown its revenue as aggressively as it

should.

Valuation shows that NB overvalued.

The stock is currently trading at a 61.27% premium to our fair value

estimate of N105.60, with a 12month investment horizon. Our fair

value computation is based on our financial performance

expectation for FY 2013. We placed a negative outlook on the

stock because of its downside potential from its current trading

price to our expected fair value.

Earnings Projection

Our FY 2013 revenue estimate for Nigerian Breweries is

N279.61billion ($1.75B) which translates to a 10.65% improvement

relative to FY 2012, while our net income estimate is N39.93billion

($249.56M) and equates to a 4.96% improvement relative to FY

2012. This yields an EPS of N5.28 and a forward P/E of 33.42X. We

think the Companys inability to grow sales is a major challenge

and despite our expectation that the Company will continue to seeimproved sales growth in the fourth quarter, we think that the

Companys sales struggle will impair overall aggressive growth in

the FY 2013. Our fair value for the stock is N105.60, our exit P/E

20.00X at which point we expect the stock is fully priced based on

our earnings projection for FY 2013.

The Company has only managed a 10% average revenue growth

rate over the last three fiscal years which we think should have

been more aggressive considering the huge investment in capacity

over the period. Operating expenses also rose at an average rate of

14% over the last three fiscal years, ahead of the revenue growthover the same period. The Companys PBT also grew by an

average growth rate of 7.3%, well under the growth rate of the

Companys controllable cost-line over the same three year period.

We think management needs to be a bit more deliberate in the

management of this cost line to improve its bottom line capacity.

Overall, we expect an improved performance from the company on

a year on year assessment for FY 2013 and 2014 as the Company

strives to ward off competition. However the Company needs to

step up to the challenge to reclaim its market dominance in the

Nigerian brewery space.

2010 2011 2012

Sales 13% 39% 20%

PBT 8% 14% -1%

13%

39%

20%

8%

14%

-1%

-50%

0%

50%

100%

150%

200%250%

300%

350%

400%

0%

5%

10%

15%

20%

25%30%

35%

40%

45%

SALES & PBT GROWTH

0.0%

5.0%

10.0%

15.0%

Sale s Operating Exps PBT

10.7%

14.2%

7.3%

3 YEAR CAGR (2010-2012)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

ROE ROA

60.0%

26.5%26.3%

16.1%

22.8%15.0%

ROE & ROA

ROA & ROE declined progressively over th

past three fiscal years.

Sales growth and PBT growth has been topsy

turvey over the last three years

On a 3year CAGR assessment, operating expenses h

grown ahead of both revenue and PBT growth.


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Valuation Analysis

Our fair value for Nigerian Breweries shares was calculated using

the Dividend Discount Model comprising our expected dividend

estimate for the company and a MorganCapital customized tweak

to adjust for the risk of investing in the Nigerian consumer goodssector. Our Required Rate of Return (RROR) factors in a risk

premium of 7% and the yield for the most recently issued 20-Year

FGN Bond was applied as the risk free rate of return.

Our projected dividend of N3.50 for FY 2013 which amounts to a

66% dividend payout ratio is based on our earnings estimate for

FY 2013.

Investment Conclusion

An overvalued stock based on our research, with focus on our FY

2013 estimates. We think the Company is currently experiencing

challenges in growing its revenue as beer consumption growth

may have been stifled with increasing focus of low income

consumers shifting to the more affordable local gin/spirit

products which are increasingly gaining prominence. We think

that Nigerian Breweries needs to re-evaluate its strategy in order

to remain competitive in this sector and focus on low income

brands to capture this growing market sect. The company also

needs to improve on its efficiency in the management of

controllable cost line to reduce the impact of the slow growth in

revenue.

Overall, NB PLC remains a strong brand; its consistent dividend

payout history and relative price stability make the stock a favorite

for investors especially Pension Fund Administrators and foreign

investors. We retain our SELL recommendation in the short-

medium term, because the stock is currently trading at a 61.27%

premium to our fair value estimate, which makes it susceptible

to a significant level of price correction in a down market. We

will re assess our position as new information becomes available.

0%

10%

20%

30%

40%50%

60%

GPM OPM PBTM

47%

24% 24%

52%

27% 27%

50%

25%22%

PROFITABILITY MARGINS

0.0

5.0

10.0

15.0

20.0

25.0

30.0

P/E P/S P/CF

29.2

4.4

21.9

28.2

3.3

19.5

PRICE RELATED RATIO

NB

GU

Nigerian Breweries is more expensive on all price

related parameters we considered compared with itpeer.

All profitability Margins have experienced a seesaw

effect over the past three fiscal years.


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Investment Risks To our Fair value

Slower/Higher than expected growth in revenue: This is a major factor that can impair our earnings estimates

Although we have adjusted our earnings expectation based on our analysis, there is always an outside chance thathe Company either out performs or under performs our revenue estimates.

Better Management of the controllable cost lines: It is our expectation that the Companys weakening profit margi

will persist as the year progresses and this was taken into account in arriving at our profit expectations. If howeve

this is not the case and there is an improvement in margins, this may impair our earnings expectation.

NIGERIAN BREWERIES

2010 2011 2012 2013(F) 2014(F)

MARKET CAPITALIZATION (N'm) ($) 3,887 4,606 6,948 4,991 5,25

GROSS REVENUE (N'm) 185,862 211,071 252,674 279,609 310,3

PROFIT B/F TAX 44,880 56,397 55,624 58,717 62,0

TAX 14,548 18,347 17,581 18,789 19,86

PROFIT AFTER TAX 30,332 38,050 38,043 39,928 42,21

EARNINGS PER SHARE (EPS) 4.01 5.03 5.03 5.28 5.58

PRICE-EARNINGS RATIO 19.22 18.76 29.22 20.00 19.9

SHARE CAPITAL 3,781 3,781 3,781 3,781 3,78

OUSTANDING SHARES (M'n) 7,562 7,562 7,562 7,562 7,56

OWNERS' EQUITY 50,172 144,828 166,799 191,819 220,5

CASH DIVIDEND 250K 125K 300K 350K 334SCRIP DIVIDEND Nil NIL NIL NIL NI

RELEASE DATE 21/03/11 09/03/12 41,611

AGM DATE 15/04/11 03/04/12 24/04/13

CLOSURE DATE 05/04/11 23/03/12 15/04/13

PAYMENT DATE 15/04/11 05/04/12 24/04/13

MorganCapital Securities Ltd

The Pent Floor

3, Biaduo Street, Off Keffi Street, S/West Ikoyi.

P.O.Box 75691 Victoria Island, Lagos.

+234-1-2714713-4,www.morgancapitalgroup.com
http://www.morgancapitalgroup.com/http://www.morgancapitalgroup.com/http://www.morgancapitalgroup.com/http://www.morgancapitalgroup.com/http://www.morgancapitalgroup.com/


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DISCLOSURE

Analyst Certification

Where applicable, the views expressed in this report accurately reflect the analysts' views about any and all of the investments or issuers to which the

report relates, and no part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations, views or

corporate finance transactions expressed in the report.

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Morgan Capital Equity Research Nigeria Breweries Plc

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