Brewery Sector Update - Tottering Momentum

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

 

Executive Summary 

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

At a P/E ratio of 25.0x, we are not in doubt of the overall attractiveness of Nigerian brewery sector. The sector offers an attractive pricing opportunity when compared with global peers across emerging and 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 INTBREW and CHAMPION are rated ‘BUY’. Our rating for NB is based on the company’s continued and weak pace of revenue growth which we believe will remain, given the unabated competitive pressures within the sector. For GUINNESS, we believe expected growth will also remain weak although we opine that revenues from spirits will buoy topline performance while the impact of lower finance cost presents an outlook for improvement in bottom-lines. Also, we are convinced INTBREW’s performance will be backed by syndicated volume growth for the newly consolidated business, while we based CHAMPION’s rating on our anticipation of sustained improvement in revenues and profit after tax. 

Nigeria’s brewery sector has been plagued by the effect of the economic recession between Q2:2016 & Q2:2017, induced by the decline 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 turn led to a backlog of unpaid salaries by state governments, exchange rate devaluation and a slowdown in private sector investments. Consequently, lower disposable incomes, higher unemployment rate (peaked at 23.1% as at Q3:2018) and ultimately a moderation in consumer spending, which moderated the earnings of brewing companies, resulted. 

Additionally, the security situation in the middle-belt of the country have been a significant pressure point for the sector following disruptions in supply of barley, sorghum, maize, rice and wheat which are primarily sourced in the region. Furthermore, the sustained decline in the foreign reserves (September 2014 - December 2016) prompted FX rationing and restricted capital outflows by the central bank as brewery companies had to import crucial supplies at higher FX costs. However, the introduction of the I&E (Investors and Exporters’) FX window in April 2017, led to improved FX access for the sector which has resultantly impacted positively on industry revenue (based on coverage companies), which is up 14.7% to N508.0bn in FY:2017 relative 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) and Champion Breweries Plc (CHAMPION). As at FY:2017, Nigerian Breweries and Guinness dominated coverage market share, accounting for 67.8% and 24.8% respectively while International Breweries and Champion Breweries, accounted for the remainder (7.4%). However, as Ab-InBev merged its three Nigerian companies (International Breweries Plc, Pabod Breweries Limited and Intafact Beverages Limited) into International Breweries Plc in December 2017, our estimated market share for INTBREW in FY:2018 is 19.3%, reducing NB, GUINNESS and CHAMPION’s market share to 56.7%, 23.2% and 0.8% respectively. 

We highlighted the likely impact of the latest fiscal regulation on the sector following the introduction of additional excise duties on alcoholic beverages that came into effect on the 4th of June 2018. Following the introduction of the tax, listed players initially responded by increasing prices to reflect the additional taxes, however, competitive pressures forced a reversal, with companies opting to bear the burden. Thus, our projections show that average cost to sales ratio for the sector (Ex-CHAMPION) will settle at 63.6% for FY:2018 compared with 57.9% in FY:2017. Further decomposed, we estimated that International Breweries’ cost to sales ratio will climb 7.5ppts to 61.1% (from 53.6% in FY:2017) while for Nigerian Breweries and Guinness, our computations show a 5.4ppts rise to 63.8% (from 58.3% in FY:2017) and a 4.4ppts increase to 66.0% (from 61.6% in FY:2017) respectively. Champion Breweries was excluded from sector average as cost to sales ratio (71.0%) in FY:2017 was an outlier 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 post consolidation as well as improvement in consumer spending during the year as the country recorded a real GDP growth of 1.9%. Nevertheless, we expect cost pressures which have increased based on new excise duties as directed by the Federal Ministry of Finance (FMoF) to impact industry profitability (PBT) which we anticipate will settle at N37.0bn, down 29.9%.

 

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