August 03, 2021 / 10:01 AM / By Afrinvest Research / Header Image
Credit: ION ASIA
The resilience of players in the Nigerian brewery industry was further tested in 2020, as the spill-over effect of the pandemic amplified the impacts of structural challenges besetting the industry's operating environment. Before 2014, the major talking point on the industry's operating environment was the increased attraction of global players such as Heineken and SAB-Miller, due to years of strong industry profitability performance. For instance, between 2006 and 2014, the industry's gross and EBITDA margins averaged 47.0% and 26.0% respectively. This was made possible by the impressive performance of the broader economy, as annual real GDP growth averaged 6.4% over this period, while the exchange rate (N141.35/$1.00), the inflation (10.1%) and the unemployment rates (12.1%) supported strong purchasing power of consumers.
However, this trend began to reverse in 2015 when the global crude oil price shock exposed Nigeria's years of economic mismanagement and external vulnerability. By the end of 2019, the real GDP, the exchange rate, the inflation, and the unemployment rates have deteriorated to 2.2%, N306.00/$1.00, 11.4% and 21.3% respectively. Furthermore, industry's gross margin and EBITDA margin (ex. INTBREW) fell to 33.5% and 11.6% respectively, due jointly to weak growth in consumer demand and accelerated increase of cost lines. Following additional pressure on sales channels in 2020 due to lockdown measures employed to tame the spread of the pandemic (especially in major commercial cities) and high Inflation rate (average: 13.2%), the industry's gross margin and EBITDA margin (ex. INTBREW) fell further to 31.6% and 6.6% respectively in 2020.
Although the size (210m) and demographic (c.100m in beer consuming age) of Nigeria's population remains a major attraction for brewing business, yet, the near-term outlook for the industry paints a different picture, given the persistent pressure on consumer wallet and cost of production. The International Monetary Fund (IMF) in its latest Article IV Consultation report projected that Nigeria's GDP growth may plateau around 2.5% over 2021/25 period, if major reforms are not implemented, especially regarding dependence on crude oil. This projection is weak for an economy with average population growth rate of 2.7% per annum, as lower GDP growth relative to population growth means more citizens will become impoverished in the coming years. Hence, this will have a direct negative impact on alcohol consumption and the earnings of brewery industry players, going forward.
In FY:2020, the brewing industry witnessed a rebalancing of market share controlled by the three industry leaders - NB, GUINNESS, and INTBREW, with a combined 98.9% share of industry revenue. Despite the impact of the pandemic and the limited scope for price adjustment to capture recent cost pressures, NBand INTBREW grew market share by 3.1% and 1.1% y/y to 57.7% and 23.4% respectively, while GUINNESS lost 4.3%. Consequently, NB's market share crossed 55.0% for the first time since 2017, while INTBREW's clearly established itself as the second biggest player ahead of GUINNESS. We also noticed that unlike in the previous three years where each of the brewers rolled out a new product or developed a variant of an existing brand, only NB expanded its portfolio in 2020 to meet shifting consumer preference and boost market penetration.
Nevertheless, the industry's profitability declined further in 2020 relative to prior year. Precisely, the industry's profit before tax (PBT) settled at a negative N30.4bn (2019: negative N5.7bn), as GUINNESS and INTBREW booked losses of N17.1bn and N24.9bn respectively. However, NB reported N11.8bn PBT in 2020, but this translates to a 50.4 y/y reduction compared to the prior year's PBT of N23.4bn.
Despite Nigeria's early exit from the COVID-19 induced recession, we maintain a cautious stance on the brewery industry performance outlook in the near term, due largely to the persistent systemic risk factors and weak economic growth projections which will have direct impact on consumer spending and production cost.
Consequently, we rate the shares of NB and GUINNESS "REDUCE," as our valuation model does not suggest significant upside potential from current prices (NB: N57.50; GUINNESS: N31.50) in the near term. On the other hand, INTBREW shares remain "UNRATED" due to the company's leverage and high operating cost situation.