Thursday, October 06, 2016 10:17am / FBNQuest Research
Macro headwinds impeding growth
Nigerian brewers have had a challenging H1 2016 (end-June). Although we estimate that the sector’s unit volume grew by mid-single digits y/y over this period, most of the growth was driven by the value segment.
For the mainstream category, beer consumption contracted in response to macro headwinds, including the persistent depreciation of the naira and inflationary pressures.
The resulting squeeze on household wallets ultimately led to consumers down-trading to cheaper products and a re-categorisation of the beer market.
Given a volume price mix tilting towards value brands, Guinness Nigeria, International Breweries and Nigerian Breweries reported average sales growth of 5% y/y in the January to June period.
Fx challenges weighed on performance
The brewers are heavily dependent on imported raw materials. Due to high production costs and the inability of manufacturers to successfully pass on cost increases to customers, Nigerian brewers reported an average gross margin contraction of -150bps y/y during the January to June period.
In addition, Guinness Nigeria and International Breweries booked fx translation losses of N3.5bn and N2.7bn respectively in the end-June quarter. These losses were on the back of the adoption by the CBN of a new flexible exchange rate regime and the naira’s downward move to c.N280 per US$ (as of end-June) from N199 previously. Both firms have US$ denominated loans of around US$25m.
Looking inwards to protect margins
Given the continued naira depreciation, the high dependency of externally sourced raw materials (c. 70%) and the inability of brewers to successfully pass on cost increases to consumers, the brewers are beginning to look inwards (domestic sourcing) for raw materials.
While sorghum, a locally sourced crop, is already being substituted for barley, other locally sourced grains (like cassava) and packaging materials are being considered as substitutes. Nigerian Breweries has already set a target of purchasing 60% of its raw material from the local market by 2020.
Volume growth to be driven by value segment
Due to the prevailing macro-economic headwinds, we expect growth to continue to be driven by the value segment in the near-to-medium term.
Furthermore, we do not see significant improvements in gross margin or reversals in finance costs (especially for Guinness Nigeria and International Breweries), and have therefore taken a conservative outlook as far as our forecasts on these lines are concerned.
For 2017E (end June), while we see EPS declining by -81.4% y/y for Guinness Nigeria, we expect International Breweries’ EPS to grow by 11% y/y (adjusting for the fx loss in Q1).
For Nigerian Breweries, we forecast EPS growth of 31% y/y in 2016E due to a 37% y/y reduction in interest expense.
Valuation still challenging
Nigerian Breweries and International Breweries have gained +16% ytd on average and are currently trading on an average P/E multiple of 27.8x, vs the 25.0x and 25.9x multiples that their global and emerging market peers are trading on.
We rate all three brewers Underperform.