Friday, January 23, 2015 10:45 AM / FBN Capital Research
Headwinds still a drag on beer demand:
Following sustained headwinds including the squeeze on household wallets arising from the partial removal of fuel subsidies in January 2012, a sharp rise in electricity tariffs and security challenges in north-east Nigeria, the sector’s unit volume growth has decelerated to single-digits from the mid-to-high teens historic growth rates seen prior to 2012.
Big brewers the hardest hit; smaller brewers the winners:
The large brewers with products in the mainstream beer segment have been the worst hit, with sizable market share loss as consumers down-trade to more affordable beer brands. Consequently, smaller brewers like International Breweries (which we are initiating coverage on with a Neutral rating) that are focused on the value / affordable beer segment were the key beneficiaries as they saw their unit volume expand and gained market share. We estimate that International Breweries’ unit volume grew by c.20% y/y over the 2012-2014E period. This compares with estimated unit volume growth of 6% and -3% for Nigerian Breweries and Guinness Nigeria respectively.
Earnings growth mirror topline growth:
While earnings growth for the two dominant players (Nigerian Breweries and Guinness Nigeria) has slowed down visibly in response to the reduction in growth on the topline, International Breweries’ earnings have grown by strong double digits over the period. Its average PBT growth of 34% y/y over the three quarters to Q2 2015 (end-Sep) compares with the 11% for Nigerian Breweries and -17% for Guinness Nigeria. Given the increasingly competitive landscape, the rapid growth of value brands, we believe that Nigerian brewers will have less ability to pass on commodity price increases to consumers going forward. As such, we expect sales growth for the brewers to mirror unit volume growth. Specifically, we see Guinness Nigeria and Nigerian Breweries delivering sales growth of 3-4% y/y in 2015E. In contrast, we forecast sales growth of 15% y/y for International Breweries on the back robust growth in unit volumes.
Nigerian Breweries and Guinness Nigeria are trading on P/E multiples of 24.1x (end-Dec) and 19.5x (end-June) respectively for average EPS growth of 11% and 14% over the next two years. Although International Breweries’ P/E multiple of 26.7x (end-June) appears rich, this multiple is justified by its superior earnings growth over the period.