Champion Breweries Plc

Champion Breweries Plc

Company Overview
CHAMPION, a brewery, domiciled in Akwa-Ibom State, Nigeria was incorporated on 31st July 1974 as South East Breweries Limited. It was later renamed Cross River Breweries Limited. The company became Champion Breweries Plc on September 1, 1992 and its shares were quoted on the Nigerian Stock Exchange a year later.

Champion Lager Beer, its flagship product was launched in 1976. The company also produces Champ Malta, a non-alcoholic malt beverage. CHAMPION was shut down in 1990 due to working capital problem. It, however, resumed operation in 2001.

Heineken NV acquired an indirect interest in the company in 2011. In 2013, Heineken NV acquired controlling interest in CHAMPION through Raysun Nigeria Limited, a wholly-owned subsidiary of Heineken. Currently, it holds 60.5% of the shareholding of the company.

Dr Elijah Akpan is the chairman of the board of directors while Mr. Patrick Ejidoh is the managing director of CHAMPION.

Investment Thesis
CHAMPION raised capital through rights issue and paid off its debts. Though it is debt free, the company's accumulated losses stood at NGN8.6 billion at the end of 2017 financial year. This prompted it to seek approval to write off its accumulated losses. We expect the company to resume payment of dividend soon and attract more investors.Earnings chart of Champion Breweries

After years of losses the company finally turned the corner. Profitability was restored in 2015; operating profit was NGN154.5 million in 2015 compared to operating losses of the earlier years. Profit Before Tax (PBT) and Profit After Tax (PAT) were NGN248.4 million and NGN77.1 million respectively in 2015. At present, CHAMPION provides brewing services to Nigerian Breweries Plc, a member of the Heineken group and the largest brewing company in Nigeria. The company made NGN1.8 billion from contract brewing and packaging compared to NGN1.9 billion of the previous period. This was tantamount to 37.2% of total revenue (2016:48.2%).

Revenue has increased at a compound annual rate of 13.1% over the past three years (2016: 20.1%). Book Value Per Share (BVPS) has risen by 11.5% over the past three years. Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) added 15.5% on a 3-year Compound Annual Growth Rate (CAGR) basis while EBITDA margin of 24.8% ranks among the best in the sector.

Valuation
CHAMPION has a trailing Price/Earnings (P/E) ratio of 30 times; it trades at 1.5 times book value and 2.7 times sales.  It has a projected BVPS of NGN1.2 and an estimated fair value ranging from NGN1.7 to NGN2.5 per share.  A share of the company should produce a return of 32.1%.Graph of return of Champion Breweries

Financial Overview
Revenue rose by 23.6% from NGN3.9 billion to NGN4.8 billion between 2016 and 2017. This was largely driven by a 49.9% increase in the sale of its products. In contrast, revenue from contract brewing declined by 4.7% year-on-year. Operating profit lost 4.7%, PBT dropped 4.9% and PAT shed 2.4% in the year under review. The BVPS of NGN1.13 was a 5.6% improvement on the figure for 2016. However, Earnings Per Share (EPS) worsened by 25%.

The cost of raw materials increased by 55.3%; it accounted for 20.7% of revenue compared to 2016 when it was 16.5% of revenue. Cost of sales rose from NGN2.8 billion to NGN3.4 billion. Cost of sales to turnover was 71% down from 72.4% of the previous year. Gross margin was better by 1.4 percentage points and operating profit margin of 11.7% represented a 3.5% improvement. PBT margin shed 4.1% while PAT margin lost 2.9%.

Shareholders' fund gained 6.1% while total assets increased by 1.3%. Returns were low; Return on Equity (RoE) and Return on Assets (RoA) were 5.7% and 4.6% respectively. The company failed to generate positive cash flow in 2017 owing to increased capital spending which stood at NGN0.13 per share at the end of 2017 financial year. CHAMPION has no debt at the moment. Both current and acid test ratios got better and closed at 1.3 and 1 respectively.

Business Risk
The market is dominated by few players. CHAMPION does not have a strong competitive advantage in the industry. In addition, the product portfolio is narrow and distribution network needs to be strengthened.

Recommendation: Hold

 Vital Statistics of Champion Breweries