Nigerian Breweries Plc


Ticker:                         NBNature of Business:    Brewers/DistillersLocation :                            Nigeria
Recent Price:                  NGN31.00       52-Week High/Low: NGN60.00/22.00Estimated Fair Value:      NGN29.90-NGN36.80
Expected Return:   27.8%Consider Buy:               Below NGN33.40Business Risk:            Average
Financial Risk:               MediumEconomic Moat:          StrongCorporate Governance:  Strong

Company Overview
In 1863 Gerard Adriaan Heineken, against all the odds, decided to purchase a brewery at a time when the brewing industry in Amsterdam was witnessing a declining fortune. What began in the 19th century as a small family business has been transformed into a world-class company. Heineken N.V.  has seen it all- two world wars, crises, boom, slump, decline, and growth. Having been on the global stage for over one and a half centuries, Heineken N.V. is, undoubtedly, one of the most viable and well-run businesses in the world. Sales and marketing expertise and quality manufacturing skills are important distinguishing core competencies of Heineken N.V.  These skills have reinforced its leading brands which have been around for more than a hundred years.

The Heineken Group controls about 56% of the largest brewing company in Nigeria, Nigerian Breweries Plc (incorporated in 1946). NB prides itself on the brewing and marketing of lager beer, stout, and non-alcoholic malt and soft drinks. Its product portfolio includes Star lager beer, Star Radler, Goldberg lager beer, Malta Gold, Life Continental lager beer, Tiger lager beer, Ace, Gulder, Maltina, Heineken, Fayrouz, Legend Extra Stout and Amstel Malta.

Management’s key strategies for growing the business are a combination of organic and inorganic growth strategies. Sona Systems Associates Business Management Limited, the maker of Goldberg lager beer and Malta Gold, was acquired in 2011. Also, Life Breweries Company Limited, which has been producing Life Continental lager beer in Onitsha (Anambra State) since 1981, was taken over in the same year. Continuous product development, coupled with an excellent distribution network, helps NB to maintain its market leadership position in Nigeria. NB increased its brands when it merged with Consolidated Breweries Plc in 2014. “33” Export lager beer, Turbo King dark ale, Williams dark ale, Hi Malt, and More lager beer were consequently added to its product portfolio.

Chief Kolawole B. Jamodu is the chairman of the board of directors. Mr. Jordi Borrut Bel (Spanish) was appointed managing director of NB on 22nd January 2018. Before his appointment, Mr. Borrut Bel had assumed different roles in the Heineken Group for over 2 decades. Mr. Atedo Peterside resigned from the board on 1st April 2020.

Investment Thesis
The excellent managerial and manufacturing expertise of Heineken Group rubs off on NB. In addition, NB has a strong distribution network and brands which have made it a market leader in Nigeria. The company generates positive cash flow for the shareholders and consistently pays dividends. Total debt increased by 30.8% in 2019. Total debt now forms 14.6% of total assets and 33.2% of shareholders’ fund. Though it has increased, total debt is still at a manageable level. But NB should watch its deteriorating working capital to avoid running into liquidity problems. 

Return on Equity (RoE)  and Return on Assets (RoA) averaged 36.1% and 14.7% respectively over the past 14 years. Dividend yield averaged 3.8%. However, from 2016 NB’s performance began to degenerate. Profit margins and returns have trailed historical averages. The operating profit margin for 2019 financial year was 10.6% compared to the historical average of 21%. The current profit margin of 6% lagged behind the average of 13.4%. The dwindling performance is not unconnected to the fortune of the Nigerian economy in which it operates. Economic growth has been slow since the recovery from the recession of 2016. Besides, low crude oil prices and the pandemic outbreak of Covid-19 have dire consequences for businesses in the country.

NB trades at 15.4 times earnings, 1.5 times book value and 0.8 times sales. NB has an Earnings Power Value of NGN25.3. A share of NB is worth between NGN29.90 and NGN36.80 from our valuation.

NB is trading within our estimated value. Revenue, on average, is growing; corporate governance is strong and the company has consistently compensated investors. Investors should benefit from buying shares of NB.

Financial Overview
NB’s revenue shrank slightly to NGN323 billion in 2019.  Net earnings contracted by 17.1% compared to 41.2% decline recorded a year ago. Gross profit rose by 3.4% but operating profit decreased from NGN36.1 billion to NGN34.2 billion. A 10.9% hike in marketing and distribution expenses was largely responsible for lesser operating profit in 2019. Profit Before Tax (PAT) was NGN16.1 billion, having shed NGN3.3 billion or 17.1% in a year.

Operating profit margin has lost 10.4% in 5 years due to 10.4% rise in operating expenses to turnover ratio. Profit Before Tax (PBT) margin was 7.2%, down from previous period’s figure of 9.1%. PAT margin dipped by 1 percentage point to 5%.

Total assets of NGN382.8 billion translated into a 1.4% decline year-on-year while total equity added 0.6%. Book Value Per Share expanded by 0.5% to close at NGN21. Earnings Per Share diminished by NGN0.42 (17.3%) in a year. RoE and RoA gained 0.7% and 0.4% respectively.

Total debt grew from NGN42.6 billion to NGN55.7 billion. Long-term debt made up 69.8% of total debt. Total debt to shareholders’ fund was 33.2%. But operational cash flow covered interest payment 3.2 times while operating profit covered it 2.8 times. Total liabilities surpassed shareholders’ fund but amounted to 56.2% of total assets. Current ratio was 0.5 time while acid test ratio was 0.2 time. NB, in our opinion, is not insolvent.  But we strongly believe that management should embark on working capital management to avoid running into some choppy waters.

Business Risk
NB is a market leader with strong brands such as Goldberg, Amstel Malta, Heineken and Maltina.  However, increasing operating costs is shrinking profit margins. Reducing purchasing power in Nigeria has adverse effect on sales revenue. And the low penetration of foreign market is a minus for the company as revenue from outside Nigeria is less than 1% of total revenue.

Recommendation: Buy


Earnings Chart of Nigerian Breweries Plc

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