Nigerian Breweries Plc

Nigerian Breweries Plc

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 about 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, quality manufacturing skills which are important distinguishing core competencies of Heineken N.V. 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 brand portfolio includes Star, Star Radler, Gulder, Maltina, Heineken, Fayrouz, Legend Extra Stout and Amstel Malta.

Management’s key strategies of growing the business are a combination of organic and inorganic growth strategies. Sona Systems Associates Business Management Limited, 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 captured in the same period. NB has strong distribution network and brands which have made it a market leader in Nigeria.

Continuous product development coupled with excellent distribution network helps NB to maintain its market leadership position in Nigeria. NB widened its brands with three new extensions of Heineken Magnum in champagne bottle, Legend Extra Stout in can and Fayrouz in plastic bottle to provide consumers with more choice. Stella, a premium lager beer, and ACE desire, a zobo flavoured spirit mixed drink were introduced in the year under review.

Chief Kolawole B. Jamodu acts in as the chairman of the board. Mr. Jordi Borrut Bel (Spanish) replaced Nicolaas A. Vervelde (Dutch) as managing director following the resignation of Nicolaas on June 16, 2017. The excellent managerial and manufacturing expertise of Heineken Group rubs off on NB.

Investment Thesis
NB has a well-established distribution chain. The company generates positive cash flow and high returns for the shareholders. Return on Equity (RoE) reached a 14-year average of 38.7% and dividend yield amounts to 3.1%. It is not highly leveraged. But NB should watch its deteriorating working capital to avoid running into liquidity problem. Earnings chart of Nigerian Breweries

NB trades at a hefty premium to our fair value estimate.

Valuation
NB trades at 21.2 times earnings, 3.9 times book value and 2 times sales. NB has an Earnings Power Value of NGN29.1. Our 2-Stage Dividend Discount Model produces a price ranging from NGN64.1 to NGN68. A share of NB worths between NGN58.4 and NGN68.8, using Discounted Cash Flow valuation.

A return of 9.9% is anticipated in three years' time.

Financial Overview
NB achieved a revenue surge of 9.8%. Net earnings rose by 16.3% compared to 25.3% decline recorded a year ago. Operating profit increased by 5% while operating profit margin and PBT margin were 15.9% and 13.5% respectively. PAT grew from NGN28.4 billion to NGN33 billion. However, cost of sales formed 58.3% of turnover and exceeded 2016 figure by 1.5%. Book value per share expanded by 7.4% to close at NGN23.56.

RoE and RoA gained 1.4% and 0.9% respectively. NB has paid down its debt; long-term debt stood at NGN8 billion. Total debt to shareholders' fund was 4.8%. But operational cash flow covered interest payment 6.8 times while operating profit covered it 5.1 times. Total liabilities surpassed shareholders’ fund but amounted to 53.4% of total assets. However, we believe that the company is not insolvent. Current ratio was 0.6 time while acid test ratio was 0.3 time. Management should embark on working capital management to avoid running into some choppy waters.Graph of returns of Nigerian Breweries

Quarter 2 result to 30th June, 2018 showed that revenue dropped 4.6% compared to the corresponding period of 2017. PAT was NGN18.4 billion down from NGN23.8 billion, a loss of 22.4%.

Business Risk
NB is a market leader with strong brands such as Star, Fayrouz, Amstel Malta, Heineken and Maltina. However, the revenue from outside Nigeria is less than 1% of total revenue.

Recommendation: Sell

Vital statistics of Nigerian Breweries