December 16, 2019/Cordros Report
Heading into 2020, we adopt a less cautious stance on the Nigerian Brewery sector. Compared to 2019, when we were wholly negative, we now see some value for 2020: bearish sentiment has led to depressed valuations at a time when we see a catalyst to earnings from beer price increases. Nigerian Breweries (TP: NGN63.30) is our preferred play as we feel the company will continue to deliver solid leadership, especially in the premium space. Thus, we rate the stock a ‘BUY’. However, the sector is not out of the woods yet as fundamentals remain challenged: (1) relatively weak economic growth outlook, (2) pressured consumer wallets, (3) higher production levies, and (4) intense competition for market share. We have a negative outlook on Guinness Nigeria (TP: NGN24.81) as we are not entirely convinced about management’s strategy to deliver above target earnings growth; the near terms risks to margins and earnings are high. Thus, we rate the stock a ‘SELL’.
Higher beer prices to serve as new impetus
NB, in November 2019, increased crate prices to distributors on Heineken and Legend – both Premium brands –, each by 1.8% (NGN50.00), and on 33 Export, a mainstream brand by 5.6% (NGN100.00). GUINNESS also followed suit, increasing the price of Guinness Foreign Extra (Premium) by 1.5% (NGN50.00). This is a welcome development, as this is needed in order to compensate for rising excise costs and weaker volumes. We note that the price increases are focused mainly at the premium segment, which grew double-digit last year, and according to NB’s parent company, Heineken NV, has been growing double-digit over the previous 3 quarters. Consumers in this segment are not as price-sensitive, relative to the mainstream and value customers, and as such a significant drop off in volumes is not expected.
Macro Pressures to Persist
Although growth is expected to pick up next year, we believe that 2020 will remain tough for Nigeria from a macroeconomic standpoint, and even more so for consumers. Upward adjustments on electricity tariffs next year, Increase in VAT, and the land border closures, provide scope for renewed inflationary pressures – we forecast average inflation of 12.77% in 2020 – thus, offsetting the impact of the new minimum wage, which we do not expect to be fully implemented across all regions of the federation. This should keep consumer discretionary spend under pressure. Additionally, higher energy costs are likely to weigh on COGS, and with brewers still unable to fully transfer the cost burden to consumers, we expect some contractionary margin pressures.
Click here to read full PDF copy of report
