August 29, 2023/Cordros Report
In this report, we review our estimates and update our views on NB for 2023E. NB faced a challenging start to the year in H1-23 as the company grappled with shrinking margins and mounting pressure on its profitability due to the liberalisation of the FX market, which resulted in a sharp depreciation of the currency. We expect continued cost pressures for NB throughout 2023E. Thus, we revised our target price to NGN45.15/s (prev.: NGN49.35/s) while maintaining a “HOLD” rating. Nevertheless, we anticipate improved revenue growth over the rest of the year as the brewer focuses on strategic pricing and enhancing its premiumisation strategy. On other developments, we are optimistic about NB’s proposed acquisition of a majority stake (80.0%) in Distell Wines & Spirits Nigeria Limited, as we believe this deal could drive the company’s revenue and lead to cost synergies that would be margin accretive over the medium term. In addition, this entry also offers NB a chance to tap into the spirit segment known for better margins and less competition. On our estimates, NB is currently trading on a 2023E EV/EBITDA multiple of 5.2x.
Price increases and premiumisation to support topline: For 2023E, we expect NB’s dominant market share in the brewery industry (c.55.0%), coupled with higher beer prices and premiumisation, to spur revenue growth. On pricing, our findings reveal that the brewer has announced price increases (c.4.0%) on some of its SKUs to mitigate the impact of rising input costs. Thus, we model a 10.0% y/y revenue growth for 2023E and a CAGR of 16.0% over 2023-2027E. Whilst we expect the brewer to build on its productivity and pricing initiatives, we expect cost pressures to remain elevated due to higher excise duties amid the lingering FX impacts on raw and packaging materials. Accordingly, we expect the gross margin to decline by 200bps y/y to 36.7% in 2023E. Likewise, we forecast an EBITDA margin of 13.4% in 2023E (2022FY: 16.6%) amid a 9.2% y/y growth in operating expenses. Consequently, we project a loss per share of NGN3.87 in 2023E based on elevated cost pressures and accounting for the FX loss recorded in the period. Further out, we expect a recovery in earnings in 2024FY and an EPS CAGR of 24.7% over 2024-2027E in the absence of any significant currency devaluation.
FX woes, rising loan profile a concern: NB reported an 848.7% y/y surge in net finance charges to NGN96.22 billion, following a 10.7x jump in net loss on FX transactions (NGN85.26 billion | 88.6% of finance costs), stemming from its foreign currency payables. We note that the brewer has significant exposure to foreign currency payables. However, management has expressed the intention to curtail the accumulation of foreign debt by sourcing more FX needs from the parallel market. Moreover, they aim to convert some short-term obligations into long-term debt. Taking everything into account, we estimate NB’s debt/equity ratio at 1.2x in 2023E (2022FY: 0.7x) with an average debt/equity ratio of 1.1x over 2023-2027E.
Valuation: We have a Dec-23 TP of NGN45.15/s from a 40/60 blend of sector-relative valuation estimate (EV/EBITDA) and a DCF valuation. On EV/EBITDA, we utilised the Middle East & African (MEA) peer average (7.0x) obtained from Bloomberg and derived a fair value estimate of NGN56.02/s. Elsewhere, our DCF FV is NGN37.91/s, assuming a 23.8% WACC and a 4.0% terminal growth rate.
