November 10, 2023/CSL Research

Nigerian Breweries’ 9M numbers showed mixed performance across key metrics. The renowned star lager brewer recorded a single digit Revenue growth of 2.1% y/y to N401.69bn (9M 2023), amidst the nation’s high inflationary pressure which has weakened consumer purchasing power. Sales volumes remain pressured as consumers persist in adapting their spending preferences towards essentials. However, we believe the company’s performance will improve in the next quarter as holiday season demand drives sales.

The Cost of Sales (adjusted for depreciation) was up 2.4% y/y to N225.26bn (9M 2023). The moderate growth could be attributed to lower barley prices (-34.8% y/y). Barley prices have materially moderated in recent months owing to increased harvest from major producers (EU, US, and Canada), masking the effect of the halt in the grain export deal between Russia and Ukraine. With management’s plan to reduce importation of raw & packaging materials and to switch to sorghum, which can be sourced locally, as substitute for barley in most of its lager brands, we believe costs should moderate in coming quarters.

Given NB’s position as a market leader with c.56% share of the sector, and with expansion strategies and initiatives to increase capacities – Ama brewery (expansion recently completed) and Kudenda plant (to commence operation mid 2024), we believe the company is well positioned to benefit from increased demand when economic conditions improve. We maintain a stable outlook on NB. We have a Hold recommendation on Nigerian Breweries with a price target of N39.17/s. Current Price N37.50/s. We derive our price target using a 50/50 blend of sector relative valuation estimates and a DCF valuation.

Shaky Top-line

Nigerian Breweries just like other brewers has been dealing with a number of issues since the start of the year. First, was the impact of the cash crunch & fuel scarcity in Q1, followed by the huge FX scarcity & Naira depreciation in Q2. Also, the high inflation and the consequent decline in household income have all contributed to slowing down Revenue growth this year despite price increases across product segments. Post Covid 2020, topline performance grew strongly, up c.27.8% y/y between 2021 to 2022, however given the recent macroeconomic and sector specific issues, Revenue growth has slowed. As a result, we have revised our FY 2023e growth forecast for Revenue down to 10.7% from 15.5%.​

Costs mildly moderated

Contrast to our view that the devaluation of the Naira will continue to spike cost for Brewers in 2023, the growth (2.4% y/y) in NB’s 9M 2023 Cost of Sales (adjusted for depreciation), marginally outpacing Revenue growth (2.1% y/y) in the same period reflects reduced production cost pressures. For context, barley prices (-34.8% y/y) have materially moderated in recent months, owing to increased harvest from major producers (EU, US, and Canada), masking the effect of the halt in the grain export deal between Russia and Ukraine. We maintain a FY 2023e growth forecast for Cost of Sales of 8.7% (N335.54bn) from 2022 (N308.79). Operating Expenses also grew marginally in the period under review, up 2.61% on the back of reduced Selling and Distribution Expenses, down by 0.9% to N94.7bn from N95.5bn.​

Business liquidity & strategy; to stay winning.

The business has an efficient cash conversion cycle of (182) days, which has optimally improved its cash and cash equivalent balance, up 43.8% to N21.4bn from N14.7bn y/y. Despite the hassles the company has faced in the last few years, NB has implemented expansion strategies and initiatives to increase capacity and reduce potential losses from liabilities. The former drive was mostly mirrored by the Ama Brewery (for maltina product expansion). Also, Kudenda malting plant is expected to fully commence operations before mid-2024.​

Outlook

In our view, NB could experience short-term pains to reap the long-term benefits of re-investing in its products. The company will likely remain under pressure while adjusting to macroeconomic volatilities. With our growth expectations for topline and cost of sales, we expect improvement in the company’s operating performance. We also expect recovery to be driven by volume growth and price increases, especially in the seasonally strong Q4.

Additional factors likely to support sales include the company’s intensified digital initiatives and unique customer engagements. In H1 2023, sales channels linked to the initiatives – B2B platform (+29.0% y/y), front-line sales (+38.0% y/y), and customer service/telesales (+32.0% y/y) – accounted for c.52.0% of revenue.

With material growth in loss on FX transactions this year, we expect a beatdown on Net earnings, and we have revised our FY 2023e forecast down to N23.1bn loss. However, we believe loss in FX transactions has been optimally absorbed by the business and won’t be significant in coming years as we do not expect Naira devaluation in coming years.​

Valuation: HOLD recommendation maintained

We maintain a Hold recommendation on Nigerian Breweries with a price target of N39.17/s derived from 50/50 blend of sector relative valuation estimates – EV/EBITDA, PE Ratio and a DCF valuation. On EV/EBITDA & PE Ratio, we utilised Bloomberg’s 2023e Middle East & African peers average 8.9x & 14.6x and derived a fair value (FV) estimate of N97.57/s & N43.1/s respectively. Our DCF FV is N33.54/s assuming a 18.8% WACC and 3% terminal growth rate.

Click here to read full PDF copy of report