March 14, 2024/Cordros Report
We update our views on Nigerian Breweries Plc (NB) following the release of its 2023FY results. The brewer’s performance in the period was impacted by weakened consumer spending, rising inflation and naira devaluation, leading to pressure on margins and profitability. Looking forward, we expect higher prices and moderate volume growth to support revenue growth amid constrained consumer spending. Additionally, we note that cost pressures, persistent FX illiquidity issues and elevated finance costs remain significant challenges to profitability. After adjusting our forecasts and updating our valuation inputs to reflect the changing yield environment, we lowered our target price by 9.1% to NGN41.05/s (previously NGN45.15/s), with a ‘‘BUY’’ rating induced by current market pricing. In the medium term, we expect that the integration of Distell’s operations will open up new growth opportunities for NB. Given NB’s recent profit challenges, this integration could enhance revenue and cost synergies while gaining exposure to the rapidly expanding spirits market. According to our estimates, NB is currently trading on a 2024E EV/EBITDA multiple of 5.4x, relative to the industry peer median of 6.7x.
FX losses to sweep topline gains: We anticipate gradual revenue recovery in 2024FY, driven by price increases and moderate volume growth. On volumes, we cite the company’s expansion efforts in the Western and Northern regions, alongside an intensified presence in the Eastern part of the country. This, coupled with a focus on premium brands, is expected to yield a 13.3% y/y revenue growth for 2024E and a CAGR of 9.3% over 2025-2028E. However, we anticipate a slight 20bps y/y decline in gross margin to 35.1% in 2024E (2023FY: 35.5%) due to increased cost pressures from the high inflationary environment and currency devaluation. Despite an anticipated 7.8% y/y increase in OPEX, we forecast a 241bps y/y increase in EBITDA margin to 17.7% in 2024E (2023FY: 15.3%), primarily attributed to the robust revenue growth of 13.3% y/y. However, the prevailing FX challenges in the country are expected to continue exerting pressure on NB’s bottom line. Specifically, we expect a 33.5% y/y increase in FX loss to NGN204.77 billion, due to the company’s foreign currency exposure and substantial debt burden. Furthermore, we project that net finance costs will remain elevated at NGN251.80 billion (+33.1% y/y) in 2024E, primarily driven by higher FX losses and increased finance costs (+31.7% y/y to NGN47.91 billion). Consequently, we forecast a net loss per share of NGN15.63 in 2024E (vs a loss per share of NGN12.80 in 2023FY).
Weak Liquidity Position Amidst High Leverage: While acknowledging NB’s strong market position, we note that this strength is somewhat offset by increasing pressure from the higher working capital absorption and debt levels. In our assessment, the brewer’s liquidity position is considered weak due to its substantial short-term obligations. Given no major projected capital expenditure in 2024E, we forecast the company’s cash balance will settle at NGN50.43 billion (2023FY: NGN39.57 billion), which is insufficient to cover the estimated maturing short-term liabilities of NGN648.14 billion (2023FY: NGN584.47 billion).
Valuation: We have a Dec-24 TP of NGN41.05/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 (6.7x) obtained from Bloomberg and derived a fair value estimate of NGN48.74/s. Elsewhere, our DCF FV is NGN35.93/s, assuming an 18.7% WACC and a 4.0% terminal growth rate.
