May 28, 2024/Cordros Report
In this report, we update our views on Nigerian Breweries Plc (NB) for 2024E. Despite a challenging macroeconomic environment, NB demonstrated resilience with an 84.2% y/y revenue growth in Q1-24, driven by product innovation, inflation-led price increases, amid a weak base in Q1-23 which was characterized by the cash crunch. Gross margin (+46bps y/y) and EBITDA margin (+559bps y/y) also expanded due to the significant growth in revenue. However, net loss increased by 386.1% y/y due to higher finance costs and ongoing naira devaluation. For the rest of 2024E, we expect sustained revenue growth from aggressive price increases and product innovation. However, cost pressures from rising inflation and naira devaluation are anticipated to remain high. Consequently, we reduce our target price to NGN29.74/s (previously: NGN41.05/s) but maintain our “BUY” recommendation. Over the medium term, we hold an optimistic outlook on NB’s growth and profitability, underpinned by its emphasis on its “beyond beer” strategy. This strategic focus is exemplified by the recent acquisition of Distell Wines and Spirits, amid expected benefits from the full execution of its recent business recovery plan. On our estimates, NB trades at an EV/EBITDA multiple of 4.2x.
Higher net finance costs depress earnings: For 2024E, we raise our topline growth projection to 36.0% y/y (previous: 13.3% y/y), majorly driven by low base effects from the prior year, more aggressive price increases, continued focus on premiumisation and product innovation. On pricing, we highlight that the brewer has raised prices multiple times this year (c. 25.0%) and we anticipate further price increases over the rest of the year given rising inflationary pressures. Over the medium term (2025 – 2028E), we expect an average revenue growth of 12.8% over 2025-2028E. However, we expect gross margin to remain pressured in 2024E (-20bps y/y) and settle at 35.3%, owing to higher cost pressures from inflation and currency devaluation. Accordingly, we expect EBITDA margin to dip to 14.7% (-69bps y/y), in 2024E. Furthermore, we expect NB to report a reduced loss per share of NGN10.17 in 2024E (previously: NGN15.63 | 2023FY: NGN12.81), as our revised FX estimate (from NGN1,700.00/EUR to NGN1,600.00/EUR) will decrease the net FX losses to NGN112.97 billion (previously: NGN234.89 billion | 2023FY: NGN153.33 billion).
NB’s strategic recovery plan is currently underway: Following the weak performance in 2023FY, NB recently initiated a business reorganization plan aimed at enhancing operational efficiency, financial stability, and returning to profitability. As part of this plan, the brewer suspended operations at two of its nine brewery plants to optimize output at the remaining seven. Additionally, to address the impact of the 2023FY loss on its balance sheet, NB plans to raise NGN600.00 billion through a rights issue. If successful, this capital raise will not only strengthen the company’s financial position but also set it on a new growth trajectory by offsetting accumulated debts. We believe this strategic move will help NB reduce costs and optimize output. Thus, leveraging its market leadership status, premiumisation led by Heineken®, and improving route-to-market strategy, we expect NB to return to profitability in 2025E, with an estimated EPS of NGN4.54 and an EPS CAGR of 20.7% over 2025-2028E.
Valuation: We arrived at our TP of NGN29.74/s through a 60/40 blend of DCF and sector-relative valuation estimates (P/E & EV/EBITDA). Our DCF FV is derived from an equal blend of FCFF (NGN38.93/s) and FCFE (NGN16.48/s), assuming a 23.5% WACC and a 4.0% terminal growth rate. Meanwhile, on EV/EBITDA, utilising the MEA peer average EV/EBITDA multiple of 4.8x, we derived a fair value estimate of NGN37.89/s.
