August 28, 2024/CSL Research

Nigerian Breweries delivered a relatively stable performance in the first half of 2024, maintaining growth across key metrics. The renowned brewer of “Star lager beer” achieved a substantial 72.9% y/y Revenue growth, reaching N479.8bn, up from N277.4bn in H1 2023. This growth was primarily driven by price increases implemented in February 2024 across the company’s product portfolio. However, high inflationary pressures in the nation have weakened consumer purchasing power, leading to sluggish sales volume growth. The company’s cost of sales (ex-depreciation) surged significantly by 102.8% y/y, rising to N302.7bn from N149.2bn in H1 2023, reflecting pressures on input costs. On a quarter-on-quarter basis, the cost of sales increased by 21.3%, reaching N165.9bn in Q2 2024, up from N136.8bn in Q1 2024.

The business reported significant Finance Cost and FX loss of N42.5bn and N112.3bn respectively, which consequently wiped off earnings in H1 2024, resulting in Loss Before Tax of N116.3bn despite an impressive operating profit of N35.4bn. The company plans to accelerate its “Beyond Beer” strategy by acquiring an 80% stake in Distell Wines Ltd, marking its entry into the wines, spirits, and flavored alcoholic beverages market. This acquisition, completed on 01 June 2024, will allow Nigerian Breweries to expand its offerings by gaining access to both local production and the importation of well-known brands from South Africa. These include Amarula Cream Liqueur, Nederburg, Bain’s Whiskey, Scottish Leader Whiskey, Chamdor wine ranges, and others.

Despite Nigerian Breweries’ position as a market leader with an approximately 54% share of the sector, and its ongoing expansion efforts—such as the fully completed Ama brewery and the upcoming Kudenda plant set to begin operations later in 2024, bringing the total to nine breweries—the company continues to face operational inefficiencies. Challenges in cost management and the optimal use of business assets have led to the temporary suspension of two production plants in April. The company remains well-positioned to capitalize on increased demand once economic conditions improve. However, we expect the company to report losses till 2026. and consequently, we maintain a Sell recommendation, with a price target of N23.27/s. Current Price N28.15/s.

Sturdy Revenue Growth; Price as driver.

Like other brewers in the sector, Nigerian Breweries has faced significant macroeconomic challenges since last year. In Q1 2023, the cash crunch and fuel scarcity impacted sales volumes, followed by foreign exchange scarcity and the first Naira devaluation in Q2 2023. Additionally, high inflation and the resulting decline in household income further slowed Revenue growth in 2023. In 2024, the company had to contend with another currency devaluation of approximately 49%, coupled with accelerated inflation, which has created a challenging business environment. Nevertheless, in line with our expectations for 2024, the company implemented a price increase across its stock-keeping units (SKUs) effective February 19.

Nigerian Breweries’ H1 2024 financial results revealed a strong 72.9% y/y increase in Revenue, reaching N479.77bn from N277.42bn (H1 2023). Also, on a q/q basis the company’s Revenue grew by 11.2% to N252.7bn from N227.1bn (Q1 2024). This new revenue milestone in H1 2024 was primarily driven by an approximate 43% overall price increase across their widely accepted product segments, which was essential for maintaining margins and mitigating rising inputs cost. We have revised our Revenue growth forecast for FY 2024 to N935.6bn, up 36.4% from our previous forecast of N685.9bn.

Cost of Inputs on steroids.

The Cost of Sales (excluding depreciation) grew faster than Revenue, increasing by 102.8% y/y to N302.67bn from N149.22bn in H1 2023. Q/q, Cost of Sales rose by 21.3% to N165.89bn from N136.78bn. This increase was due to higher raw material costs and overheads. As a result, the Gross Margin decreased to 36.9% from 46% in H1 2023. Despite this, Gross Profit grew by 38.1% y/y to N177.1bn from N128.2bn in H1 2023. Considering this, we have revised our Cost of Sales forecast for FY 2024 to N624.2bn, up 62.5% from our previous forecast of N384.1bn.

The high-cost business environment impacted the company’s Operating Expenses (OPEX) which grew 49.3% y/y. While Selling and Distribution Expense rose by 55.3% to N20.45bn, up from N13.2bn, Administrative Expense was up by 44.2%y/y, to N92.2bn from N63.9bn (H1 2023). Regardless, EBITDA increased by 21% y/y, reaching N61.13bn compared to N50.5bn in H1 2023, though EBITDA margin was down 5.5ppts, settling at 12.7% from 18.2% (H1 2023). The company reported N2.69bn in other income from ancillary operations which supported Earnings Before Interest and Tax (EBIT) to reach N38.14bn from N28.38 (H1 2023). We have revised our OPEX for FY 2024 to N235.1bn, up 32.4% from our previous forecast of N177.5bn.

The company’s Finance Income rose to N332m from N186m (H1 2023) as interest income on their bank deposits grew, supported by a 10.1% increase in Cash Equivalents balance to N43.57bn in H1 2024 compared with N39.56bn at the close of 2023. However, Net Loss on Foreign Exchange Transactions grew by 31.7% to N112.27bn from N85.3bn in H1 2023. It is unclear what percentage of the FX loss is realised and unrealised. We have revised our Net FX loss forecast for FY 2024 to N134.7bn up from our previous forecast of N55.7bn. Finance Cost jumped by 281.6% to N42.54bn from N11.15bn (H1 2023) on the back of high interest payment on ballooned loans & borrowings which shot up to N588.24bn from N253.15bn (H1 2023). It is noteworthy that the business would have recorded Pre-tax loss (ex-FX loss) of N4.07bn. Overall, the company reported a Pre-tax loss of N116.34bn compared with a Pre-tax loss of N67.84bn in H1 2023

Business liquidity & management strategy.

Despite the challenges faced in recent years, Nigerian Breweries has pursued expansion strategies and initiatives aimed at increasing capacity and mitigating potential losses from liabilities. This effort is exemplified by the Ama Brewery, which became fully operational at the end of 2023 to support Maltina product expansion. Additionally, the Kudenda malting plant is expected to commence full operations later in 2024. However, operational inefficiencies remain, particularly in cost management and the optimal use of business assets, leading to the temporary suspension of two production plants in April 2024

Loans and borrowings surged significantly to N588.2bn as of mid-2024, up from N341.6bn in December 2023, exceeding our FY 2024 forecast of N437.28bn. Further analysis indicates that approximately 60% of these funds were utilized to support working capital and cover other shortfalls. Borrowings are likely to continue rising throughout FY 2024, as they are crucial for enhancing the company’s liquidity. This underscores the need for Nigerian Breweries to raise capital to maintain a healthy balance sheet, settle outstanding foreign exchange payables, and address part of its local bank facilities. In April, shareholders at the 78th Annual General Meeting (AGM) of Nigerian Breweries Plc unanimously approved a plan to raise N600bn through a rights issue. This authorization allows the board to proceed with capital restructuring, offering all shareholders the opportunity to acquire additional shares in proportion to their current holdings, at a price determined by the board based on prevailing market conditions.

The company plans to accelerate its “Beyond Beer” strategy by acquiring an 80% stake in Distell Wines Ltd, marking its entry into the wines, spirits, and flavored alcoholic beverages market. This acquisition, completed on 01 June 2024, will allow Nigerian Breweries to expand its offerings by gaining access to both local production and the importation of well-known brands from South Africa. These include Amarula Cream Liqueur, Nederburg, Bain’s Whiskey, Scottish Leader Whiskey, Chamdor wine ranges, and others.

Outlook

In our view, NB could experience short to medium-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 the recovery to be driven by price and capacity efficiency. However, we expect the company to report losses till 2026.

Valuation: SELL recommendation

We maintain a Sell recommendation on Nigerian Breweries with a price target of N23.27/s. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50. Current Price: N28.15/s.

Kindly click on the below link to download the full report.

​Nigerian Breweries H1 2024 Company Update.pdf​​​​​​​​​​​​​

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