WED, JUNE 26 2019-theG&BJournal-Nigeria’s brewery sector bears the scars of weak economic performance, with upwardly sticky and still relatively high inflation-the sector’s pain is heard loudest at the stock market where their stocks have borne the brunt of the selloffs in the equities market, with NB, GUINNESS, and INTBREW shedding 30%, 36%, and 45% respectively.
Let off from their pains is not even expected to wane any soon given the uncertain direction of real wage growth and unclear outline for the implementation of the new minimum wage. Competition brings its own burden also while higher marketing spend in bid to boost volume are expected to weigh on earnings and the bottomline for some brewers.
Cordros Securities outlook for the country’s two big brewers, -Nigeria Breweries Plc and Guinness Nigeria Plc published Monday is not too good.
Analysts at Cordros Securities say they have a neutral view of the sector overall, in the mid-year report, given the relatively weak economic growth outlook, pressured consumer wallets, higher production levies, and intense competition for market share which have led to weaker earnings and downward price re-ratings in recent months.
“Although, the negative effects of the aforementioned appear to have all reached respective peak impact, we do not expect a rapid recovery in the near term,” Cordros Securities said in their summary.
On expected 2019 numbers, Cordros Securities said they believe the brewers under their coverage will report flat-to-negative volume growth, with revenue growth below inflation, with higher operating costs leading to decline in earnings.
Nigeria Breweries got off to bad start to the year. Their Q1-19 performance even though slightly better than expected, it was still disappointing nonetheless in Cordros Securities’ view. Gross revenue grew 3.3% y/y, beating estimates by 5%. Heineken NV (NB’s parent company) said that its “Nigeria beer volume grew mid-single digit”. Volume growth is expected to remain subdued in 2019 given the weak macro outlook, amidst a still pressured consumer wallet and a more intense competitive environment.
Cordros Securities said their channel checks revealed that demand was weak in Q2-19, as the Ramadan season negatively impacted beer consumption. The recent 17% hike in excise duty to NGN0.35 per cl, will consume 10.5% of gross revenues from H2-19, up from c.9% following the first hike to NGN0.30 per cl, and c.6% towards the end of the former ad-valorem regime.
‘’On the whole, we expect flat to declining revenue over the next three quarters, and forecast revenue in 2019FY to decline by 2.3%.’’
NB Plc management hinted at price increases this year to compensate for inflation pressure and the impacts of excise tax. No specifics were provided on what brands would be affected nor implementation dates. The distributors spoken to said NB usually provides 3-weeks’ notice ahead of any price changes, however, no notice had been given at the time of writing.
In our view, any price hikes will be greatly dependent on competition; INTBREW in particular, Cordros said.- (NB hastily hiked, then reversed the prices of Star Radler, Life, Gulder, and Goldberg in H1-18 following the increase in excise, however, competitors retained prices).
The bad news for NB Plc is that their gross and EBITDA margins are projected to hit record lows of 38.9% and 18.9%, respectively, in 2019FY, amidst higher operating costs – management’s focus on its “sell-out” strategy is likely to lead to higher marketing expenditure, in order to address dwindling volumes.
EPS is also forecast to decline by 20.1% y/y in 2019FY despite lower net finance costs.
NB Plc challenges could be compounded by higher raw materials costs stemming from increased insecurity in the northern part of the country and lower-than-expected volume growth, owing to material slowdown in economic activities.
NB is now trading on 2019E and 2020E P/Es of 30.9x and 26.5x, respectively, and EV/EBITDAs of 8.6x and 7.7x, respectively.
‘’We believe the stock is fairly priced, suggesting upside is limited from current level,’’ Cordros said.
Guinness Nigeria Plc revenue fell 3.8% y/y in Q3-19 (end Mar-19) as volume growth in Spirits, Guinness, and non-alcoholic Malta Guinness was offset by decline in lager (Harp and Satzenbrau). Increased excise duty on value spirits negatively impacted sales, and production was disrupted due to the February elections. EPS also declined by 43.5% y/y, as higher operating expenditure and finance costs, compounded the revenue decline.
Cordros say they expect GUINNESS to continue to struggle in the beer and ready-to-drink (RTD) markets, and less so in its spirits business (which holds healthier gross and EBITDA margin promise) following the impact of the 16.7% hike in excise duties, to NGN0.35 per cl and NGN1.75 per cl for beer and spirits respectively. Beer volumes, which make up c.37% of GUINNESS’ sales, are likely to remain depressed, and will continue to be the major drag on GUINNESS’ revenue in 2020FY.
GUINNESS is now trading on 2019E and 2020E P/Es of 17.1x and 15.9x, respectively, and EV/EBITDAs of 6.1x and 5.8x, respectively.
‘’We view the stock as fairly priced, suggesting upside is limited upside from current level, Cordross said.
Cordros also noted developments within the latest entrant to market, International Breweries’ (INTBREW – Not covered)’ and its disruption of the sector, specifically via growing presence in the economy beer segment which is described as ‘impressive.’ from a business perspective.
The company’s USD250 million greenfield Sagamu brewery was completed in H2-18, leading to double digit volume growth and continued market share gains. However, with total investment in the new brewery expected to increase to USD400 million (according to AB InBev), competition is expected to intensify, thus affecting the profitability of the broader market negatively.
‘’We see respite from the rise in young, middle-class consumers, presenting companies the opportunity to sell more premium brands, particularly into the leisure segment of the sector. We believe this helps in easing the price mix pressure that producers have faced in recent years, especially as the ability to increase prices is still constrained,’’ Cordros said in the outlook report.
The premium segment has been resilient in recent years, gaining 2% in market share in 2018FY. Both NB Plc and Guinness have a strong focus on premiumisation, with GUINNESS launching Guinness Gold in H1-19 and NB, while launching Tiger, continues to drive Heineken’s growth via strong marketing.
|twitter:@theGBJournal|email: info@govandbusinessjournal.com.ng|
