TUE, JULY 10 2018-theG&BJournal-The prediction is that it will be a fight that rages throughout 2018-19, driven largely by pricing and the continuing pressure on consumers’ pockets. Those not likely to increase their prices may gain additional market share but at the cost of operating margins.
Unlike Nigerian Breweries (NB) and Guinness Nigeria, the International Breweries is not contemplating any increases in prices but may suffer some dents in operating margins.
Most analysts are revising their estimates for the Nigerian Brewers already post the introduction of higher alcohol excises in Nigeria including CORDROS capital who reckon that the likes of NB may see loss of market share.
‘’ We now forecast that NB will report an 11.2% decline in volume in 2018 and a 3.0% decline in 2019, thereby losing market share. NB’s pricing strategy and IB’s incursion into Lagos and the southwest remain a concern,’’ according to CORDROS Capital.
CORDROS believes that valuations are stretched, especially for IB, which is trading at a material premium to peers on forward multiples and fundamentals.
‘’We therefore downgrade our rating for IB to SELL (from Buy) and cut our TP by 3%. We cut our TP for NB by 3% and upgrade to HOLD (from Sell) after a material de-rating YtD. We cut our TP for Guinness Nigeria by 9% and maintain our HOLD rating.’’
The analyst say NB’s strategy of defending market share has clearly not worked since 2012 and it is difficult to see how IB’s advance can be stalled, especially with IB continuing to offer quality brands at discounted prices. NB’s earnings growth will also be moderate, on our forecasts, with an EPS CAGR of 10.8% in FY17-22E.
IB’s rapid expansion in Nigeria, which saw it gain market share (to 16.4% in 2017), has driven industry margins lower, and while its ability to grow faster than the industry is adjudged as pleasing, its margin outlook and balance-sheet structure post-merger are a concern. With incremental interest about to pass through the income statement post-commissioning of new capacity, it is believed low EBIT margins will not cover its material interest expense from 2H18.
‘’We expect it to report net losses in FY18 and FY19, driven by low operating margins, as it sells at materially discounted prices and has high interest expenses. While it is not in our base case, we think management might consider a rights issue in 2H19 to restructure its balance sheet. On our estimates, IB is trading on 1Y and 2Y forward EV/EBITDA multiples of 24.8x and 19.3x, respectively. We view this valuation as stretched and downgrade to SELL (from Buy),’’ CODROS says.
‘’Our estimates imply that NB is trading on 1Y and 2Y forward P/E of 23.6x and 24.4x, respectively. This compares with a historical average forward P/E of 24.1x. On unlevered multiples, we estimate that NB is trading on 1Y and 2Y forward EV/EBITDA of 9.5x and 10.2x, respectively. We now view the stock as fairly valued and upgrade to HOLD (from Sell).’’
Guinness has come through the worst, in their view, with product introductions and discounting helping it to reclaim market share in the past two years.
Analysts at CODROS says that they believe GUINNESS alcoholic brands will suffer from recent price rises, volume growth of about 4-5% in its non-alcoholic brands (22.5% of total volume) and its recently completed rights issue should limit the impact of the decline in alcoholic beer volume growth on its net profits.
‘’We believe that at the current share price the risk-reward is neutral; maintain HOLD.’’
