Nigerian Breweries Plc – Staying resilient through tough economic times

Robust value presence will still be a key driver of topline growth in 2017: The strategy to increase its product offerings in the affordable segments (mainstream and discount) through its merger with Consolidated Breweries in December 2014 proved to be a step in the right direction. Given the weak macroeconomic climate of 2016, many consumers increasingly down-traded to affordable beer brands as a result of lower purchasing power. On the back of its improved offering in the cheaper segment (an increase to six from two following the merger), NB reported a positive turnover growth of 6.7% YoY. We highlight that in the same operating period, its key competitor – Guinness, struggled to grow revenue due to its limited presence in the value segment. With much of the harsh economic realities expected to persist in 2017, although at a much lesser extent relative to 2016, we expect NB’s turnover and earnings to remain somewhat resilient.

Well positioned to capture growth potential in the long term: Beyond 2017, we believe the brewer is well positioned for future growth as it continues focus on achieving cost efficiencies, and leverages on its strong brand portfolio. The just released Q4’16 GDP figure showed that the economy is on the path out of its current economic recession. With NB’s leading position in lager brands across all price points particularly in the premium category, we believe the company is placed to capture growth following an upturn in the economy. We hold this view as we expect consumers to up trade when the economy recovers and disposable income improves. In the long term, NB’s growth potential is undoubtedly strong in the beer market as Nigeria’s beer consumption rises to pre-recession levels. We highlight that NB dominates over 60% of the beer market. Also, there are prospects for stronger profit margins in the longer term in view of the company’s backward integration projects (through investments in the cassava, sorghum and sugar value chain). 

We downgrade our rating on the counter to a HOLD: With our blend P/E and EV/EBITDA valuation, our target price has been revised lower to N146.50 (previous: N150.34) and we downgrade our recommendation to a HOLD from a buy recommendation. Our price target of N146.50 implies a 12.4% upside potential to NB’s current market price. A risk however to our valuation is a major upswing in the exchange rate following another currency depreciation. We believe this would have a negative impact on NB’s production costs given that 45% of Nigerian Breweries inputs is imported.

Source: CardinalStone Research Nigeria