Company description
Nigerian Breweries Plc is considered to be the pioneer in the Nigerian brewery industry. Incorporated in 1946, headquartered in Lagos, NB is today the largest brewing company in Nigeria and the second largest in terms of market capitalisation. In June 1949, first bottle of STAR lager beer rolled off its Lagos Brewery bottling lines.
Nigerian Breweries Plc has a strong portfolio of products which spans across time and experience. Some of the well-known brands the company dons are Star lager beer, Gulder lager beer, Maltina, Legend Extra Stout, Amstel, Heineken lager beer (which was re-launched into the Nigerian market in 1998). Innovative Maltina Sip-it, packaged in Tetrapaks, was launched in 2005. The company diversified in premium non-alcoholic soft drink in 2006 with the launch of Fayrouz. In 2010, NB launched Climax, an herbal energy drink.
Investment summary
Cost minimisation: Nigerian Breweries enjoys cost advantage and is competent in translating it into a fatter bottom line. The company is also taking initiatives to further bring about cost effectiveness. It is involved in developing Sorghum hybrids to produce better quality malt and also to reduce its dependence on imported food grains. This would help the company beat its rising costs. Brewers in Nigeria import close to 25 percent-35 percent of the raw materials making them heavily reliant on global food grain prices and fluctuations in foreign exchange.
The company’s COGS (as a percentage of revenues) though increased 626bps Y/Y to 50.4 percent in FY2012 on the back of rising food grain prices. However, the company remains cost effective and one of the best in the industry, with its closest competitor, Guinness, operating at COGS of 55.7 percent in FY2012.
First mover advantage: Nigerian Breweries is the pioneer in the brewing industry. The company is the largest brewery in Nigeria, dominating the industry with a market share of 60.0 percent, followed by Guinness Plc with a distant 20.0 percent share of the Nigerian brewery market. Nigerian Breweries is the largest Fast Moving Consumer Goods (FMCG) company in terms of product turnover. Being the first makes its business acumen and understanding of the market stand out as is reflected in its financial results too. In addition, extensive experience in the Nigerian market coupled with strong and tested distribution network makes the company bear with struggling times like now. The company has come a long way from its humble beginning in 1946; Nigerian Breweries today operates through eight breweries covering all states of Nigeria. Ama Brewery is today the biggest brewery in Nigeria.
Strong supply chain network: Heineken N.V. holds 54.10 percent stake in Nigerian Breweries plc. Nigerian Breweries accounts for approximately 10.0 percent of the total sales of its parent company, a percentage which is higher than other subsidiaries of Heineken N.V. Nigerian Breweries leverages technological expertise of its parent company. Its systems, operational processes and procedures all conform to international standards. Nigerian Breweries’ research and development centre started in 1987 helps the company stay ahead of the curve and bring about innovations in the industry. NB diversified into the soft drink market with the launch of “Fayrouz” in 2006, much ahead of its competitors, seeing a potential untapped market segment then.
Financial Analysis
Revenue: Net revenues, increased 21.9% to N252.7 billion in FY2012 compared to $207.3 billion in FY2011. Revenue increased primarily due to higher expends on selling and distribution to push up sales. The company even relaxed its credit terms as reflected in the increased receivables to push sales. Nigerian Breweries derives the majority of its revenues domestically, which posted sales of N252.5 billion in FY2012, accounting for 99.9% of the total sales. The company is working on developing its export business which currently accounts for a meager 0.08% (or N0.2 million) of the total sales. Meanwhile, newly acquired breweries added recognized products like Goldberg Lager & Malta Gold and Continental Life Lager to NB’s widened product offerings. Sona Systems Associates Business Management Limited and Life Breweries Company Limited’s acquisitions brought in its wake three more breweries each at Onitsha, Ota and Kaduna) which are expected to expand production capacity along with roping in increased sales in times to come.
Margins: The company’s COGS (as a % of revenues) though increased 626bps Y/Y to 50.4% in FY2012 on the back of rising food grain prices. This pushed the gross profit margin (as a % revenue) 564bps to 49.6% in FY2012 compared to 52.6% in FY2011. Administrative expenses and Selling & Distribution expenses claimed a lower portion of sales on a yearly basis, declining a tad to 25.1% in FY2012 compared to 25.2% in FY2011. However, Operating profit margin could not be saved from climbing down 798bps Y/Y to 25.3% in FY2012 versus 27.5% in FY2011 due to inflated COGS this fiscal year. More than six-fold increase in interest expense to N8.9 billion in FY2012 restricted the increase in net sales to translate into a fatter bottom line. Net profit margin decreased 18.8% Y/Y to 15.1% in FY2012.
Balance Sheet & Liquidity: Cash & cash equivalents decreased a humongous 54.3% to N9.5 billion in FY2012 from N20.8 billion in FY2011 as the company made two big ticket acquisitions expending N37.9 billion on expanding its capital asset base. Cash from operating activities decreased 870bps or N5.3 billion to N55.9 billion in FY2012 from N61.2 billion in FY2011. This decrease can primarily be attributed to decrease in net income year-on-year basis and increased cash tax payments during the year. Capital expenditures more than doubled to N37.9 billion in FY2012 from N17.2 billion in FY2011 as the company continued its expansion plans through inorganic growth. NB’s total debt increased to N45.0 billion in FY2012 from N39.0 billion in FY2011.
Dividends: The company has a history of paying dividends. The dividend declared remained flat compared to previous year at N3.0 per share in FY2012.
Outlook
Opportunities
Nigerian Breweries made a string of acquisitions in FY2011. With its latest purchase of Sona Systems Associates Business Management Limited and Life Breweries Company Limited, NB added three breweries (each at Onitsha, Ota and Kaduna), strong brands (like Goldberg Lager & Malta Gold and Continental Life Lager), and potential to expand revenues manifold.
Recent Acquisitions offers substantial opportunities to grow earnings, strengthen and widen brand portfolio, and achieve economies of scale. The recent acquisition of Sona Systems is expected to provide Heineken with an added technical capacity of 3.7 million hectolitres, aiding to improve the company’s existing capacity constraint. It is also believed that this would even lead to improvement in the locations of breweries for the company.
The African continent accounts for 6.0% of the global consumption of beer, with South Africa representing 25% of it followed by Nigeria at a close second. However, the continent accounts for 18.0% of the world’s population. This is where the opportunity lies; only companies needs to undermine them. According to Forbes, the U.S. domestic beer market is matured and the growth potential now exists in Africa. Heineken is well-positioned to leverage the expanding middle-class of Africa, particularly Nigeria to its advantage, as it already earns a fifth of its net profits from African markets.
The company has claimed higher share of the wallet through exercising innovative marketing and Corporate Social Responsibility (CSR) policies over the years. For instance, sponsoring of football teams, both the Nigerian Super Eagles and local teams helped the company earn brand loyalty. In addition, the company started a reality show called “Gulder Ultimate Search” winning the hearts and higher wallet share of the ballooning African middle class.
NB needs to concentrate on the stout market too where Guinness is the clear leader controlling approximately 91.0% of the Nigerian stout market.
Struggling Liquidity:
The company has a struggling liquidity position which is reflected in a low Current ratio of 0.65x and a Quick ratio of 0.37x. The cash balance of NB declined a whopping 54.3% Y/Y to N9.5 billion during the concerned period due to funding of two big ticket acquisitions. NB had raised debt to the tune of N39.0 billion during
Financial Summary
Increased competition: SABMiller, the second largest beer maker in the world and the largest in South Africa, opened shops in Nigeria in 2009. SAB after trying for more than five years was successful in breaking into the growing Nigerian brewing market. The company entered Nigeria through the unorganized lower-end of the alcohol industry to tap in to the N4.7 billion informal beer markets and substituted “burukutu” and “pito” with its branded and brewed economical beer. To keep itself financially viable, it started promoting domestic growth of cassava and barley. This changed the trend in Nigerian brewery market which was dominated by two players NB and Guinness so far. SAB has captured approximately 5.0% of the total Nigerian beer market since 2009. This also paved the way for foreign investments in the industry helping the industry in more than one way. Bigwigs like Castle and Carlsberg are also not out of race of grabbing a share of the pie. In response to the consolidation spree led by SAB, NB made its two latest acquisitions. Guinness Nigeria Plc, the subsidiary of Diageo Plc, plans to spend over N52.0 billion during the year to expand its existing brewing capacity, heightening the beer war beat.
Rising prices of food grains: The largest producer of barley in European Union, France has pegged the price of malting barley at EUR50 – EUR55 per ton for 2013, which is way above the projected price of EUR35 – EUR40 per ton by RMI Analytics, an agri-consultancy. The U.S Department of Agriculture (USDA) also estimates the price of barley to increase in 2013 due to supply shortfalls which in turn is a result of colder winters and delayed plantation. However, the price of sorghum is expected to remain stable riding on the back of declined demand compared to supply. In addition, the latest efforts by Nigerian brewers to supplement barley with locally produced sorghum are expected to reduce their dependence on global food grain prices and provide them a cost advantage.
Struggling economy: The economy is plagued by decelerating GDP growth (pegged at 6.75% for 2013), high unemployment rates, decreasing purchasing power of consumers and rising security issues. Nigeria is expected to witness a high average inflation rate of 9.8% during 2013. NB too is caught in the whirlwind and is facing a challenging environment of decreasing demand and rising costs. The brewery sector is directly proportional to the income levels of the people. Moreover, price level plays a poignant role in determining the demand for the sector.
FY2011, which surged the cash balance for that period. The cash from operations (CFO) declined 8.7% Y/Y to N55.9 billion in FY2012 pulling down the cash balance in the current fiscal. During the company’s investors’ meet, when asked about the liquidity crisis which is apparent in the company’s financials, the management said that the largest portion of the current liabilities are made up of the deposits due to the customers which is paid back to them when they return the bottles to the company. That’s the practice across the industry; yet there are companies sitting on better current ratios. For instance, the second largest Nigerian player, Guinness Nigeria Plc has a current ratio of 0.96x and Heineken Plc has a current ratio of 0.71x. This brings us to the conclusion that NB needs to tighten its working capital practices to improve its liquidity position. In addition, it should strategically manage its rising inventory levels and ballooning receivables which seems like an adverse impact of pushing up sales on credit to combat the struggling Nigerian economy at large.
Cash Flow Analysis:
As the Finance Director mentioned that he expects capex for FY2013 closer to FY2012 capex figure rather than FY2011 figure. Baking that into the financials of the company, we believe that the company would need to borrow funds in the near-term, given the debt maturity schedule. In addition, the Finance Director during the Investors’ meet mentioned, NB tries to keep the cash balance as low as possible to avoid paying interest on the same. This leads us to believe that most of the cash balance sitting on the balance sheet is borrowed fund. Huge capex expenditure and repayment of loans & borrowings is expected to lower the cash balance further for FY2013.
The company; however, emphasizes that it has arrangement with several banks to fund its liquidity requirements, though it has not disclosed the details in the annual report. We believe NB is too aggressive with its expansion plans which would impact adversely the near-term operations of the company.
Conclusion:
The revenue growth rate of the company is expected to decline a tad to 20% for FY2013. COGS are expected to go up riding on the back of rising food grain prices domestically as well as internationally. The S&D expenses (as a %of sales) are expected to rise due to the projected shrinkage in revenue.
Gross profit margin declined 564bps Y/Y to 49.6% in FY2012. Net Profit Margin (NPM) declined 18.8% Y/Y to 15.1% and Operating margin declined 79.8bps Y/Y to 25.3%. However, it is much ahead in the race compared to Guinness’ NPM of 11.8% in FY2012.
To maintain its current level of profits, the company needs to bring down its interest expenses substantially by restructuring its debt. Interest expenses increased more than six-folds to N8.9 billion in FY2012 compared to N1.4 billion in FY2011. The company plans to spend funds to the tune of N15.0 billion to achieve the expansion of its Aba plant in Abia. Thus, it looks difficult for the company to bring down its interest expenses and debt burden in near term. Moreover, the repayment of N30.94 billion by 2015 is also looming large.
The company is struggling to reach its 2009-performance levels and it looks difficult for it to achieve the same in near-term. The current capex invested in expansion, increasing cost of sales, and increasing competition are likely to toil hard on the company in the coming years.
However, over the long-term, the company is expected to perform better leveraging its advantage of being the largest and pioneering brewing company in Nigeria. In addition, being a wholly owned subsidiary of Heineken, substituting imported barley with locally produced sorghum and replacing bottles with cans is believed to work in favor of the company.
Industry Outlook
The total consumption of beer across the globe amounted to 188.78 million kiloliters in 2011, an increase of 3.8% compared to 2010. China continued to be the largest beer consuming country for the ninth consecutive year. Africa’s beer consuming population grew 6.9% Y/Y in 2011, primarily driven by South Africa which witnessed an annual growth rate of 2.5% in 2011.
The brewery industry has evolved through mergers compared to organic growth across the globe. The largest brewer of the world, AB-InBev, emerged out of the merger of two biggies; the U.S.-based AB and In-Bev of Brazil.
African brewing industry is trading the beaten path. The beer industry of Africa is still underpenetrated compared to the global industry. According to analysts at Bernstein Research, Europe and North America leads the beer consumption race with 70 litres per beer drinker, followed by Central & South America and Central & Eastern Europe at 50 litres consumption rate, Asia-pacific at a distant 18 liters and Africa being at the tail-end with just 11 litres per capita. Thus, it is believed that this makes Africa the most attractive market for brewing and beverage companies. In addition, the existing oligopolistic market structure and estimated strong growth in GDP in the longer-term supports the analysis.
Africa contributes close to 5.0% to global beer production and in that Nigeria accounts for less than 1.0%. South Africa is the largest beer market of the continent as far as consumption is concerned followed by Nigeria at a distant second.
Nigerian beer market stood at $2.7 billion in 2009 (an increase of 21.8% Y/Y). On an average, Nigerian consumption of beer stood at 10 litres per capita. Industry analysts project it to increase at a CAGR of 23.45% between 2011 and 2014. Nigerian brewery market is expected to reach 23 million hectoliters by 2015. The primary reason assigned for the projected growth is both increase in per capita alcohol consumption and also growth in per capita income. Beer accounts for close to 96.0% of all alcohol consumption in the country and the segment is expected to grow manifolds rising on the back of the growing youth demographics of the nation.
Both the beer market and carbonated soft drink (CSD) market constitute 87.0% of the Nigerian beverage market. The beer market is largely controlled by two big players; Heineken N.V. controls more than 70.0% of the market with its two subsidiaries Nigerian Breweries and Consolidated Breweries Ltd. On the other hand, Diageo controls approximately 27.4% of the market through its subsidiary Guinness. Similarly, the CSD market is dominated by two companies; the bottler of Coca Cola, Nigerian Bottling Company Plc, and PepsiCo bottler, 7UP Plc.
Lately, the alcohol giants sniffed potential in the CSD market and advanced towards grabbing a pie through launching their in-house soft drinks’ brands. Guinness; however, has taken no initiatives in this direction. Having said that, Nigeria still remains the 2nd largest market for Guinness Stout brand.
The industry is currently working on backward integration strategies. The two industry giants are working on strategies to substitute imported barley with locally produced sorghum to control costs and save themselves from the vagaries of rising barley prices. Nigeria being the second largest producer of sorghum will cushion breweries from adverse movement in foreign exchange and rising global prices in future.
Additionally, the industry has largely shifted to cans from bottles which have brought down significantly the cost of retrieving empty bottles from retailers. GZ Industry Nigeria Limited in partnership with Rexam Plc, a public company listed on LSE, has opened shop in Nigeria. It has a current capacity of producing 1.2 billion cans a year. Thus, local sourcing of inputs will make the companies more efficient and would expand the gross margins substantially. On the flip side, GZI import almost all of its aluminum; thus making it dependent on imported aluminum coils and the fluctuation of foreign exchange.
The rising population of Nigeria, particularly the youth population and expanding middle class will form the backbone of the brewery industry. The total population of Nigeria is expected to rise to 170 million by 2013 from 160 million in 2006.
The end of military rule in 1999 saw the advancement of multinationals brands to Nigerian markets to cater to the growing middle-class segment of the Nigerian society, which represented close 23.0% of the total population in 2011. The members of the emerging and expanding middle class of Nigeria earn between $480 and $645 a month and have an appetite for lifestyle products.
