- The investment case for the Nigerian beer market has weakened in recent years on account of an increase in competitive pressure and a deterioration in the macroeconomic environment since 2012. The result has been a decline in sector earnings, as highlighted in the weakness in the sector’s profit pool to US$271mn in 2016 vs its peak of US$609mn in 2013). Given these sector challenges, we have observed quite a shift in the industry paradigm with the following trends: (1) a flight to affordable beer, making the segment the second largest by volumes in 2016; (2) an increase in industry innovation; and (3) the consolidation of industry players.
- The flight to affordable beer has had the most profound impact on the industry in our view, given: (1) changes to the structure of the market with Heineken and Diageo subsidiaries losing as much as 10ppt market share in favour of AB InBev subsidiaries including International Breweries; and (2) its negative implication for industry profitability amid a high inflationary environment with little headroom to raise prices. As we expect that the contribution of affordable beer to sector beer volumes will continue to rise over the medium term, reaching 58% of volumes in 2019f vs 44% in 2016, we believe that sector profits will remain challenged, especially as we do not expect rev/hl to rise fast enough to offset costs.
Beer producers need to significantly cut their cost base and/or find a niche that makes them more competitive in order to sustainably improve their profitability over the medium term. In our opinion, most brewers would be more successful at building a niche than costing costs owing to inflationary pressures on the latter. In our analyses of the cost profile and positioning of our universe of Nigerian brewers, International Breweries ranks highly, partly influencing our positive view on the company. In any case, we expect our universe of Nigeria beer companies to witness strong growth in net earnings over the medium term (FY16 – FY19f), mostly reflective of a low base effect with Guinness showing the most rebound, coming from a loss in FY16f. We note that International Breweries is an exception, growing of 19% pa over the period on a relatively strong base.
International Breweries. We initiate coverage on International Breweries with a Buy recommendation and a TP of NGN28.00, representing an ETR of +28%. The premise for our recommendation is: (1) a strong medium-term earnings growth outlook – driven by robust growth in volumes, price increases and operating efficiency; (2) relatively strong profitability and competitive cost profile; (3) unique market positioning and strategy; (4) an effective management team; and (5) attractive valuations.
- Nigerian Breweries. We reiterate our Sell recommendation on Nigerian Breweries on valuation grounds as it trades on a FY18f P/E and EV/EBITDA of 26.0x and 12.6x respectively.
- Guinness Nigeria. We maintain our HOLD recommendation on Guinness Nigeria on account of its: (1) attractive valuation; (2) strong earnings growth; and (3) concerns over weak management execution.
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