Nigerian Breweries held a financial markets forum yesterday, to discuss recent developments in the operating environment and their impact on the business.
Overview: Management acknowledges the challenges in the Nigerian operating environment and, although some improvements have been noticed, the broad expectation is for conditions to remain tough as cost pressures and intense competition persists.
Key takeaways from the forum:
- Relatively new management team in Nigeria: The team is relatively new. All members, save for the company secretary, have less than two years' experience of managing the Nigerian operations. They believe they are well suited to address the changes that have occurred in the industry.
- Positive volumes trend as deterioration in market share has halted: Volumes started improving in Q4 18 and this was continued through H1 19, with continued growth in Premium (Heineken) and a rebound in key brands, Star Lager Beer and Goldberg. Hence, the loss in market share has stalled and Nigerian Breweries remains the biggest beer company in Nigeria. However, management declined to give details around this.
- Price adjustment limited by competition: Prices should ideally increase as excise duties and VAT are typically absorbed by consumers; however, given the intensity of competition in the industry as well as sustained pressures on consumer wallets, the company has limited ability to raise prices (for fear of losing market share). Hence, the strategy has been to repackage products in smaller variants as seen in the recently launched Heineken and Tiger cans.
- Current capacity is believed to be sufficient: There are no plans for major capital spending as current capacity is considered sufficient to meet existing demand. Management gave no guidance on current capacity utilisation.
Our view. We have a Buy rating on NB, with a TP at NGN75.84. We will revisit our forecasts in light of recent developments: although the rebound in volumes is a key positive for NB, we expect sustained weakness in consumer spending as well as cost pressures (from higher excise duties) to weigh on overall performance. The stock trades at PE and EV/EBITDA multiples of 18.1x and 6.2x, respectively, relative to the Nigerian peer average of 15.2x and 6.2x