On Nigeria Breweries outlook
IMPLICATIONS: NO MAJOR IMPLICA TIONS; information provided by management on the business fundamentals were not surprising. We therefore do not see adjustments to consensus estimates on the back of the event. We also expect the market reaction to be broadly neutral. Our own forecasts are in line with management guidance.
Below are the key takeaways:
Sales
• H1 2019 sale volumes were driven by premium lager Heineken, which grew by double-digit and is showing a strong recovery. The -1% y/y sales decline by value was caused by the higher excise tax. Around N5bn worth of sales were eroded by this increase.
• Management confirmed that market share in the economy segment was under competitive pressure from International Breweries (IB). As such, price increases could not implemented as this would risk further market share losses.
• Stella (premium lager brand introduced in 2017) and Maltex (malt drink) have been taken off brand portfolio because their performance didn’t meet expectations.
• There was optimism surrounding premium lager beer Tiger; recognition of this brand is growing.
• Legend Stout remains a regional brand so there is less energy focused on driving growth through awareness campaigns.
• Malt brands like Maltina and Amstel Malta are facing a ramp up in competition from other malt brands as well as soft drinks. With the malt brands broadly seen as premium, price sensitive consumers would rather go for the cheaper option – soft drinks.
CoGS
• 57% of raw materials were sourced locally in 2018. The target is to increase this to 60% in
• For packaging, 100% of bottles and cans are acquired locally, though these contain imported components sourced by suppliers.
Opex
• The company’s workforce is leaner on the back of the staff downsizing done last year.
• One notable initiative introduced recently to manage costs is the installation of tracking devices in distribution trucks.
• Essentially, the general focus for management is to fully optimise costs.
Capex
• No investment capex planned. Spare capacity is more than enough to accommodate demand growth.
Dividend
• Dividend policy remains unchanged; no plans to plough back earnings. Outlook
• Despite the tightly competitive environment, the issue of whether to increase prices remains a recurring discussion.
• Management implied that they may be forced to pass on the +2.5% VAT increase next year.
• IB’s planned rights issue is a negative for NB. IB’s post-issue deleveraging means it will have more power to stay price competitive.
Year-to-date, NB shares have shed -39.2%, underperforming the broad market index which is down by -12.0%.
We have an Underperform rating on NB’s shares with a price target of N64.8.