GTI Research Equity Research Nigeria

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INVESTMENT HIGHLIGHT FY-2014: Declining revenue stirs up corresponding dip in profit.

Nigerian Breweries released its Audited Financial Statements for the Year ended December

31, 2014 on February 12, 2015. The Company recorded lower sales volume during the period

in comparison with the prior year which translated in to weak net income performance during

the period. Revenue declined by 0.8% YoY to N266bn from N268bn in 2013, (we estimated a

0.9% decline for FY 2014 in our Q3 2014 review), while net income declined by 1.3% between

FY 2014 and FY 2013 (we estimated a 3.1% decline for FY 2014 in our Q3 2014 review). The

stronger reduction in finance cost (22% YoY) was responsible for the disparity between our

estimate PAT and the actual. The Company proposed a dividend of N3.50 and as at current

price (N129.01), the dividend yield is 2.7% with total payout ratio settling at 84% (FY 13: 79%)

after the addition of the interim dividend of N1.25 declared in Q3 14 (FY13:79%).

Furthermore, pressures from increased distribution and administrative expenses constrained

net income growth as the line item grew by 1.5% from N69.38bn in FY 2013 to N70.44bn in FY

2014. More so competition has remained a major challenge to the company which is reflected

in the steady quarterly contraction of revenues; this trend we observed was attributed to

escalating competition especially from the emerging low end ‘’Gin/ Spirit’’ market which has

gained prominence especially among the middle and low income earners. However, cost of

sales decreased by 1% in the midst of daunting economic challenges especially the recent

devaluation of the naira which escalated input costs of companies in the consumer goods

sector from escalating costs of imported raw materials. Impressively, Nigerian Breweries was

able to hedge against this by significantly lowering importation as well as sourcing its major

raw materials locally. The recent 21% drop in Sorghum prices (one of NB’s major raw

material) also helped to cushion the effect of currency devaluation on input costs.

The Company traditionally posts its strongest quarterly performance in the fourth quarter,

however this was not the case in 2014 as the company saw its highest performance in Q2

where it reported a revenue of N72.51bn; 4.7% increase from the period in the prior year and

a net income of N13.81bn; 22.86% increase from the period in the prior year. On a quarter on

quarter analysis, revenue was up by 5.1% to N72.52billion in Q2 2014 from N68.97billion in

Q1 2014, but declined by 26.6% to N53.24billion in Q3 2014 and finally grew by 34.5% to

N71.63bn in Q4 2014. Net income on the other hand rose by 37.3% to N13.81billion in Q2 2014

from N10.06billion in Q1 2014, but crashed by 57% to N5.95billion in Q3 2014 and rebounded

by 112.9% to N12.69bn in Q4 2014.

Heineken N.V, the company’s major shareholder proposed its merger with Consolidated

Breweries PLC (another subsidiary of Heineken). The merger was concluded on the 31st of

December 2014 and was expected to enlarge the company’s capability to fully capitalize on

the opportunities in the Nigerian beer and malt drinks market and create significant value

through delivery of broader product offering, operational efficiencies and access to new

markets, however from the result released it is evident the impact of the merger is yet to be

felt.

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Key Statistics at a glance

Fair Value 144.21

Current Price 145.00

Outlook Neutral

Industry View Positive

Market Cap $7.88B

Price-Earnings [P E]

2013 Trailing 29.82X

2014 26.67X

2015F 25.28X

ROE 24.23%

ROA 12.20%

Outstanding Shares 7.56Billion

N.B YTD -1.72%

ASI YTD -12.38%

Coverage Analyst: Chisom Nwankwo

c.nwankwo@gti.com.ng

Lead Analyst: Chuks Anyanwu

c.anyanwu@gti.com.ng

5th March 2015

NIGERIAN BREWERIES PLC

Bloomberg Ticker: NB: NL

NSE Symbol: NB

Listed on the Nigerian Stock

Exchange

NIGERIAN BREWERIES

PLC

NIGERIAN BREWERIES: is the giant subdued?

Recommendation: HOLD

…Financial Possibilities

EQUITY ‖ NIGERIA ‖ CONSUMER GOODS

GTI Research Equity Research Nigeria

Going forward, we are moderately optimistic that the Company’s merger with

consolidated breweries will boost revenue especially in 2015 financial year.

However, Competition still clearly remains the major challenge for Nigerian

Breweries and this is reflective in its inability to grow revenue in 2014. As was

our opinion in our Q3 2014 review of the Company’s performance, we

recommend the Company takes innovative steps to effectively diversify its

production lines through a detailed analysis of its target market and

consequently produce goods that are well in line with consumer taste. This

will not only help deepen market penetration but cushion the effect of

competition on gross earnings and bottom line.

VALUATION ANALYSIS

Based on our analysis, the stock is currently trading at 0.07% premium to our

estimated fair value of N144.21, in a 12 month investment horizon. We focused

on the historical financial performance of the stock and our expectation for FY

2014 to arrive at our fair value for the stock.

Our fair value for Nigerian Breweries shares was calculated using the

Dividend Discount Model comprising our expected dividend estimate for the

company and GTI Securities customized tweak to adjust for the risk of

investing in the Nigerian consumer goods sector. Our Required Rate of Return

(RROR) factors in a risk premium of 7% and the yield for the most recently

issued 20-Year FGN Bond was applied as the risk free rate of return.

We have placed a NEUTRAL rating on the stock of Nigerian Breweries

because the stock is just about fully priced based on our analysis.

FORECASTS

Our FY 2015 revenue estimate for Nigerian breweries is N277.03bn

representing a 4% increase relative to FY 2013, while our net income estimate

for FY 2015 is N43.37bn which is a 2% increase from FY 2013. This yields an

EPS of N5.73 and a forward P/E of 24.43x.

Our estimates were driven majorly by the impact of the acquisition of

consolidated breweries through its diversified product portfolio and

distribution strength. This is because the merger will now enable the

surviving entity, Nigerian Breweries; efficiently manufacture products of both

entities through the combined operational capacity of both companies.

Products will also be sold and distributed across the combined sales and

distribution network of the two companies. These synergies are expected to

result in increased returns to shareholders.

Similarly, the company’s limited exposure to currency pressures along with

the recent modernization of the Aba brewery as well as the activities

surrounding the forth-coming general elections will be the catalysts for the

larger volume consumption of the company’s products, ultimately providing

a scope for gross margin expansion.

Overall, we think the Company’s inability to grow sales is a major challenge

and despite our expectation that the Company will record an improvement in

sales in FY 2015, we think competition is a major challenge in that sector and

this will impede overall aggressive growth in the FY 2015.

Sea-saw effect in Revenue and PAT: Notice the consistent

increase in Q2 figures, followed by a corresponding dip in Q3

figures and then an impressive rebound in Q4 figures. *Heineken

notes that Q2 2014 volumes in Nigeria were driven by value

Beers (Goldberg and Life)*

Over the past 6 years Revenue growth was strongest in 2011,

but has continued to decline since then, PBT on the contrary

rebounded from its lowest point of 1% in 2012 to 12% in 2013

and finally reverted back to 1% in 2014.

64.5769.25

56.48

78.31

68.9872.51

53.25

71.63

9.42

11.…

6.2

16.28

10.06

13.81

5.96

12.69

0

2

4

6

8

10

12

14

16

18

0

10

20

30

40

50

60

70

80

90

Q1

(2013)

Q2

(2013)

Q3

(2013)

Q4

(2013)

Q1

(2014)

Q2

(2014)

Q3

(2014)

Q4

(2014)

QUARTERLY GROWTH TRENDS IN NB REVENUES AND PROFIT AFTER TAX

Revenue (Bn) PAT(Bn)

2009 2010 2011 2012 2013 2014

Sales(%) 13 13 24 10 6 -1

PBT(%) 10 8 26 1 12 1

-10

0

10

20

30

6 YEAR SALES AND PBT GROWTH TREND

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The company has managed to keep its financial liabilities on the

decline over the past four years bringing its debt to equity

ratio to 1.03 in 2014.

2.011.71

1.251.03

2011 2012 2013 2014

FOUR YEAR DEBT TO EQUITY RATIOS

GTI Research Equity Research Nigeria

INVESTMENT CONCLUSION/OUTLOOK FOR N.B

The shares of NB is slightly overvalued with focus on our FY 2015

estimates. The stock is currently trading at a 3.95% premium to our fair

value estimate of N144.21 and a P.E of 26.67x.

Considering the company’s recent merger resulting to an expanded

portfolio with four value beers (33, Williams, Turbo King, and More

Lager) added to its product offerings along with its limited exposure to

economic pressures, we envisage an increase in turnover and an

expansion in profitability margins in FY 2015. However, the threat from

the emerging low end gin market still is a major cause for concern. We are

of the opinion that the increasing difficulty in growing revenue currently

being experienced especially by the premium beer brands may not only

be on account of the shrink in disposable income, but also a gradual

change in taste as more people are becoming health conscious and this is

reflecting in their consumption pattern. It is our opinion that NB needs to

develop a strategy to capture this growth segment of the market.

We have a HOLD recommendation on the shares of Nigeria Breweries

because it is trading close to our target price with focus on FY 2015

estimates. The strong dividend antecedence of the company and its

relative price stability still makes it a favorite among institutional

investors like PFA’s and foreign investors especially during a period of

heightened price volatility.

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Profitability margins have been more or less consistent over the

past 4years with marginal movements up &down

47

24 24

48

24 24

50

2522

51

25 23

51

25 23

0

10

20

30

40

50

60

GPM OPM PBTM

PROFITABILITY MARGINS

2010 2011 2012 2013 2014

ROE and ROA has declined consistently over the past 4years

48

.60

%

16

.14

%

40

.71

%

14

.99

%25

.06

%

12

.30

%24

.73

%

12

.20

%

R E TU R N O N E Q U I TY R E TU R N O N A S S E T

R O E & R O A

2011 2012 2013 2014

Over the past five years, revenue has managed a 7.5% growth

(CAGR) while liabilities has risen by 22.6% over the same period.

Profit before tax and profit after tax rose 6.5% and 7% respectively

over the same period.

7.5%

22.6%

10.7%

6.5% 7.0%

Sales Liabilities AdminExpenses

PBT PAT

5-Year CAGR (2010-2014)CAGR

GTI Research Equity Research Nigeria

NIGERIAN BREWERIES

2011 2012 2013 2014 2015F 2016F

N '000 N'000 N'000 N'000 N'000 N'000

REVENUE 230,123,215 252,674,213 268,613,518 266,372,475 277,027,374 288,108,469

GROSS PROFIT 109,762,016 125,452,144 136,477,042 135,584,179 138,090,967 146,680,225

GROSS PROFIT MARGIN 48% 50% 51% 51% 50% 51%

PROFIT B/F TAX 56,372,692 55,624,366 62,240,317 61,461,821 63,920,294 65,198,700

PBT MARGIN 24% 22% 23% 23% 23% 23%

TAX 18,347,122 17,581,652 19,159,968 18,941,568 20,549,636 20,960,633

PROFIT AFTER TAX 38,025,570 38,042,714 43,080,349 42,520,253 43,370,658 44,238,067

OWNER'S EQUITY 78,050,571 93,447,892 112,359,185 171,964,263 201,387,348 235,844,723

CASH DIVIDEND 125k 300K 450K 475K 4.75K 4.80K

RELEASE DATE 22/02/12 22/02/13 13/02/14 12/2/2015

AGM DATE 16/05/12 15/05/13 14/05/14 13/05/15

CLOSURE DATE 14/03/12 14/03/13 5/3/2014 5/3/2015

PAYMENT DATE 17/05/12 16/05/13 15/05/14 14/05/15

NIGERIA BREWERIES BRAND PORTFOLIO AT A GLANCE

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GTI Research Equity Research Nigeria

DISCLOSURE

Conflict of Interest

GTI Securities Ltd and its sister companies within the GTI Group may execute transactions in securities of companies

mentioned in this document and may also perform or seek to perform investment banking services for those

companies mentioned herein. Trading desks may trade, or have traded, as principal on the basis of the research

analyst(s) views and report(s).

Analyst Certification

Where applicable, the views expressed in this report accurately reflect the analysts' views about any and all of the

investments or issuers to which the report relates, and no part of the analysts' compensation was, is, or will be, directly

or indirectly, related to the specific recommendations, views or corporate finance transactions expressed in the report.

Disclaimer

This report by GTI Securities Ltd is for information purposes only. While opinions and estimates therein have been

carefully prepared, the company and its employees do not guaranty the complete accuracy of the information

contained herewith as information was also gathered from various sources believed to be reliable and accurate at the

time of this report. We do not take responsibility therefore for any loss arising from the use of the information.

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