1. Imara Sub Saharan Africa Breweries Report
Cheers to a compelling consumer story…
May 2011
Analyst
Batanai Matsika
+263 772 889 556
batanai.matsika@imara.co
www.imara.co
2. 1
CONTENTS PAGE
African Breweries Companies- Fast Facts………………………………………………………………………………………………………………………2
Global Executive Summary………………………………………………………………………………………………………………………………………………5
Relative Valuation Matrix for SSA and Global Breweries……………………………………………………………………………………………… 8
West Africa
West Africa Industry Overview…………………………………………………………………………………………………………………………………………10
Guinness Ghana……………………………………………………………………………………………………………………………………………………………… 11
Guinness Nigeria………………………………………………………………………………………………………………………………………………………………14
Nigerian Breweries………………………………………………………………………………………………………………………………………………………… 17
East Africa
East Africa Industry Overview…………………………………………………………………………………………………………………………………………20
Bralirwa……………………………………………………………………………………………………………………………………………………………………………21
East African Breweries Limited………………………………………………………………………………………………………………………………………24
Tanzania Breweries Limited……………………………………………………………………………………………………………………………………………27
Southern Africa
Southern Africa Industry Overview…………………………………………………………………………………………………………………………………30
African Distillers Limited…………………………………………………………………………………………………………………………………………………31
Delta Corporation……………………………………………………………………………………………………………………………………………………………34
National Breweries plc……………………………………………………………………………………………………………………………………………………37
Namibia Breweries Limited………………………………………………………………………………………………………………………………………………40
Phoenix Beverages Limited………………………………………………………………………………………………………………………………………………43
SABMiller…………………………………………………………………………………………………………………………………………………………………………46
Sechaba……………………………………………………………………………………………………………………………………………………………………………49
Zambian Breweries………………………………………………………………………………………………………………………………………………………… 52
Appendix to Abbreviations:
AB InBev: Anheuser-Busch InBev
Afdis African Distillers Limited
BRALIRWA: Brasseries et Limonadereis du Rwanda
BRVM: Bourse Régionale des Valeurs Mobiliѐrs
BWP: Botswana Pula
c: circa
CSD: Carbonated Soft Drinks
CMBTC: Canadian Malting Barley Technical Centre
DSE Dar es Salaam Stock Exchange
EABL: East African Breweries Limited
EAC: East African Community
GDP: Gross Domestic Product
GGBL: Guinness Ghana Breweries Limited
GHS: Ghanaian cedi
GNL: Guiness Nigeria
HIPC: Highly Indebted Poor Countries
hl: Hectolitres (1 hl= 100 litres)
IAS: Imara Africa Securities
IES: Imara Edwards Securities
IPO: Initial Public Offering
KES: Kenyan Shilling
LHS: Left Hand Side
MUR: Mauritius Rupee
NAD: Namibian Dollar
NGN: Nigerian Naira
NACADA: National Agency for the Campaign against Drugs
Natbrew: National Breweries Limited
Nambrew: Namibia Breweries Limited
NBL: Nigerian Breweries Limited
PBL: Phoenix Beverages Limited
pp: per person
PRB: Population Reference Bureau
RHS: Right Hand Side
RWF: Rwandan Franc
SADC: Southern African Development Community
SSA: Sub-Saharan Africa
SBHL: Sechaba Breweries Limited
TBL: Tanzania Breweries Limited
TZS: Tanzania Shilling
USD: United States of America Dollar
ZAR: South African Rand
Zambrew: Zambian Breweries Limited
ZMK: Zambian Kwacha
ZSE: Zimbabwe Stock Exchange
3. 2
Sub Saharan Africa Breweries-Fast Facts
Table 1: West Africa
Capacity Market Cap Market Cap/hl
Ghana (mhl) (USDm) (USD)
Guiness Ghana 1.1 138.3 125.8
Capacity Market Cap Market Cap/hl
Nigeria (mhl) (USDm) (USD)
Guiness Nigeria 5.5 2,405.9 437.4
Nigerian Breweries 11.0 4,291.3 390.1
Table 2: East Africa
Capacity Market Cap Market Cap/hl
Kenya (mhl) (USDm) (USD)
EABL 9.0 1,916.5 212.9
Capacity Market Cap Market Cap/hl
Tanzania (mhl) (USDm) (USD)
Tanzania Breweries 3.0 353.5 117.8
Capacity Market Cap Market Cap/hl
Rwanda (mhl) (USDm) (USD)
Bralirwa 1.3 152.8 117.5
4. 3
Sub Saharan Africa Breweries-Fast Facts
Fig 1: Share of Africa’s Population by Income Class
Source: AfDB
Table 3: Southern Africa
Capacity Market Cap Market Cap/hl Capacity Market Cap Market Cap/hl
Botswana (mhl) (USDm) (USD) Zambia (mhl) (USDm) (USD)
Sechaba 2.5 232.1 92.8 Natbrew 1.8 92.0 51.1
Zambrew 2.0 202.7 101.3
Capacity Market Cap Market Cap/hl
Namibia (mhl) (USDm) (USD)
Nambrew 3.0 245.0 81.7 Capacity Market Cap Market Cap/hl
Zimbabwe (mhl) (USDm) (USD)
Capacity Market Cap Market Cap/hl Delta 8.5 941.5 110.8
Mauritius (mhl) (USDm) (USD)
Phoenix Beverages 1.3 120.7 92.9
According to the ADB, Africa's middle class is approximately 30% of the total population. This amounts to 313.0m people on a total
population size of 1.0bn people. (Middle Class- Those that spend USD 2 -USD 20/day).
On the other hand, McKinsey believes that consumer spending across the continent increased at a compound annual rate of 16% (from 2005
to 2008), which is more than twice the GDP growth rate. In addition, many consumers in SSA have moved from destitute levels of income
(less than USD 1,000 a year) to the basic-needs (USD 1,000 to USD 5,000) or middle-income (up to USD 25,000) levels. In Nigeria, for
example, the collective buying power of households earning USD 1,000 to USD 5,000 a year doubled from 2000 to 2007, reaching USD
20.0bn. Despite the recent slowdown in economic expansion, GDP per capita should continue on its positive trajectory of a 4.5% compound
annual growth rate (CAGR) until 2015. That would mean a more than 35% increase in spending power. Combined with strong population
growth (2.0%) and continued urbanisation (3.0%), this increase is estimated to add 221.0m new consumers by 2015. The number of
attractive or highly attractive national markets—with more than 10.0m consumers and gross national income exceeding USD 10.0bn a year—
is expected to increase to 26 in 2014, from 19 in 2008.
5. 4
The Brewing Process
Beer is an alcoholic beverage made from the brewing and
fermentation of starch. Brewing is the production of beer
through steeping a starch source (commonly cereal grains) in
water and then fermenting with yeast. The basic ingredients
of beer are water; a starch source, such as malted barley
which is able to be fermented (converted into alcohol); a
brewer's yeast to produce the fermentation; and flavouring
such as hops. A secondary starch source (an adjunct) may be
used, such as maize (corn), rice or sugar. Less widely used
starch sources include millet, sorghum and cassava root in
Africa, potato in Brazil, and agave in Mexico, amongst others.
The Brewing Process in Detail
1. Malting- This is the process in which the barley grain is
made ready for brewing. Malting is broken down into three
steps, which help to release the starches in the barley. First,
during steeping, the grain is added to a vat with water and
allowed to soak for approximately 40 hours. During
germination, the grain is spread out on the floor of the
germination room for about five days. The final part of
malting is kilning. Here, the green malt goes through a very
high temperature drying in a kiln. The temperature change is
gradual so as not to disturb or damage the enzymes in the
grain. When kilning is complete, there is a finished malt
product.
2. Milling- This is when the grains that are going to be used in
a batch of beer are cracked. Milling the grains makes it easier
for them to absorb the water that they are mixed with. Milling
can also influence the general characteristics of a beer.
3. Mashing - This is the process of combining a mix of milled
grain (typically malted barley with supplementary grains such
as corn, sorghum, rye or wheat), known as the "grain bill", and
water, known as "liquor", and heating this mixture in a vessel
called a "mash tun".
4. Lautering- This is the separation of the wort (the liquid
containing the sugar extracted during mashing) from the
grains. This is done either in a mash tun outfitted with a false
bottom, a lauter tun, or a mash filter.
5. Boiling- Boiling the malt extracts, called wort, ensures its
sterility, and thus prevents a lot of infections. During the
boiling, hops are added, which contribute bitterness, flavour,
and aroma compounds to the beer, and, along with the heat of
the boil, causes proteins in the wort to coagulate and the pH
of the wort to fall.
6. Fermentation in brewing is the conversion of
carbohydrates to alcohols and carbon dioxide or organic acids
using yeasts, bacteria, or a combination thereof, under
anaerobic conditions.
7. Conditioning- When the sugars in the fermenting beer have
been almost completely digested, the fermentation slows
down and the yeast starts to settle to the bottom of the tank.
At this stage, the beer is cooled to around freezing, which
encourages settling of the yeast, and causes proteins to
coagulate and settle out with the yeast.
8. Filtering- This process stabilises the flavour and
gives beer its polished shine and brilliance. Not all beer
is filtered. When tax determination is required by local
laws, it is typically done at this stage in a calibrated
tank.
9. Packaging- is putting the beer into the containers in
which it will leave the brewery. Typically this means
putting the beer into bottles, aluminium cans and kegs,
but it may include putting the beer into bulk tanks for
high-volume customers.
Sub Saharan Africa Breweries-Fast Facts
Fig 2: Brewing Process
Source: www.beer-brewingadvice.com
6. 5
Global Executive Summary
Introduction
The case for African breweries is plain as it is supported by
demographics and high GDP growth rates. Africa as a continent is
experiencing a ballooning population with growth rates of about
2.5%-3.0%. In addition, bottom-heavy demographic charts also
ensure that there is scope for a sustained demand pool in most
developing nations.
According to the latest World Economic Outlook (WEO) report by
the IMF, growth in SSA is being led by low-income countries (LICs)
which are forecast to grow by 6.0% in 2011. Ghana for example is
now the third-largest LIC in the region and is forecast to grow at a
double digit growth rate of 13.75% in 2011. With rising crude oil
prices, oil producing countries such as Nigeria have bullish macro-
economic prospects. Though oil prices have come down recently,
foreign currency reserves in Nigeria have climbed 8.0% to about
USD 35.0bn. This has translated to positive economic growth.
According to provisional data from the National Bureau of
Statistics (NBS) in Nigeria, the projected figure for real GDP
growth in Q1 2011 is 7.43%. It is also worth noting that the
recovery of commodity prices has also meant better fortunes for
commodity- driven countries such as Zambia, Botswana, Namibia,
Zimbabwe and Rwanda.
Global Trends
Beer is one of the world’s biggest consumer goods categories. The
global beer market is estimated to have grown by 1.6% in 2008 to
reach a value of USD 453.9bn. By 2013, the global beer market is
forecast to have a value of USD 487.2bn, (increase of 7.3%) with
Europe accounting for 49.2% of the total value. According to
Canadean, global beer consumption will top 2.0bn hl by 2013.
Canadean also notes that although beer consumption was affected
by the global economic crisis, global level growth is still relatively
robust.
In Asia, beer consumption is predicted to grow at a CAGR of 5.0%
between 2009 and 2015 while the African beer market is also
predicted to grow by 5.0%, Latin America 3.0%, Middle East 5.5%,
East Europe 1.5%, North America 0.5% and Western Europe 0.01%.
The four largest brewing groups (AB InBev, SABMiller, Heineken
and Carlsberg) now account for a combined share of 42% of all
beer sold worldwide. With average global per capita consumption
forecast at just 30 litres pp in 2015, there is still plenty of
potential for further growth.
The African Beer Industry
There are a number of brewing firms located across Africa with
operations ranging from small to large scale producers which have
production capacities above 1.0m hl per year. Generally,
multinational companies such as SABMiller, Heineken, Castel
Group and Diageo command the lion’s share of the market given
the capital-intensive nature of brewery operations. Trends in beer
consumption in developing countries are often taken as a
revealing proxy for economic activity. Economic growth, rising
incomes, and a growing share of disposable to total income all
tend to drive the consumption of beer in developing countries.
While growth in beer consumption has been a modest 2.0% per
annum in the past years in most developed markets, it has
actually been several times that rate in fast-growing developing
countries. Beer consumption in Africa has been experiencing
impressive growth on the back of foreign investments in new
production and changing consumption patterns.
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Fig 3: World Beer Production (bn hl)
Source:IAS/CMBTC
0 100 200 300 400
AB InBev
SAB Miller
Heineken
Carlsberg
Tsingtao…
Goup…
Molsoon…
Vanjing
Kirin
Asahi
Fig 4: World's Top Brewers (Prod. Volumes mhl)
Source:IAS/CMBTC
North
Africa, 5.0
South
Africa, 28.0
Southern
Africa, 13.0
French-West
Africa, 9.0
English-West
Africa, 15.0
Central
Africa, 6.0
East
Africa, 14.0
Fig 6: Africa Beer Market (Million hl)
Source: IAS/SABMiller
- 5,000 10,000 15,000 20,000 25,000
Carlsberg
Stella Artois
Amstel
kirin
Foster's
Asahi
Corona
Heineken
Budweiser
Fig 5:World's Top Brands (Value USDm)
Source:IAS/CMBTC
7. 6
The Bull Case for African Breweries
Bottom-heavy demographic charts guarantee sustained demand.
A comparison between population pyramids of the developed
countries with that of developing nations clearly shows that there
is a rapid increase in the number of young people in developing
countries (<15 years) as a result of high birth rates. This implies
that virtually all future world population growth will take place in
developing countries. With population growth rates of 2.5% - 3.0%,
the ballooning populations offer sturdier growth potential for
African brewers. It also worth mentioning that about 52 cities in
Africa have a population size of more than 1.0m people. In
addition, consumer spending in Africa is forecast to rise to
approximately USD 1.4trn by 2020, with working-age Africans
expected to reach 1.1 bn by 2040
Increased Multinational Company presence
World Brewers jostling for market share. Clearly, beer
production is a capital intensive process requiring a significant
capital outlay. We believe this factor limits the threats of new
entrants in the industry and at the same time opens up an
opportunity for the larger players, with operational expertise and
strong balance sheets. The African beer industry continues to
experience increased multinational presence on the back of the
potential of the market and the low beer per capita consumption
levels.
SABMiller Plc (World's No 2 brewer) commands the largest slice of
Africa’s beer market share. The brewer has spent about USD 1.5bn
over the last three to four years and is eyeing growth in new
markets such as Nigeria, Angola, Southern Sudan, Ethiopia,
Uganda, Zambia and Mozambique. The group recently
commissioned breweries in Angola (North Luanda: 2.5m hl),
Mozambique (Nampula: 0.5m hl), Tanzania (Mbeya: 0.5m hl) and
has invested in Nigeria (Onitsha: 0.5m hl). Heineken NV, on the
other hand, has acquired controlling interests in five breweries in
Nigeria through the purchase of two holding companies from Sona
Group Nigeria (3.7m hl capacity). Diageo’s Guinness Nigeria Plc is
also planning to spend NGN 52.0bn (USD 335.8m) on expanding
brewing capacity at its two existing plants in Ikeja and Benin.
These planned investments are a clear indication of bullish
expectations for African brewers.
Consumers trading-up on the back of improved disposable
incomes. Over the past five years, the global beer industry has
seen a trend towards consumers trading up to more expensive
beers. As a result, premium beer has gained more than 40 bps and
now constitutes 17.9% of total beer sales. For mainstream beer
consumers, particularly in emerging markets (including Africa); the
most common trade-up proposition is to attractive, local, premium
brands. Down-trading is limited as there are notable instances of
consumers continuing to trade up, both into beer and, within the
category, into premium products. This, in our view, has resulted in
a steady and sustained decline in the demand for traditional beers
thus generating sound demand for the more modern and easily
accessible beers.
Income and Consumption Levels
A cross-country GDP/capita analysis reveals a convincing story.
An important highlight is the defensive nature of the brewing
industry’s products with regards to its ability to grow sales
volumes despite over riding economic considerations. Beer demand
is resilient and largely inelastic given the habitual nature of
alcohol. It can therefore be argued that consumption levels are
not entirely linked to economic fortunes but also individual
lifestyles. However, with average GDP per capita levels of about
USD 3,500 versus USD 32,000 for developed countries, Africa
exhibits a strong investment case.
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
0
20
40
60
80
100
120
140
160
180
Nigeria
Ethiopia
Egypt
Tanzania
Kenya
Algeria
Ghana
Mozambique
CotedIvoire
Madagascar
SouthAfrica
Angola
Malawi
Zambia
Zimbabwe
Rwanda
Namibia
Lesotho
Botswana
Mauritius
Reunion
Fig 7: Africa Demographics
Population (Millions)-LHS Rate of Natural Increase (%)-RHSSource:IAS/PRB
-0.40%
-0.20%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
-
200
400
600
800
1,000
1,200
1,400
1,600
China
USA
Brazil
Russia
Germany
France
UK
Italy
Spain
Canada
Venezuela
Australia
Netherland
Portugal
Sweden
Austria
Switzerland
UAE
Norway
Ireland
NewZealand
Fig 8: Developed World Demographics
Population (Millions)-LHS Rate of Natural Increase (%)-RHSSource:IAS/PRB
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Algeria
Mauritius
Botswana
SouthAfrica
Egypt
Angola
Namibia
CotedIvoire
Nigeria
Zambia
Madagascar
Kenya
Ethiopia
Malawi
Mozambique
Ghana
Tanzania
Rwanda
Zimbabwe
Lesotho
Fig 9: Africa-GDP per Capita Vs GDP Growth Rates
GDP per Capita(USD)-LHS GDP Growth Rates-RHSSource:IAS/PRB
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Norway
USA
Switzerland
Netherland
Sweden
Austria
Ireland
Canada
UK
Germany
France
Australia
Spain
Italy
NewZealand
Portugal
Russia
Venezuela
Brazil
China
Fig 10: Developed Countries- GDP per Capita Vs GDP Growth Rates
GDP per Capita(USD)-LHS GDP Growth Rates-RHSSource:IAS/PRB
8. 7
Per Capita Consumption levels still far from saturation levels.
Although Africa is the sixth largest beer producer by volume,
producing 4.8% of global beer after China (23%), USA (13%), Russia
(6.0%), Brazil (6.0%) and Germany (5.0%), it has one of the lowest
global per-capita consumption rates due to the very low purchasing
power of consumers. The African region is credited with an average
per capita beer consumption of 6.0 litres pp, the lowest of all
regions, with the exception of the Middle East (which is
significantly lower owing to its large Islamic population). We opine
that in the near term, there exists significant headroom for growth
in sales volumes and profit margins for African brewers. Only
Namibia, Botswana and South Africa have made headway in
increasing per capita consumption to near saturation levels.
The Bear Case for African Breweries
Commodity prices are running a marathon. Generally, rising
inflation expectations and actual rate hikes in 2011 are expected
to steepen upward-sloping commodity-price curves. Other factors
that have sustained higher commodity prices include the increased
demand from China and some weather-related factors. In 2010,
involuntary supply losses—mostly the result of severe weather—
drove risk across a number of commodity markets, helping spur
significant price surges in wheat, sugar, rice, coffee, barley,
cotton and corn. Generally, high commodity prices coupled with
high domestic inflation present a huge risk for beer firms in Africa
as they generally lead to a reduction in profit margins. While most
firms such as East African Breweries Limited (EABL)and Guinness
Ghana Breweries Limited (GGBL) have moved towards cheaper and
more drought resistant crops such as sorghum, they still remain
largely exposed to commodity price shocks given their
requirements of barley and hops for flavouring.
Regulation and Controls
Not exempt from the “long arms” of Governments. Generally,
alcoholic beverages have the highest taxes and excise duty charges
in most African countries. Other regulatory requirements are in the
areas of distribution, promotions and advertising, labour, pensions
and environmental impacts. These laws and regulations have a
profound impact on brewing firms. A good example is Sechaba
Breweries Holdings Limited (Botswana), a company that has been
negatively impacted by levies and government policies. In Kenya,
East African Breweries Limited is also likely to be affected by the
full effect of the Alcoholic Drinks Control Act, 2010. This is likely
to retard sales growth in the future.
Religion and Cultural Norms
Religious and cultural issues at play. The diverse ethnic and
religious groups in Africa have an impact on beer consumption. In
predominantly Muslim Sharia compliant countries like Algeria and
Libya, alcohol consumption is generally low (and in some Nigerian
states as well). Generally, individual faith and lifestyle restrictions
advocated by some religions against alcohol consumption may limit
growth prospects. With increasing proportions of the populace in
Africa, seeking comfort in various religions, consumption levels are
likely to be negatively impacted. Another factor is the increasing
desire for healthy foods and drinks by some individuals. This may
also limit the consumption of alcoholic products as several health
campaigns advocate for reduced alcohol intake.
Technology and Infrastructural Gaps
It’s an era of “power cuts”. Inadequate supply of energy and poor
infrastructure impacts greatly on the cost structure and
efficiencies in terms of distribution. Inconsistent supply of
electricity also impacts negatively on the quality of the product
and dependability as at times brewing has to be put on hold or
rescheduled to keep processes in line with power outages. Power
deficits in SSA have become major stumbling blocks for most
industries.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Kenya
Nigeria
Coted'Ivoire
Tanzania
Rwanda
Uganda
DRC
Zambia
Morocco
Fig 11: African Countries- Alcohol Per Capita Consumption
Source:IAS
Source: World Economic Outlook 2011
Fig 12: Commodity Price Graphs
Raw
Materials, 15%
Labour, 12%
Packaging, 45%
Advertising
, 20%
Administration,
8%
Fig 14: Cost Structure of A Typical Brewery
Source:IAS
Fig 13: World Bank index: Ease of Doing Business
Countries are ranked from 1 to 183. The closer the index
is to 1, the more conducive the regulatory environment.
10. 9
-
2.00
4.00
6.00
8.00
10.00
12.00
Bralirwa
Delta
EABL
Guiness
Guiness
Nambrew
Natbrew
NB
Phoenix
Sechaba
TBL
Zambrew
Fig 15: African Breweries Capacity Vs Production
Production (m hl) Capacity(m hl)Source:IAS
African Breweries- Relative Graphs
0
20
40
60
80
100
120
140
160
Bralirwa
Delta
EABL
Guiness
Guiness
Nambrew
Natbrew
NB
Phoenix
Sechaba
TBL
Zambrew
Fig 16:Per Capita Capacity Vs Consumption
Per capita cons.(litres) Per capita capacity (litres)
Source:IAS
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
-
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
500.0
Bralirwa
Delta
EABL
Guiness
Guiness
Nambrew
Natbrew
NB
Phoenix
Sechaba
TBL
Zambrew
Fig 17: Valuation per hl Vs Sales Growth
EV/hl (USD)-LHS Sales growth-RHSSource:IAS
0%
5%
10%
15%
20%
25%
30%
35%
40%
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Bralirwa
Delta
EABL
Guiness
Guiness
Nambrew
Natbrew
NB
Phoenix
Sechaba
TBL
Zambrew
Fig 18: EV/EBITDA Vs EBITDA Margins
EV/EBITDA-LHS EBITDA Margin-RHS
Source:IAS
Methodology
Our research covers 12 Sub Saharan Africa brewers (Bralirwa, Delta, East African Breweries, Guinness Ghana, Guinness
Nigeria, Nambrew, Natbrew, Nigerian Breweries, Phoenix, Sechaba, Tanzania Breweries and Zambrew). We have also
included African Distillers (Afdis), a spirit manufacturer in Zimbabwe in our analysis. In addition, a company snapshot for
SABMiller was included. Given that the global brewer does not fall under our coverage universe, we have limited our
analysis strictly to its prospects and plans in Africa.
We largely valued the companies through a comparative valuation technique based on the EV/hl (prod.), given the similar
nature of company operations, even across various geographies. However, we have complemented this with Discounted
Cash Flow (DCF) valuations.
Recommendation and Conclusion
Our report clearly indicates that African brewers exhibit a strong investment case. According to the IMF, SSA has
recovered from the global financial crisis and the region is now second only to Asia in its rate of expansion. Domestic
demand growth remains robust while commodity prices are on a positive trajectory. Overall, real activity in SSA is
projected to expand by 5.5% in 2011 and 6.0% in 2012. These conditions, in our view tend to fuel a rise in personal
disposable incomes across various geographies and therefore are supportive of the consumer sector that includes
breweries and beverage companies.
11. 10
West Africa Industry Overview
West Africa remains a hotspot for buying into the continent’s
consumer driven growth story. Generally, West Africa is
experiencing rapid economic growth owing to the strengthening
of oil prices in 2011. Most oil exporting economies have the
advantage of using the buoyancy of global oil markets as an
opportunity to return to fiscal surpluses and rebuild reserves.
Ghana, for example is expected to be the fastest growing
economy in SSA, with the IMF forecasting a growth rate of 13.75%
in 2011. This is largely due to the commencement of oil
production at the Jubilee Oil fields. With a large population in
excess of 20.0m and with one of the regions most accomplished
political systems, Ghana's business environment is considered to
be one of the region’s most encouraging. We anticipate
significant investment into the consumer sector over the next
few years.
From a top down perspective, Nigeria is one of the most
attractive countries for investors seeking exposure in the
consumer sector on the back of the following points;
Nigeria is an 18.0m hl beer market and is the second
largest market in Africa (after South Africa- 28.0m hl);
The above average GDP growth rate of c7.0% is expected
to stimulate demand. GDP per capita of USD 1,370 in
Nigeria (significantly lower relative to developed world
standards) means there is headroom for growth;
There appears to be strong grassroots demand (low per
capita consumption of 10.5 litres pp relative to
developed markets);
The recent increase in the minimum wage is likely to
stimulate private consumption, which is supportive of
the beverages and brewing sectors;
Nigeria’s population of 158.3m ensures a massive pool of
consumers. This argument is supported by the strong
presence of multinational companies in Nigeria. Brewers
operating in Nigeria such as Guinness Nigeria and
Heineken (Nigerian Breweries) have also announced
investment plans to increase capacity in Nigeria.
SABMiller is also investing USD 100.0m in the next three
years in Nigeria; and
The removal of the ‘bad-debt’ overhang within the
banking sector, by the AMCON, and the improvement in
financial performance of the sector is a key ingredient
for growth. Despite, a contractionary monetary policy
being implemented by the Central Bank of Nigeria (CBN),
we contend that “cleaner” balance sheets, will in the
long term help unlock credit in the broader economy.
Comment on valuation and pricing
A comparative analysis of West African brewers, particularly in
Nigeria, indicates that most of the counters are fully valued. This
is because of the fact that the main brewers - Nigerian Breweries
and Guinness Nigeria - have all announced their investment plans
to increase capacity. As a result, share prices have sky rocketed
in line with the volume growth expectations amongst investors.
Hence the companies are trading at PER’s of about 20x.
However, one may argue that the demanding ratings are justified
given the demographics and high GDP growth forecasts. On the
other hand, Guinness Ghana Breweries Limited (GGBL) appears
to be the “diamond in the rough” in the sense that it had been
registering losses in prior years but is operating in a potentially
high growth beer market.
Table 4 GGBL GNL NB
EBITDA Margin 18.7% 23.5% 29.3%
RoaE -7.6% 41.8% 63.0%
RoaA -2.0% 18.0% 27.3%
PER (Hist) n/a 27.0 21.8
PER(T+1) n/a 22.3 18.7
PBV (Hist) 3.5 10.9 13.3
PBV(T+1) 3.7 9.4 12.7
EV/EBITDA (Hist) 7.2 14.0 11.9
EV/EBITDA (T+1) 5.9 11.9 10.3
EV/hl (USD) 201.7 464.8 450.8
Fig 19: Global Oil Prices
Fig 21: Exchange Rate GHS Vs USD
Fig 20: Exchange Rate NGN Vs USD
144
146
148
150
152
154
156
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23-Jun-10
23-Jul-10
23-Aug-10
23-Sep-10
23-Oct-10
23-Nov-10
23-Dec-10
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23-Feb-11
23-Mar-11
23-Apr-11
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12. 11
EQUITY RESEARCH
GHANA
MAY 2011
BREWERIES & BEVERAGES
GUINNESS GHANA BREWERIES LIMITED
Bearing the brunt of the pain…
The commencement of oil production at the Jubilee Oil
fields will place Ghana’s economy on a solid growth
trajectory as this will have positive spill-over effects to
non-oil sectors of the economy. It is a no brainer that
consumer sector players such as the breweries and
beverage companies will benefit directly from any increase
in GDP per capita and disposable incomes.
Strategically positioned for economic upturn.
Guinness Ghana Breweries Limited (GGBL) has
managed to maintain its leadership position in the
Ghana alcoholic beverages industry over the years
(market share of c73% by sales volume). At a per
capita GDP of USD 760 and consumption per capita of
9.7 litres pp, there is significant headroom to move
in line with other West African averages (GDP per
capita of cUSD 1,000), largely driven by the discovery
of oil.
Finance costs continue to weigh on positive
financial performance. Despite an impressive 4-year
CAGR turnover growth rate of 29%, this growth has
not been reflected in the bottom-line owing to high
cost of sales and finance costs (Net debt/EBITDA
ratio of 4.0x).
There is light at the end of the tunnel. Our
argument is broadly based on the assumption that a
high GDP growth of c9.0% will translate to an
improvement in local consumer demand. However,
while there is some scope for a positive earnings
surprise in FY 2012, downside risks in the form of
gearing and inefficiencies on the cost side emanating
from utilities, remain elevated. Based on a
combination of our EV/hl comparative technique and
a DCF method, we derive a target price of GHS 2.05,
implying 61% potential upside. Value-scavengers may
consider punting. SPEC BUY.
BLOOMBERG:GGBL:GH SPEC BUY
Current Price (GHS) 1.27
Current Price (USD) 0.84
Target Price (GHS) 2.05
Target Price (USD) 1.35
Upside/Downside 61.0%
Liquidity
Market Cap (GHSm) 209
Market Cap (USDm) 138
Shares (m) 164.7
Free Float 58%
Ave. Daily vol ('000) 30.4
Share Price Performance
6 Months (GHS) -18.6%
Relative change (%)* -17.9%
12 Months (GHS) -18.1%
Relative change (%)* -24.5%
*Relative to MSCI Frontier Market Index
Financials(GHS 000)-FY 30 June 2010 2011F 2012F
Turnover 206,499 251,769 279,464
EBITDA 38,611 47,105 52,758
Profit after tax (4,640) (2,285) 10,110
EPS (GHS) (0.0) (0.0) 0.1
DPS (GHS) - - 0.03
NAV/share (GHS) 0.4 0.3 0.4
Ratios 2010 2011F 2012F
Gearing 148.6% 153.5% 105.4%
RoaA -2.0% -0.9% 4.5%
RoaE -7.6% -3.9% 17.0%
EV/EBITDA 7.2 5.9 4.8
EV/hl (USD) 201.7 193.4 166.3
PBV (x) 3.5 3.7 3.4
PER (x) n/a n/a 20.7
Earnings Yield 0.0% 0.0% 4.8%
Dividend Yield 0.0% 0.0% 2.3%
EBITDA margin 18.7% 18.7% 18.9%
STRENGTHS WEAKNESSES
Managerial and technical support Highly geared
from parent company Exposure to foreign exchange
Market leader- strategically positioned risks and commodity price
for upturn in economy flactuations
Wide distribution network
OPPORTUNITIES THREATS
Growth in disposable incomes Competition from imports
Spill-over effects of oil Structural constraints- energy
revenues from the Jubilee fields and power disruptions
Capacity expansion Currency instability
Bottom heavy demographics
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
09-Jul-09
09-Sep-09
09-Nov-09
09-Jan-10
09-Mar-10
09-May-10
09-Jul-10
09-Sep-10
09-Nov-10
09-Jan-11
09-Mar-11
Guinness Ghana: Price Vs Volume
Volume Traded-RHS Price (GHS)-LHS
13. 12
Nature of Business
Guinness Ghana Breweries Limited (GGBL) is involved in the
production and sale of beer, stout and malt drinks and ancillary
products in Ghana. It also produces Malta Guinness, Amstel
Malta and other non-alcoholic beverages. Diageo plc (UK) owns
51% of GGBL, and the remainder is held by a combination of
offshore funds and individual shareholders. GGBL operates three
breweries: Kaasi and Ahensan in Kumasi and the Achimota
Brewery in Accra.
Q3 2011 Financial Results Overview
GGBL registered an 11.2% growth in net revenues to GHS 179.3m
(USD 119.0m) on the back of increased sales volumes. However,
the cost of sales increased at a faster pace of 16.5% y-o-y,
leading to a decline in the GP margin from 32% in Q3 2010 to
28%. This can be attributed to higher raw material costs (barley
prices) and frequent interruptions in the supply of utilities such
as power and water. In addition, Ghana adopted a new ad
valorem tax regime in 2010. The EBITDA margin declined from
20% in Q3 2010 to 18.6%. Finance costs remained high but
declined 20.5% to GHS 16.2m. The decline in finance costs was
largely a result of a lower average cost on borrowings. In
addition, interest bearing debt declined from GHS 83.5m to GHS
72.9m. Overall, the company posted a profit of GHS 0.9m, which
was an improvement on the prior period’s profit of GHS 0.2m.
The balance sheet showed a deterioration in the current ratio to
0.36x as a result of a 45.2% increase in current liabilities. There
was an improvement, however in cash flow generation given
that GHS 37.8m (USD 25.1m) was generated from operations
versus a negative GHS 23.5m (USD 15.6m) during the previous
period. The net cash flow position improved to GHS 15.2m from
a negative GHS 27.7m in Q3 2010. However, taking into account
the bank overdraft of a hefty GHS 26.0m (USD 17.3m), the
closing balance was negative.
Operational Review
Cost Management. As a strategy to achieve cost efficiencies,
GGBL is increasing the proportion of local raw materials and
sourcing from “in-house”/local agricultural projects in Ghana.
Our enquiries have revealed that efforts are being made to
control margins by replacing barley with locally procured
sorghum. This is expected to ensure a steadier supply of raw
materials as sorghum is a more drought-tolerant crop than
barley. The company is devising strategies to resolve its utility
(water and power) constraints so as to limit production cuts.
Outlook
A recovery in volumes to ensue. Current production levels are
in the region of 0.9m hl. However, we estimate a growth of 5.0%
to 1.0m hl in FY 2011, which will translate to revenue growth of
22.0% (y.o.y)
Valuation and Recommendation
Comparing GGBL to its West African peers such as Nigerian
Breweries and Guinness Nigeria reveals that the counter is a
clear laggard in terms of return measures given that it has been
registering losses. In addition, EBITDA margins are thinner owing
to finance charges. In future, the company expects to generate
positive cash flows that will be directed towards the repayment
of debt. While we expect an improvement in cash flow
generation on the back of a recovery in volumes and debt
repayment initiatives, we do not expect GGBL to be “out of the
woods” by FY 2011. Nonetheless, an EV/hl of USD 202/hl versus
USD 465/hl for Guinness Nigeria indicates a significant discount
(above 50%). SPEC BUY
800
850
900
950
1,000
1,050
1,100
-
50,000
100,000
150,000
200,000
250,000
300,000
2006 2007 2008 2009 2010 2011F
Fig 22: Turnover & Beer Volumes
Turnover (GHS 000)-LHS Sales Volumes (000 hl)-RHSSource: IAS
Table 5: Shareholder Structure
Diageo Highlands BV 51%
Heineken Ghanaian Holdings 20%
Others 29%
Source: IAS
Income Statement (GHS 000) Q3 2010 Q3 2011 % Δ
Net Turnover 161,286 179,290 11.2%
COS (110,284) (128,493) 16.5%
Gross profit 51,002 50,797 -0.4%
Operating Profit 21,012 17,341 -17.5%
Net finance charge (20,427) (16,235) -20.5%
Profit after tax 209 909 335%
EPS (GH) 0.001 0.006 500%
Balance Sheet (GHS 000) Q3 2010 Q3 2011 % Δ
Total Assets 192,368 201,046 4.5%
NAV 49,548 46,072 -7.0%
Current Assets 47,955 42,568 -11.2%
Current Liabilities 82,424 119,663 45.2%
Current ratio 0.58 0.36
Cash flow (GHS 000) H1 2010 H1 2011
Operating activities (23,450) 37,799
Investing activities (27,285) (22,571)
Financing activities 23,078 (56)
Net cash flow (27,657) 15,172
Table 6 GGBL GNL NB
EBITDA Margin 18.7% 23.5% 29.3%
RoaE -7.6% 41.8% 63.0%
RoaA -2.0% 18.0% 27.3%
PER (Hist) n/a 27.0 21.8
PER(T+1) n/a 22.3 18.7
PBV (Hist) 3.5 10.9 13.3
PBV(T+1) 3.7 9.4 12.7
EV/EBITDA (Hist) 7.2 14.0 11.9
EV/EBITDA (T+1) 5.9 11.9 10.3
EV/hl (USD) 201.7 464.8 450.8
15. 14
GUINNESS NIGERIA
Thank goodness for Guinness…
The Nigerian brewing industry has generally been
described as a ‘pseudo duopoly’ on account of the
significant size and influence of the two leaders in the
industry (Nigerian Breweries and Guinness Nigeria).
Guinness Nigeria commands a market share of c30% by
value. It is also worth noting that Nigeria has overtaken
Ireland as the second largest market in the world for
Guinness Stout after Great Britain, accounting for about
40% of Guinness stout sales world wide. The improving
economic climate in Nigeria should continue to accelerate
sales growth as consumption per capita levels improve.
Bullish investment plans announced. Guinness
Nigeria Plc is planning to spend NGN 52.0bn (USD
335.8m) on expanding brewing capacity at its two
existing plants in Ikeja and Benin. The expansion
project is expected to be complete before
December 2011.
Investments to pay off. Guinness Nigeria has
maintained steady growth in revenues over the
years given a four-year CAGR of 19%. We expect the
company’s investments in capacity expansion and
marketing to pay off in FY 2012.
Less compelling relative to SSA peers. Using a
universe of SSA brewers, ratings are demanding at
an EV/hl of 465/hl. While we see room for upside
vis’a vis the low per capita consumption in Nigeria
of 10.5 litres pp and anticipated production volumes
growth, it appears that market has priced this in.
We have assigned equal weighting on our two
valuation techniques and derived a fair value of NGN
236 per share. This indicates 6.2% downside risk.
Investors should consider taking profits. SELL
BLOOMBERG: GUINNESS:NL SELL
Current Price (NGN) 251.60
Current Price (USD) 1.63
Target Price (NGN) 236.00
Target Price (USD) 1.53
Upside/Downside -6.2%
Liquidity
Market Cap (NGN) 371,110.0
Market Cap (USDm) 2,405.9
Shares (m) 1,475
Free Float (%) 46.0
Ave. Daily vol ('000) 384.8
Share Price Performance
6 Months (NGN) 39.8%
Relative change (%)* 40.4%
12 Months (NGN) 56.3%
Relative change (%)* 49.9%
*Relative to MSCI Frontier Market Index
Financials (NGNm) FY-31 Dec 2010 2011F 2012F
Turnover 109,367 125,772 140,865
EBITDA 25,647 30,909 35,533
Attributable earnings 13,736 16,636 19,371
EPS (NGN) 9.31 11.28 13.13
DPS (NGN) 7.50 9.00 10.00
NAV/share (NGN) 23.19 26.82 29.96
Ratios 2010 2011F 2012F
Gearing 3.8% 0.0% 0.0%
RoaA 18.0% 20.2% 21.4%
RoaE 41.8% 45.1% 46.3%
EV/EBITDA 14.0 11.9 10.4
EV/hl (USD) 464.8 433.1 420.0
PBV (x) 10.9 9.4 8.4
PER (x) 27.0 22.3 19.2
Earning Yield 3.7% 4.5% 5.2%
Dividend Yield 3.0% 3.6% 4.0%
EBITDA margin 23% 25% 25%
EQUITY RESEARCH
NIGERIA
MAY 2011
BREWERIES & BEVERAGES
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
-
50.0
100.0
150.0
200.0
250.0
08-Jul-09
08-Sep-09
08-Nov-09
08-Jan-10
08-Mar-10
08-May-10
08-Jul-10
08-Sep-10
08-Nov-10
08-Jan-11
08-Mar-11
Guinness Nigeria: Price Vs Volume
Volume Traded-RHS Price (NGN)-LHS
STRENGTHS WEAKNESSES
Strong customer loyalty across products Power constraints
Sound mangerial and technical expertise Short term Naira weakness
supplied by parent company Inflation may affect incomes
Continued infrastructural development
OPPORTUNITIES THREATS
Development of gas fields and further Niger Delta violence
infrastructural development Commodity price volatility
Rising per capita income Infrastructural constraints
Bottom heavy demographics Increased competition from new
and existing players
SAB Miller's recent entry into the
Nigerian market
16. 15
Nature of Business
Guinness Nigeria is a brewer of premium alcoholic and non alcoholic
drinks and is the second largest brewer in Nigeria. It was
incorporated in 1962 with the building of a brewery in Ikeja, the
heart of Lagos. Other breweries that have been opened over time
include Benin City brewery in 1974 and Ogba brewery in 1982.
Guinness Nigeria is reputed for brands such as Foreign Extra Stout,
Guinness Extra Smooth, Malta Guinness, Harp Lager Beer, Gordon’s
Spark, Smirnoff Ice and Satzenbrau. Guinness Nigeria Plc is 58%
owned by the Diageo Group (UK), a multinational beer, wine and
spirits company, trading in over 180 markets around the world.
Diageo’s top markets for the Guinness brand are Great Britain,
Nigeria and Ireland.
Q3 2011 Financial Results Overview
While turnover grew 11.4% to NGN 89.8bn (USD 572.0m), PBT
increased by 27.7% to NGN 17.6bn, as margins increased, with the
PBT margin increasing to 19.6%. The improvements in margins can be
attributed to the easing of capacity constraints due to new
outsourcing arrangements. Overall, the brewer posted a profit after
tax of NGN 11.9bn, indicating 32% growth ahead of Q3 2010.
Operational Review
Volume increases in Harp and Malta Guinness. Guinness has
continued to pursue organic growth via its expansion strategy,
strengthening its existing brand portfolio and packaging capabilities.
It is worth noting that the brewer’s Harp lager brand has taken
market share from Star (Nigerian Breweries Plc) as sales volumes for
Harp have more than doubled during the years and have firmly
crossed the 1.0m hl mark. Harp competes directly with Nigerian
Breweries’ brands. According to management, Guinness Nigeria has a
volume market share of 20% and has taken approximately 2% from
Nigerian breweries in the past 12 months. Management also
estimates that its value market share is around 30%.
Poor exposure to the low-cost beer segment. Guinness Nigeria’s
exposure to the lower-end beer segment is generally poor relative to
its competitors. While Harp larger volumes have increased,
Guinness’ focus on premium products has limited further market
share growth given Nigeria’s flourishing beer industry. However,
management is optimistic that strong GDP growth in Nigeria will
gradually lead to a higher proportion of a more affluent middle class
which can afford the company’s premium products.
Outlook
Initiatives are aimed at retaining and growing market share.
Guinness has played host to several initiatives to cushion its market
share from potential erosion and maintain its position relative to its
peers in other countries around the world. Margins are likely to
remain under pressure (EBITDA margins of c25%) due to increased
competition from Nigerian Breweries following a recent strategic
acquisition by its parent body, Heineken. However, Guinness has
responded through its plans to invest NGN 52.0bn (USD 335.8m) on
expanding brewing capacity at existing plants in Ikeja and Benin. As
a result, we estimate sales volumes to grow at a CAGR of 11.0% to
6.0m hl in FY 2012.
Valuation and Recommendation
On a relative basis, Guinness Nigeria’s PER of 27.0x is in line with
Nigerian Breweries (21.8x). However, an EV/hl of USD 465/hl is
demanding relative to our SSA weighted average of USD 345/hl and
USD 450/hl for Nigerian Breweries. Return measures for Guinness
Nigeria are also significantly lower. While we anticipate an
improvement as economies of scale benefits come through from the
expansion, we see limited prospects for capital gains. SELL
0%
5%
10%
15%
20%
25%
30%
35%
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20,000
40,000
60,000
80,000
100,000
120,000
140,000
2007 2008 2009 2010 2011F
Fig 24: Guinness Nigeria Financials
Sales (NGNm)-LHS EBITDA(NGNm)-LHS
Sales growth -RHS
Source:IAS
0
1
2
3
4
5
6
7
9.6
9.8
10
10.2
10.4
10.6
10.8
11
11.2
11.4
2009 2010 2011F 2012F
Fig 23: Beer Consumption Trends
Beer Sales (mhl)-RHS
Beer Consumption (l per capita)-LHSSource:IAS
Table 7: Shareholder Structure
Guinness Overseas Ltd 46.03%
Atlantaf Limited 7.77%
Other shareholders 46.20%
Source: IAS
Table 8 GGBL GNL NB
EBITDA Margin 18.7% 23.5% 29.3%
RoaE -7.6% 41.8% 63.0%
RoaA -2.0% 18.0% 27.3%
PER (Hist) n/a 27.0 21.8
PER(T+1) n/a 22.3 18.7
PBV (Hist) 3.5 10.9 13.3
PBV(T+1) 3.7 9.4 12.7
EV/EBITDA (Hist) 7.2 14.0 11.9
EV/EBITDA (T+1) 5.9 11.9 10.3
EV/hl (USD) 201.7 464.8 450.8
Income Statement (NGNm) Q3 2010 Q3 2011 % Δ
Turnover 80,576 89,801 11.4%
Profit before tax 13,754 17,562 27.7%
Tax (4,704) (5,620) 19.5%
Profit after tax 9,049 11,942 32.0%
PBT margin 17.1% 19.6%
PAT margin 11.2% 13.3%
18. 17
NIGERIAN BREWERIES Plc
Betting on the Right Horse?
Nigeria is an 18.0m hl beer market, the second largest
market in Africa (after South Africa), and has been growing
at an annual rate of 9.0% in the 10 years to 2009. The
market is dominated by Heineken, with around 70%
market share, and Diageo's Guinness business with over
25% and SABMiller, with less than 5.0%. We expect
Nigeria’s per capita GDP to increase owing to the above
average GDP growth forecasts of c8.0%. While Guinness
Nigeria leads the stout segment with its Guinness Stout and
Guinness Extra Smooth brands, Nigerian Breweries has a
strong presence in the clear beer market, with its brands
Star and Gulder being the leading brands in Nigeria.
Possible consolidation with five breweries. We
expect Nigerian Breweries (NB) to be involved in a
corporate action in 2011. Heineken NV, NB’s parent
company announced that it acquired controlling
interests in five breweries in Nigeria. The transaction
was concluded by purchasing two holding companies
from Sona Group Nigeria. The acquisition would bring
additional capacity of 3.7m hl so as to alleviate
capacity constraints in the market and to improve
the geographic spread of its production. Heineken
currently has capacity of about 12.0m hl in Nigeria.
Highly defensive stock. We like Nigerian Breweries
primarily for its dominant position in the sector. In
addition, the company has the ability to convert
volume growth into margin expansion due to
economies of scale. Another key element is that
Nigerian Breweries is highly exposed to a
burgeoning lower-end beer segment in Nigeria.
Within the SSA context, ratings are demanding at an
EV/hl of USD 450/hl. However, this is a “must have”
stock within the Nigerian consumer space. Our
valuation method ascribes a fair value of NGN 89 per
share. HOLD.
BLOOMBERG: NB:NL HOLD
Current Price (NGN) 87.50
Current Price (USD) 0.57
Target Price (NGN) 89.00
Target Price (USD) 0.58
Upside/downside 1.7%
Liquidity
Market Cap (NGN) 661,724
Market Cap (USDm) 4,291
Shares (m) 7,563
Free Float (%)
Ave. Daily vol ('000) 2,140.0
Share Price Performance
6 Months (NGN) 10.8%
Relative change (%)* 11.5%
12 Months (NGN) 20.7%
Relative change (%)* 14.3%
*Relative to MSCI Frontier Market Index
Financials (NGNm)-FY 31 Dec 2010 2011F 2012F
Turnover 185,863 213,742 244,735
EBITDA 54,482 63,299 71,736
Attributable earnings 30,332 35,467 40,430
EPS (NGN) 4.01 4.69 5.35
DPS (NGN) 2.40 4.69 5.35
NAV/share (NGN) 6.57 6.91 7.13
Ratios 2010 2011F 2012F
Gearing 0.0% 0.0% 0.0%
RoaA 27.3% 29.5% 31.1%
RoaE 63.0% 69.6% 76.2%
EV/EBITDA 11.9 10.3 9.0
EV/hl 450.8 425.1 400.9
PBV (x) 13.3 12.7 12.3
PER (x) 21.8 18.7 16.4
Earnings Yield 4.6% 5.4% 6.1%
Dividend Yield 2.7% 5.4% 6.1%
EBITDA margin 29.3% 29.6% 29.3%
EQUITY RESEARCH
NIGERIA
MAY 2011
BREWERIES & BEVERAGES
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
10-Jul-09
10-Sep-09
10-Nov-09
10-Jan-10
10-Mar-10
10-May-10
10-Jul-10
10-Sep-10
10-Nov-10
10-Jan-11
10-Mar-11
Nigerian Breweries: Price Vs Volume
Volume Traded-RHS Price (NGN)-LHS
STRENGTHS WEAKNESSES
Wide distribution network Corruption
100% dividend payout policy (historically) Short term Naira & oil price weakness
Diversified product range through Inflation may affect incomes
Heineken and constant product innovation
Largest market share of c70%
OPPORTUNITIES THREATS
Potential for increased capacity (Sona) Infrastructural constraints (power)
as a result of consolidation Commodity price volatility
Minimum wage increases to drive Competition from cheap imports and
consumption levels local players (Guiness, SAB Miller)
Rising middle class population
.
19. 18
Nature of Operations
Nigerian Breweries Plc (“NB”) was incorporated in Nigeria on 16
November 1946 and commenced operations in 1949 at its Lagos
brewery with the roll out of the first bottle of Star Lager beer. The
company is a subsidiary of Heineken N.V. Nigerian Breweries has
enjoyed over 60 years brewing experience in the Nigerian brewing
industry with a resulting bouquet of tested and trusted brands.
These brands include: Star Lager, Gulder Lager, Maltina, Legend
Extra Stout and Fayrouz.
Q1 2011 Financial Results Overview
NB registered turnover growth of 28.1% to NGN 40.6bn. The growth
was also driven by robust volume growth in the larger and malt drink
segments. PBT and PAT grew 25.8% and 22.7%, respectively. The
increase was the result of an improvement in the supply of products
and cost advantages emanating from increased investment in
capacity. The PBT margin declined marginally to 22.8%, signalling
the effect of rising costs of prime raw materials. However, the price
of barley receded by c3.0% Overall, PAT was NGN 7.9bn (up 22.7% y-
o-y).
Operational Review
Room to grow capacity. We believe there is still room for Nigerian
Breweries to grow its production capacity organically. At current
production levels of about 9.5m hl, the company has spare capacity
to grow output to about 11.0m hl (installed capacity), in line with
increasing per capita consumption, which is currently at 10.5 litres
pp.
Volume growth through external acquisitions. Nigerian Breweries
is planning to purchase two local beer-makers (Sona Systems
Associates Business Management and Life Breweries). The
acquisitions are aimed at adding market share in Africa’s most
populous country while avoiding the cost of constructing new
factories. In addition, it will strengthen its market coverage, market
share and efficiency. Management has indicated that if the
acquisition is not concluded, the group might also consider building
a new brewery. The acquisitions will give NB five additional beer-
making plants across the country and will increase production
capacity by about 2.0m hl to 13.0m hl.
Outlook
The demand/ supply mismatch still evident. Despite the company’s
commendable production levels of c9.5m hl, this is in actual fact
still inadequate to meet the existing demand for the company’s
products. As a result, we expect additional capacity investments,
financed largely from internal cash flows to help improve subsisting
production capacity in order to close the demand/ supply mismatch.
Valuation and Recommendation
Although NB has fatter EBITDA margins of c29% and above average
return measures (RoaE and RoaA), compared with GGBL and GNL, its
EV/hl of USD 448/hl implies that it is one of the most expensive
West African brewers. However, we feel that its dominant position
(market share of 70%) justifies these ratings.
With about 42% of the 158m population below the age of 15 years,
Nigeria has the strongest case in Africa for growth in the beverages
sector. While population growth in the region is estimated at about
2.0%-3.0% per year, we strongly feel that it guarantees a sustainable
demand pool in the future for Nigerian Breweries. Another key
driver of course is the relatively low per capita consumption of
about 10.5 litres pp. HOLD
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2006 2007 2008 2009 2010
Fig 25: Nigerian Breweries Financials
Turnover (NGNm)-LHS Operating Profits(NGNm)-LHS
Net Income Margin (%)-RHSSource: IAS
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2005 2006 2007 2008 2009 2010
Fig 26:NB Production Volumes (mhl)
Source:IAS
Table 9: Top Shareholders' List
Heineken Brouwerjen BV 37.7%
Distell Trading International BV 16.4%
Others 45.9%
Source:IAS
Table 10 GGBL GNL NB
EBITDA Margin 18.7% 23.5% 29.3%
RoaE -7.6% 41.8% 63.0%
RoaA -2.0% 18.0% 27.3%
PER (Hist) n/a 27.0 21.8
PER(T+1) n/a 22.3 18.7
PBV (Hist) 3.5 10.9 13.3
PBV(T+1) 3.7 9.4 12.7
EV/EBITDA (Hist) 7.2 14.0 11.9
EV/EBITDA (T+1) 5.9 11.9 10.3
EV/hl (USD) 201.7 464.8 450.8
Income Statement (NGNm) Q1 2010 Q1 2011 % Δ
Turnover 40,574 52,029 28.2%
Profit before tax 9,426 11,856 25.8%
Tax (2,969) (3,936) 32.6%
Profit after tax 6,456 7,919 22.7%
PBT Margin 23.2% 22.8%
PAT Margin 15.9% 15.2%
21. 20
East Africa Industry Overview
Kenya as a country possesses some of the truest emerging market
credentials of all the countries in Africa, driven by bank lending, an
emerging middle classes and rapid growth in consumption. The
country is considered as the gateway to Eastern Africa, situated in an
enviable position, surrounded by six landlocked post-conflict
countries. The capital, Nairobi is generally used as the hub to supply
a 300.0m strong population catchment area. Due to its developed
infrastructure, Kenya also acts as the base for multinationals in the
region and has huge strategic importance to the West for military
and humanitarian reasons.
Generally, growth of beer production in the EAC region has been
stagnant, albeit with Kenya production well ahead of other
countries. East African Breweries Limited (EABL) is the largest
brewer in the region, producing approximately 5.0m hl of beer per
annum. The other major player in the region is SABMiller, which has
about 80% market share in Tanzania and 52% in Uganda.
Increased economic integration in the EAC region is likely to lead to
strong economic gains, particularly for the smaller nations. Rwanda
for example, has developed into an attractive investment destination
and has registered strong macro-economic growth, with GDP
expanding at an average rate of 8.8% y-o-y since 2004. GDP growth
rates of 11.6% in 2008 and 6.0% in 2009 for Rwanda were in actual
fact the highest in East Africa.
Further trade promotion in East Africa could also lead to the creation
of a monetary union. There is also scope for further cooperation
between countries. For example, countries with comparative
manufacturing advantages such as Kenya can increase exports to
Rwanda, Burundi, Uganda and South Sudan.
Overall, the following points are supportive of brewers operating in
East Africa;
Low alcohol consumption of under 12 litres pp; and
Stable top down fundamentals with the region experiencing
steady economic growth of c5.0%, leading to a growth in
disposable incomes.
However the main risks are as follows;
Increased competition from imports; and
The region is prone to drought which has a negative impact
on GDP growth given the high agricultural component
contribution to GDP. For example, the IMF recently cut its
2011 growth forecast for Tanzania from 7.0% to 6.0%. The
international institution projects output growth for 2011 to
decline largely as a result of widespread weather-induced
power shortages. Kenya is currently experiencing a drought
and this has also affected some parts of Tanzania.
Comment on valuation and pricing
Generally, brewers in East Africa are cheap on a broader SSA
comparison matrix given an average EV/hl of about USD 155/hl
versus a SSA weighted average of USD 344/hl.
Comparatively, the smaller brewers in East Africa by volumes
(Bralirwa and Tanzania Breweries) have attractive ratings relative to
East African Breweries (EABL). The main set back however is that
foreign investors have limited ways to gain exposure given the low
free-float in Bralirwa and foreign shareholding limits on Tanzania
Breweries.
We also highlight the fact that regulatory threats affecting EABL can
potentially limit growth, particularly in Kenya.
Table 11 Bralirwa EABL TBL
EBITDA Margin 26.3% 35.7% 31.8%
RoaE 45.6% 35.4% 48.8%
RoaA 18.3% 19.7% 21.8%
PER (Hist) 8.8 22.9 6.1
PER(T+1) 7.0 16.9 5.7
PBV (Hist) 5.6 7.9 2.7
PBV(T+1) 5.0 6.5 2.6
EV/EBITDA (Hist) 7.2 11.6 3.4
EV/EBITDA (T+1) 5.2 9.6 3.2
EV/hl (USD) 119.0 214.5 131.9
Fig 27: Exchange Rate RWF Vs USD
Fig 29: Exchange Rate TZS Vs USD
555
560
565
570
575
580
585
590
595
23-May-10
23-Jun-10
23-Jul-10
23-Aug-10
23-Sep-10
23-Oct-10
23-Nov-10
23-Dec-10
23-Jan-11
23-Feb-11
23-Mar-11
23-Apr-11
70
72
74
76
78
80
82
84
86
23-May-10
23-Jun-10
23-Jul-10
23-Aug-10
23-Sep-10
23-Oct-10
23-Nov-10
23-Dec-10
23-Jan-11
23-Feb-11
23-Mar-11
23-Apr-11
1,360
1,380
1,400
1,420
1,440
1,460
1,480
1,500
1,520
23-May-10
23-Jun-10
23-Jul-10
23-Aug-10
23-Sep-10
23-Oct-10
23-Nov-10
23-Dec-10
23-Jan-11
23-Feb-11
23-Mar-11
23-Apr-11
Fig 28: Exchange Rate KES Vs USD
22. 21
BRALIRWA
New to the market but an old player in the brewing
game…
At an alcohol consumption per capita of 7.0 litres pp,
Rwanda is still below its East African peers such as
Kenya (11 litres pp) and Burundu (18 litres pp). This
gap, in our view represents upside potential for
Bralirwa, which is a dominant market player in the
Rwandan brewing industry.
An oversubscribed IPO reflects an undisputed
investment story. As part of the Government of
Rwanda’s privatisation and divestiture programme
aimed at reducing its direct role in some of its
public entities, the Government sold its 25% stake
comprising of 128,570,000 ordinary shares in
Bralirwa through an offer for sale and listing of the
company’s shares on the Rwanda Stock Exchange.
The IPO was almost three times oversubscribed.
Applications totalled USD 80.0m, compared with the
required USD 29.5m.
Ahead of the pack in terms of market share. For
most of its 50 year presence in Rwanda, Bralirwa has
been the sole brewer and sparkling beverages
manufacturer in the country. Despite the recent
opening of local brewery Brasserie des Mille
Collines, (BMC), and the launch of its Skol beer
brand, Bralirwa’s market share is expected to
remain strong at c94%.
It’s a question of timing. While the current share
price represents a 29% premium to its IPO price
(RWF 136), Bralirwa’s share price has de-rated from
a peak of RWF 235. We believe now is an opportune
time to snap up shares. An EV/hl of USD 119/hl
represents a 65% discount to our SSA sector average.
Our two valuation approaches point to a target price
of RWF 225 per share, indicating 45% upside
potential. BUY
EQUITY RESEARCH
RWANDA
MAY 2011
BREWERIES & BEVERAGES
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
-
50
100
150
200
250
31-Jan-11
07-Feb-11
14-Feb-11
21-Feb-11
28-Feb-11
07-Mar-11
14-Mar-11
21-Mar-11
28-Mar-11
04-Apr-11
11-Apr-11
BRALIRWA: Price VS Volume
Volume Traded-RHS Price (RWF)-LHS
BLOOMBERG: NQ* BUY
Current Price (RWF) 176.00
Current Price (USD) 0.30
Target Price (RWF) 255.00
Target Price (USD) 0.43
Upside/Downside 44.9%
Market Cap (RWFm) 90,464.0
Market Cap (USDm) 152.8
Shares (m) 514.0
Free Float (%) 25.0
Ave. Daily vol ('000) 336.2
Share price performance
6 Months (RWF) -25.1%
Relative change (%)* -24.5%
12 Months (RWF) -25.1%
Relative change (%)* -31.5%
*Relative to MSCI Frontier Market Index
Financials (RWFm)-FY 31 Dec 2010 2011F 2012F
Turnover 52,799 61,774 72,276
EBITDA 17,673 21,499 26,401
Attributable earnings 10,331 12,961 16,314
EPS (RWF) 20.1 25.2 31.7
DPS (RWF) 20.1 25.2 31.7
NAV/share (RWF) 31.3 35.1 39.4
Ratios 2010 2011F 2012F
Gearing 1.8% 0.1% 1.4%
RoaA 18.3% 27.3% 32.2%
RoaE 45.6% 66.0% 75.9%
EV/EBITDA 7.2 5.2 4.3
EV/hl (USD) 119.0 124.2 110.6
PBV (x) 5.6 5.0 4.5
PER (x) 8.8 7.0 5.5
Earnings Yield 11.4% 14.3% 18.0%
Dividend Yield 11.4% 14.3% 18.0%
EBITDA margin 26.3% 33.5% 34.8%
*Not qouted on Bloomberg
STRENGTHS WEAKNESSES
Sole bottler of Coca- cola Land locked nature of Rwanda increases
Wide distribution network the costs of importing input material
Market leader (Mkt Share of 94% -Beer) High cost of energy (US22c/Kw hr)
Product support from Heineken
OPPORTUNITIES THREATS
Macro-economic growth in Rwanda Increased competition from imports
Growth in disposable incomes Political risks
Massive population growth Seasonal fluctuations in demand
Lucrative export markets in East Africa Changes in laws, tax and excise duty
23. 22
Nature of Operations
Bralirwa is the leading producer of beer and sparkling beverages in
Rwanda. It is a subsidiary of the Heineken Group, which owns 75%
of the company. Bralirwa has two subsidiaries, Bramin (50%) a
maize growing company and Cogelgas (62.4%), a company involved
in methane gas production. Bralirwa’s estimated market share for
breweries and beverages in Rwanda is estimated at 94% and 97%,
respectively. The key beer brands include Primus, Mutzig, Amstel,
Heineken, Guinness and Turbo King. With the exception of
Heineken beer, all the other beers are locally produced by the
Company. Bralirwa is the sole bottler of Coca-Cola in Rwanda and
its CSD brands include Coca Cola, Coke Zero, Fanta, Krest Tonic
and Vitalo Eau Gazeuse (carbonated water).
FY 2010 Financial Results Overview
Bralirwa registered a 16.1% top line growth in FY 2010 to RWF
52.8bn (USD 89.9m). Beer sales contributed 73% to total revenues,
whilst CSDs contributed 27%. Volumes were up 12.5% to 1.365m hl
(FY 2009: 1.213m hl) as a result of strong growth of the Primus and
Mützig beer brands and higher soft drink sales. The EBITDA margin
improved to 33.2% (27.2%: FY 2009). Overall, the group posted
earnings of RWF 10.3bn (USD 17.5m), representing a 62.8% y-o-y
growth. A total dividend of RWF 20.09 per share for 2010 was
proposed, indicating a 100% dividend payout.
Operational Review
Production volumes to grow beyond 1.4m hl. Production volumes
are expected to grow beyond 1.4m hl in FY 2012. In 2010, volumes
have increased 12.5% to approximately 1.365m hl. The Gisenyi
Brewery which was commissioned in 1959 and primarily produces
beer brands has a current production capacity of about 1.2m hl per
annum. Over 130.0m bottles are produced annually and beer
volumes have increased over the past 10 years from 440,000hl in
2000 to 925,000hl in 2010 (CAGR of 7.0%). In 2011, capacity will be
further expanded by adding additional fermentation tanks and a
capacity extension of the brew house. The sparkling beverages
plant, located in Kicukiro and constructed in 1974, has an installed
capacity of about 300,000hl. However, the plant facilities have
been upgraded over the years and production levels are also
expected to increase.
Outlook
Strengthening mainstream brands. The company’s growth strategy
will hinge mainly on the national brand, Primus, which is seen as
the brand that will create the greatest growth in consumption as
the lower strata of society experiences increased disposable
incomes with the expansion of the Rwandese agro-based economy.
Primus is seen as an aspirational product amongst the lower income
earners.
Competition can be shaken off. Bralirwa remains relevant in its
market place through its world class products, supported by
Heineken. This advantage, in our view, enables the company to tap
into the rising per capita incomes in Rwanda as consumers move up
the ‘drinking curve’. In addition, the company’s most popular
brands, Primus and Mutzig have a combined market share of 88%
and are the two leading beer brands in Rwanda.
Valuation and Recommendation
Bralirwa’s EBITDA margin of approximately 26% is the lowest
amongst it East African peers (TBL and EABL). However an EV/hl of
USD 119/hl is the lowest on a sample of East African Breweries. The
share price has de-rated from a peak of RWF 235 to RWF 176. We
believe now is an opportune time to snap up shares. Using a
relative comparative technique and the DCF method, we generated
a fair value of RWF 255 per share. BUY
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
Fig 30: Bralirwa Production Volumes (hl)
Source: IAS
Table 13 Bralirwa EABL TBL
EBITDA Margin 26.3% 35.7% 31.8%
RoaE 45.6% 35.4% 48.8%
RoaA 18.3% 19.7% 21.8%
PER (Hist) 8.8 22.9 6.1
PER(T+1) 7.0 16.9 5.7
PBV (Hist) 5.6 7.9 2.7
PBV(T+1) 5.0 6.5 2.6
EV/EBITDA (Hist) 7.2 11.6 3.4
EV/EBITDA (T+1) 5.2 9.6 3.2
EV/hl (USD) 119.0 214.5 131.9
Table 12 :Shareholders' List No of Shares
Heineken Internatonal B.V. 205,740,000 40%
Beleggingsmaatschappij Limba B.V 179,975,000 35%
Other Shareholders 1,282,845,000 25%
Total 1,668,560,000 100%
Source: Company Records
Income Statement (RWFm) F2009 F2010 % ∆
Revenue. 45,478 52,799 16.1%
COS (26,730) (27,115) 1.4%
Gross profit 18,749 25,684 37.0%
Net finance charge (405) (128) -68.4%
PBT 9,333 14,402 54.3%
Attributable earnings 6,347 10,331 62.8%
Balance Sheet (RWFm) F2009 F2010 % ∆
Total Assets 37,086 38,685 4.3%
NAV 15,200 16,094 5.9%
Current Assets 19,909 20,127 1.1%
Current Liabilities 20,987 21,749 3.6%
Current ratio 0.95 0.93
Cash flow (RWFm) F2009 F2010
Operating activities 13,993 13,769
Investing activities (5,220) (4,250)
Financing activities (5,233) (9,596)
25. 24
EAST AFRICAN BREWERIES LIMITED
Regulations dampening prospects...
Kenya’s production of beer continues to be well ahead of
all the other countries in the East African region. East
African Breweries Limited (EABL) is the largest brewer in
East African, commanding about 90% of the beer market in
Kenya, c30% in Tanzania and 48% in Uganda.
The Serengeti deal should drive earnings in FY
2011. EABL acquired a majority stake in Serengeti
Breweries Limited (SBL) in September 2010. As
Tanzania’s second-largest brewer, SBL produces the
popular, premium Serengeti Lager (40,000hl
capacity). We expect EABL to consolidate Serengeti’s
results in H2 2011 and this should drive group revenue
higher. In addition, Tanzania as a country has stronger
growth prospects than most East African states
(increasing population, growing middle class and
affluence) and we should see Tanzanian operations’
contribution to revenue overtaking that of Uganda in
the next three years. In addition, prospects in
Southern Sudan also provide significant expansion
opportunities.
Moving away from barley usage to “drought
resistant” sorghum. Kenya is currently experiencing
a drought and there are expectations that rains will
be below expectations, hurting barley production.
The company rolled out a large-scale sorghum
production exercise in Kenya and Uganda. This
exercise is expected to reduce barley reliance to 60%
and increase sorghum input to 40%, thereby
translating to cost advantages.
The Alcoholic Drinks Control Act is the major
dampener. While EABL is a clear favourite on a
sample of SSA breweries at an EV/hl of USD 215/hl,
the impact of this Act will be in the form of a slow
down in sales in FY 2012. HOLD.
BLOOMBERG: EABL:KN HOLD
Current Price (KES) 208.00
Current Price (USD) 2.42
Target Price (KES) 251.89
Target Price (USD) 2.93
Upside/ Downside 21.1%
Liquidity
Market Cap (KESm) 164,481
Market Cap (USDm) 1,916
Shares (m) 790.8
Free Float 50%
Ave. Daily vol ('000) 174
Share Price Performance
6 Months (KES) -1.9%
Relative change (%)* -1.2%
12 Months (KES) 21.6%
Relative change (%)* 15.2%
*Relative to MSCI Frontier Market Index
Financials (KESm)-FY 30 June 2010 2011F 2012F
Turnover 37,965 41,987 46,185
EBITDA 13,539 15,815 17,424
Attributable earnings 7,179 9,728 10,836
EPS (KES) 9.1 12.3 13.7
DPS (KES) 8.8 9.2 10.3
NAV/share (KES) 26.3 31.9 35.3
Ratios 2010 2011F 2012F
Gearing 0.0% 0.0% 0.0%
RoaA 19.7% 24.2% 24.8%
RoaE 35.4% 42.3% 40.8%
EV/EBITDA 11.6 9.6 8.5
EV/hl (USD) 214.5 195.3 177.1
PBV (x) 7.9 6.5 5.9
PER (x) 22.9 16.9 15.2
Earnings Yield 4.4% 5.9% 6.6%
Dividend Yield 4.2% 4.4% 4.9%
EBITDA margin 35.7% 37.7% 37.7%
EQUITY RESEARCH
KENYA
MAY 2011
BREWERIES & BEVERAGES
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
-
50
100
150
200
250
09-Jul-09
09-Sep-09
09-Nov-09
09-Jan-10
09-Mar-10
09-May-10
09-Jul-10
09-Sep-10
09-Nov-10
09-Jan-11
09-Mar-11
EABL: Price Vs Volume
Volume Traded-RHS Price (KES)-LHS
STRENGTHS WEAKNESSES
Nil gearing Fiscal constraints
Supply optimisation and cost leadership Cost inflationary pressures
Strong regional presence Heavily taxed products relative to peers
Diverse product portfolio that suits
different market segments
Reduced reliance on barley through use
of sorghum to lower production costs
OPPORTUNITIES THREATS
Further regional expansion-Ethiopia Excise duty increases
Spirits opportunity Drought threats in Kenya
Growing middle class population High oil/ energy prices
Harmonisation of tax regimes in Kenya Competition-SABMillers' competitive
as a result of an intergration of EAC aspirations in Kenya
economies Weakening of KES
Privatisation of breweries in East Africa
26. 25
Nature of Business
EABL is East Africa's leading branded alcohol beverage business and
has an outstanding collection of beer and spirits brands. Its main
operations are in Kenya and it also has a footprint in Uganda and
Tanzania, while exporting its products to Rwanda, Burundi and
Southern Sudan. With breweries, distilleries, support industries and
a distribution network across the region, the group's diversity is an
important factor in delivering the highest quality brands to East
African consumers. Core brands include the country's leading brand
– Tusker (the flagship brand and a Kenyan icon). Other members of
the EABL Kenya family include: Tusker Malt, Pilsner, White Cap,
White Cap Light, Senator, Guinness, Allsopps, President and the
latest addition, Windhoek lager.
H1 2011 Financial Results Overview
Revenues for the half year were 9.9% ahead of H1 2010 at KES
20.46bn (USD 243.6m), with the Kenyan operations contributing 75%
to total revenues. The gross profit was KES 10.6bn, implying a GP
margin of 52% (H1 2010: 49.5%). This was largely a result of a 12%
volume increase as opposed to price increases. The operating profit
improved by 14.5% to KES 6.12bn (OP margin of 29.9%).
Earnings declined 8.7% as a result of a higher tax charge of 32.7%
versus 29.3% in H1 2010, and the fact that associate income from
Tanzania Breweries (TBL) was not included in H1 2011 results. EABL
still owns 20% of TBL but has indicated its intentions to sell its stake
in the future.
The group declared an interim dividend of KES 2.5 per share (total
payout of KES 2.0bn), which is the same amount paid out in H1
2010. On the balance sheet, total assets were up 10% to KES
42.21bn, as a result of a 2.80% growth in current assets (these
include EABL’s 20% stake in TBL as it was classified as an asset held
for sale).
Operational Review
Regulations limiting market place wins. The effect of the Alcoholic
Drinks Control Act could limit growth in the key Kenyan market in
FY 2011. Under the new Act, the NACADA Authority has the mandate
to enforce laws that control the production, manufacture, sale,
labelling, promotion, sponsorship and consumption of alcoholic
drinks with the intent of protecting consumers and avoiding
irresponsible drinking. The law restricts the hours within which the
sale of alcoholic drinks is permitted. We expect the full impact of
this Act to be reflected in FY 2012 in the form of a slow down in
sales and by extension, profits.
Capex to remain a priority. EABL has embarked on a number of
capex investments including a new packaging line in Uganda, and
increased water storage facilities. Current production volumes are
around 8.5m hl. The refurbishment to the Malting plant was
undertaken so as to improve efficiencies and guarantee malt
quality.
Outlook
Focus on premium spirits and beer. In H1 2011, spirits volumes
rebounded significantly, supported by tax reprieves and price
increases of premium/mainstream brands. The group’s strategy will
focus on brand building and market development initiatives which
should drive future growth.
Valuation and Recommendation
Generally, most states in the East Africa region are expected to
register GDP growth rates of c5% in 2011. However, we expect
moderate sales growth for EABL, given the impact of the Alcoholic
Drinks Control Act. HOLD
8
8.5
9
9.5
10
10.5
11
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
2007 2008 2009 2010 2011F
Fig 31: Capex & Production Volumes
Beer Production (mhl)-RHS Capex (KES bn)-LHS
Source: IAS
Table 14: Top 5 Shareholder's List
Diageo Kenya Limited 42.82%
Diageo Holdings Netherlands BV 4.55%
Board of Trustees NSSF Board 4.55%
Guinness Overseas Ltd 2.61%
CFC Stanbic Nominees 2.37%
Source: IAS
Income Statement (KESm) H1 2010 H1 2011 % ∆
Turnover 18,617 20,463 9.9%
COS (9,396) (9,851) 4.8%
Gross profit 9,221 10,612 15.1%
Operating Profit 5,342 6,115 14.5%
Net finance charge 144 50 -65.3%
Attributable earnings 3,491 3,189 -8.7%
HEPS (Shs) 4.41 4.03 -8.6%
Balance Sheet (KESm) F2010 H1 2011 % ∆
Total Assets 38,420 42,209 9.9%
NAV 23,953 21,727 -9.3%
Current Assets 17,456 17,937 2.8%
Current Liabilities 11,684 17,695 51.4%
Current ratio 1.49 1.01
Cash flow (KESm) H1 2010 H1 2011
Operating activities 8,121 6,165
Investing activities (1,137) (6,900)
Financing activities (5,353) (4,601)
Table 15 Bralirwa EABL TBL
EBITDA Margin 26.3% 35.7% 31.8%
RoaE 45.6% 35.4% 48.8%
RoaA 18.3% 19.7% 21.8%
PER (Hist) 8.8 22.9 6.1
PER(T+1) 7.0 16.9 5.7
PBV (Hist) 5.6 7.9 2.7
PBV(T+1) 5.0 6.5 2.6
EV/EBITDA (Hist) 7.2 11.6 3.4
EV/EBITDA (T+1) 5.2 9.6 3.2
EV/hl (USD) 119.0 214.5 131.9
28. 27
TANZANIA BREWERIES LIMITED
There is still some juice in the lemon…
We believe the investment thesis in consumer stocks such as
Tanzania Breweries Limited (TBL) warrants significant
attention given the above-average GDP and population
growth rates in the East African region in general.
In-house strategies bearing fruits. TBL has positioned
itself through its SAIDIANA Project (launched in 2010).
The project promotes barley growing and the
development of a self sufficient malting industry in the
Southern Highlands of Tanzania. In line with this
initiative, 5,800t of sorghum has been contracted in
different parts of the country. The winery development
in Central Dodoma region where grapes produced by
small scale farmers are used by Tanzania Distilleries in
the production of Valeur brandy and Overmeer box
wine also has similar benefits to TBL’s barley and
sorghum initiatives.
EABL/Serengeti deal a threat to market share. The
arrangement between TBL and East African Breweries
Limited (EABL), which entailed both companies selling
each other’s brands in their respective countries, was
terminated in 2010. EABL acquired the company’s local
rival Serengeti Breweries Limited (SBL) and now owns
51%. An erosion of TBL’s market share is expected as a
result.
Attractive valuation but DSE regulations limit
exposure. TBL trades at a low PER multiple of 6.1x and
its EV/hl of USD 132/hl is also attractive. However,
foreign investors on the DSE are only allowed to invest
up to 60% in aggregate of the share capital of any listed
company. Furthermore, once invested there is a lock-in
period of six months before a foreign investor is
allowed to exit. Given SABMiller’s majority
shareholding, the stock is only accessible to local
investors. Nonetheless, we maintain that the stock is
one of the best value plays in East Africa. BUY
EQUITY RESEARCH
TANZANIA
MAY 2011
BREWERIES & BEVERAGES
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
1,640
1,660
1,680
1,700
1,720
1,740
1,760
1,780
1,800
1,820
1,840
06-Jul-09
06-Sep-09
06-Nov-09
06-Jan-10
06-Mar-10
06-May-10
06-Jul-10
06-Sep-10
06-Nov-10
06-Jan-11
06-Mar-11
TBL: Price Vs Volume
Volume Traded-RHS Price (TZS)-LHS
BLOOMBERG: TBL:TZ BUY
Current price (TZS) 1,820
Current price (USD) 1.2
Target price (TZS) 2,650.0
Target price (USD) 1.7
Upside/downside 45.6%
Liquidity
Market cap. (TZSm) 536,769.80
Market cap. (USDm) 353.49
Shares (m) 294.9
Free Float (%)
Ave. Daily vol ('000) 16.4
Share Price Performance
6 Months (TZS) 2.2%
Relative change (%)* 2.9%
12 Months (TZS) 5.8%
Relative change (%)* -0.6%
*Relative to MSCI Frontier Market Index
Financials (TZSm)-FY 31 March 2010 2011F 2012F
Revenue 527,768 614,786 676,264
Gross profit 254,242 272,878 300,166
Profit before tax 133,842 146,110 164,009
Profit after tax 92,449 100,816 113,166
EPS (TZS) 296.5 321.3 360.7
DPS (TZS) 150.0 162.6 182.5
NAV/share (TZS) 669.1 710.7 756.4
Ratios 2010 2011F 2012F
Gearing 50.4% 49.9% 49.3%
RoaA 21.8% 19.6% 18.8%
RoaE 48.8% 45.7% 48.3%
EV/EBITDA 3.4 3.2 2.9
EV/hl 131.9 125.9 118.7
PBV (x) 2.7 2.6 2.4
PER (x) 6.1 5.7 5.0
Earnings Yield 16.3% 17.7% 19.8%
Dividend Yield 8.2% 8.9% 10.0%
EBITDA margin 31.8% 29.4% 29.4%
STRENGTHS WEAKNESSES
Significant market share of c80% Exposure to commodity price shocks can
Synergies from parent company; SAB Miller lead to a decline in operational efficiency
Has invested significantly to expand capacity DSE regulations limit exposure for foreigners
Wide distribution network
Training and development programs provided
by SABMiller ensure best practices
Wide brewery footprint in Tanzania
OPPORTUNITIES THREATS
Rising per capita consumption in Drought
Tanzania as a result of economic growth Competition for Serengeti Breweries/EABL
New markets in EAC states Infrastructural constraints relating to
Exports to Southern Sudan, Uganda, Burundi, power shortages
Rwanda and Kenya TZS weakness
Rural penetration
29. 28
Nature of Operations
The company’s principal activities are the production, distribution and
sale of malt beer and alcoholic fruit beverages (AFB’s) in Tanzania. It
operates breweries in Dar es Salaam, Arusha, Mwanza and Mbeya and
thirteen depots throughout the country. It also produces malt at its
malting plant in Moshi. The company owns and manages Tanzania
Distilleries Limited (65%), a spirit liquor company that commands
about 95% of the spirits market share in Tanzania. TBL’s brands
include Safari Lager, Kilimanjaro Premium Lager, Ndovu Special Malt
and Konyagi. The company also produces and distributes Castle Lager,
Castle, Milk Stout, Castle Lite and Redds Premium under licence from
SABMiller. Tanzania Distilleries Limited also distributes Amarula and
various other international brands of wines and spirits under licence
from Distell of South Africa. TBL has consistently maintained a record
of annual growth in profit since 1998 and has a production capacity of
about 3.0m hl. The company has a total of 14 Distributors, 180
distribution centers, 10,000 retail outlets serviced and a sales force
team of about 125 individuals
H1 2011 Financial Results Overview
TBL posted a strong performance for the six months ended 30
September 2010. Revenue was up 16.7% to TZS 292.8bn (USD 192.8m),
with clear beer contributing about 85%. The increase was a direct
result of gains in market share and an improved product mix. While
gross profit was 12.0% ahead of H1 2010, the GP margin eased from
47% to 45%. The EBITDA margin also declined marginally from 25% to
24%. A significant rise in fuel prices adversely affected distribution
costs, leading to lower margins. Overall, a profit of TZS 38.8bn was
registered, representing 0.4% growth on H1 2010.
Operational Review
Increased marketing efforts to counter competition. TBL continues
to focus on brand innovation. Castle Lite was launched in a new 375ml
green bottle, complementing Ndovu Special Malt in the premium
category which continues to reflect volume performance well above
expectation. Safari Lager benefited from the national rollout of the
long neck 500ml returnable bottle. Grand Malt, a non-alcoholic malt
drink launched in April 2010, has also resonated well with consumers.
In its FY 2011 results, SABMiller indicated that lager volumes in
Tanzania grew by 5% for the full year. Prior year volumes included
licensed brand production for East African Breweries Limited (EABL) –
however, if the impact of these volumes are excluded, lager brands
grew 19% in the year, with the total beverage portfolio up 23%.
Capex projects remain a priority. The company continues to embark
on expansion and facility upgrade programmes required to meet
anticipated market growth. In H1 2011, a total of TZS 29.0bn was
invested, with an additional TZS 22.0bn still to be spent in H2 2011.
Outlook
New brewery to open up new opportunities. The new brewery in
Mbeya, which was successfully commissioned during H1 2011, allowed
the group to substantially reduce distribution costs in the southwest
region. The brewery is also expected to grow market share as it opens
up new market opportunities in the southwest region.
Exploring new opportunities in EAC. TBL is looking into the possibility
of expanding its beer market to all East African Community (EAC)
member states and beyond. TBL is also planning to launch a variety of
its new brands and also strengthen the current brands so as make
them even more competitive in the beer industry.
Valuation and Recommendation
TBL is one of our preferred East African consumer plays. An EV/hl of
USD 132/hl represents a 39% discount on EABL’s EV/hl of USD 215/hl.
Forward ratings (PER and PBV) are also undemanding relative to its
peers. We have assigned equal weighting to our valuation techniques
and derived a target price of TZS 2,650 per share. BUY.
Clear
Beer, 87.7%
Wines and
Spirits, 12.3%
Fig 32: F2010 Revenue Split
Source:IAS
Table 16: Top 5 Shareholders' List
SAB Miller Africa BV 52.8%
East African Breweries Limited 20.0%
Unit Trust of Tanzania 4.5%
United Republic of Tanzania 4.0%
International Finance Corporation 3.8%
Source:IAS
Income Statement (TZSm) H1 2010 H1 2011 % Δ
Turnover 250,761 292,755 16.7%
COS (133,457) (161,433) 21.0%
Gross profit 117,304 131,322 12.0%
Operating Profit 63,571 70,087 10.2%
Finance costs (4,521) (9,785) 116.4%
Attributable earnings 38,619 38,771 0.4%
EPS (TZS) 130.90 131.50 0.5%
Balance Sheet (TZSm) H1 2010 H1 2011 % Δ
Total Assets 412,318 465,427 12.9%
NAV 175,059 236,122 34.9%
Current Assets 124,199 119,756 -3.6%
Current Liabilities 223,094 143,931 -35.5%
Current ratio 0.56 0.83
Cash flow (TZSm) H1 2010 H1 2011
Operating activities 16,685 83,235
Investing activities (57,592) (28,910)
Financing activities 35,780 6,098
Table 17 Bralirwa EABL TBL
EBITDA Margin 26.3% 35.7% 31.8%
RoaE 45.6% 35.4% 48.8%
RoaA 18.3% 19.7% 21.8%
PER (Hist) 8.8 22.9 6.1
PER(T+1) 7.0 16.9 5.7
PBV (Hist) 5.6 7.9 2.7
PBV(T+1) 5.0 6.5 2.6
EV/EBITDA (Hist) 7.2 11.6 3.4
EV/EBITDA (T+1) 5.2 9.6 3.2
EV/hl (USD) 119.0 214.5 131.9
