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Brewers on the Rise…
29 September 2009

Executive Summary
Validation. Recent events have clearly validated our earlier expressed and continued optimism in the Brewery Sector. In our ‘Chronicles of 2008’ as well as our subsequent ‘Securing the Future’ and ‘Revived Spirits’ reports published in December 2008, February 2009 and August 2009 respectively, we expressed our confidence in Nigerian Brewers and their ability to move against the market’s then bearish trend. Our views have been proven right as the Brewery Sector has continued to reveal significant divergence against the broader market. Flight to Safety: Manufacturing Companies Hold the Ace. In the face of sustained uncertainty surrounding stocks in the Financial Service Sectors due to the current Banking Sector reforms, investors have shown a preference for shares in companies producing consumer goods as in the Breweries, Food and Beverage and Conglomerate Subsectors. This level of investor’s predeliction continues to portray a positive prognosis for capital appreciation for investors in the Brewery Sector. Increased Multinational Presence. We had earlier opined in our outlook for 2009, that the Nigerian Brewery Sector would experience increased multinational presence on the back of the potentials of the Nigerian market. Beer Consumption per capita in Nigeria is currently quite low relative to other African countries and around the world. This opinion has held true as multinational brewers have been increasing their activities justifying the growth potentials of the market. Expansion, Innovation & Restructuring. The view amongst Industry operators is that industry capacity is inadequate to meet market potential demand. Consequently, the two market leaders have been expanding capacity as a first line strategy considering their market dominance to fight threats from new entrants. Focus is also on operational efficiency and innovation to ensure lower cost of production and a deeper market penetration Threat of New Entrants. The structure of the Nigerian Brewery Industry is a pseudo- duopoly, due to the large number of inactive and moribund companies that exist within the sector. Most of the key activities within the industry are attributable to the market leaders, NB and Guinness. However, in recent times, we have witnessed a resurrection of these erstwhile moribund companies, with many of them enjoying interests and financial injections, from new multinational entrants. Does this mark the onset of a paradigm shift? Our Optimism Remains. While we are conservative with our forecasts, analysis, and expectations, we remain largely optimistic; that despite the infrastructure challenges, as well as the erosion of disposable incomes faced by Nigerian consumers, the cultural and habitual premise of consumption in the brewery Industry as well as the observed bottom heavy and growing demographics will mitigate against these challenges to revenue and earnings growth. We remain overweight in the Nigerian Brewery Sector.
Industry Sector FMCG Breweries

Vetiva Equity Research Oluwakemi Owonubi Head, Research Division Gbadebo Bammeke Senior Analyst Adedoyin Adelakun Analyst Eloho Onwah Analyst Adesoji Solanke Analyst Uduakobong Equere Analyst Oluwaseun Oyegunle Analyst

Vetiva Capital Management Limited 266B Kofo Abayomi Street Victoria Island, Lagos Tel: +234-1-46175213 Fax: +234-1-4617524 Email: research@vetiva.com

September 2009
24 September 2009

TABLE OF CONTENTS

AFRICA IN PERSPECTIVE ...........................................................................................................3 THE NIGERIAN BREWERY SECTOR IN VIEW .................................................................................7 UNVELING OF NEW PLAYERS ................................................................................................... 18 RESURRECTION OF UNLISTED PLAYERS .................................................................................... 21 MEET THE FRINGE PLAYERS .................................................................................................... 24 PRESENT TRENDS AMONGST KEY PLAYERS ............................................................................... 25 THE EVOLUTION OF THE BREWERY SECTOR .............................................................................. 11 MARKET UPDATE - BREWERS SHOW RESILIENCE ....................................................................... 29 LEADING THE PACK - NIGERIAN BREWERIES PLC ...................................................................... 30 HOLDING FORT: GUINNESS NIGERIA PLC ................................................................................. 37 SUMMARY ............................................................................................................................. 42

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AFRICA IN PERSPECTIVE
In recent times, Africa has been looked upon severally as an investment haven with limitless potentials, thus qualifying as a prime investment destination. Key drivers are strong consumption and bottom heavy demographics, urbanisation and industrialisation, growing levels of disposable income, stable leadership (with democracy gaining hold in most of its countries), strong economic growth (as against declines in the developed nations) and low penetration levels. Besides these, are the opportunities created by mono-product economies such as Nigeria seeking to re-strategise and diversify their GDP profiles. This theme has inspired increasing levels of Foreign Direct Investment (FDI) in recent times into emerging market nations and Africa at large. As potent as the argument is, the African Brewery industry highlights the case more succinctly and transparently than many other investment options. This highlights the Brewery Sector as an imperative investment class for insightful investors in Africa and likewise Nigeria and this report will attempt to highlight the basis for our unbridled optimism. Although this report discusses the Brewery Industry in Nigeria, we also attempt to draw parallels and otherwise between the Nigerian market and other African Brewery markets. Whilst we are not in doubt as to the striking effect the global credit crunch will have on consumption across the world, especially in more developed economies, we believe African consumption is likely to go against the trend. This is largely premised on the obvious dearth of credit in Africa, and where available, its limited availability, thus restraining growth significantly to the self sustaining and self financing abilities of Companies. Thus most growth in African economies is self funded rather than credit financed and this has to a large extent inhibited the growth of local brewers across Africa. This perhaps accounts for the significant stake of multinational parent brewers in Africa’s largest breweries. SAB Miller leads the pack, with controlling stakes in 4 African brewers, Diageo and Castel in 2 each and the O&L Group owning controlling stakes in 1. This breakdown perhaps also explains the aggression by SABMiller to commence operations in Nigeria, a country largely regarded as a highly profitable African brewery market.
Brewer Delta Corporation East African Breweries Limited Namibia Breweries Limited Nigerian Breweries Sec haba Breweries National Breweries Solibra Zambian Breweries Limited Country Zimbabwe Kenya Namibia Nigeria Botswana Zambia Cote d'Ivoire Zambia Parent Company SABMiller Diageo O&L Group Heineken SABMiller SABMiller Castel Castel SABMiller

Soc iete des brassieries du Maroc Morocc o

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African Brewers: Investment Highlights
Company Country Parent Population(mn) Capacity (mhl) Production(mhl) Per Capita capacity (litres) Per Capita consumption Market Cap (US$) Per Capita GDP (US$) Capacity Utilisation(%) Delta EABL Guinness NamBrew NB Nigeria Diageo 144.00 4.70 3.76 2.78 2.70 1,357 1,703 99% 289 61.43 27.30 29.00 Namibia Nigeria Zimbabwe Kenya SABMiller 12.00 7.00 2.20 58.33 18.30 157 203 31% Diageo 37.00 5.80 4.70 15.68 12.70 1,145 1,477 81% 197 34.04 11.10 19.80 NatBrew SABMiller Sechaba SBM Solibra Zambrew South Cote Zambia Africa Botswana Morocco D'Ivoire Zambia SABMiller 2.00 2.50 2.40 125.00 119.20 248 6,940 100% 99 39.68 19.30 26.20 Castel 30.9 1.10 1.10 3.56 4.00 682 6,433 92% 620 563.64 5.90 50.00 Castel 20.60 2.00 1.80 9.71 8.90 387 1,153 92% 194 96.75 12.70 22.40 SABMiller 11.70 1.30 1.00 11.11 8.60 85 1,305 80% 65 50.30 7.60 25.30

O&L Group Heineken SABMiller SABMiller 2.10 3.00 2.50 142.86 119.70 123 3,725 83% 41 13.67 29.50 16.40 144.00 9.00 8.50 6.94 6.90 3,015 1,703 94% 335 37.22 29.60 29.40 11.70 1.50 1.50 12.82 12.40 50 1,305 97% 33 22.22 5.10 20.90 47.60 45.00 43.20 94.54 91.00 22,875 6,311 96% 508 11.30 15.00 19.40

Market Cap/hl ($) 22 Mkt Cap/Hectolitre 3.20 Sales Growth (%) EBITDA Margin 30.70 10.00

Source:Bloomberg, CIA factbook, Vetiva forecasts and estimates

Large Upside Potential Exists Consumption per capita in Africa is anywhere but near saturation, as with the exception of South Africa, Namibia and Botswana, consumption levels remain at very dismal levels. Considering the data presented below, this translates to an average per capita consumption of 10.4 litres per person for Africa. In comparison with that of more developed countries reveals significant upside potential, sometimes exceeding 8 multiples. Note that we have excluded South Africa, Botswana and Namibia from this analysis, as they have estimated per capita consumption levels of above 90 litres pp.

AFRICAN BREWERS: CONSUMPTION PER CAPITA
(Litres Per Person) Morocco4.0 Cote D’Ivoire 8.9 Nigeria 10.4 Zambia 12.4

Kenya 12.7 Zimbabwe South Africa Botswana Namibia Average 44.1
Source: Bloomberg, Imara Research, Vetiva Estimates

18.3 91.0 119.2 119.7

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this translates to a per capita capacity of 5 litres per person. With the African population estimated at 1 billion. mounting pressure on previously low capacity levels. Further accounting for a significant Muslim (and mostly alcohol averse). Alcohol Consumption A clear relationship exists between income levels and alcohol consumption as is exemplified by the chart below. With an assumption that they currently produce at 90% capacity. 5 . one sees a patent relationship as consumption levels are largely premised on per capita income levels. inspires a per capita alcohol consumption of 10 litres per person for the continent. this would put Africa’s total production capacity at 50 million hectolitres per annum. Imara Research. Accounting for the skew in Morocco (by reason of a significantly higher Muslim population) as well as Namibia (a large proportion of sales is exported). This is especially in the light of currently bottom heavy demographics which are beginning to come of age and translate into increased demand.AFRICAN BREWERIES Capacity/Production (Millions of Hectolitres) 12 Capacity 10 Production 8 6 4 2 0 NB Delta EABL Guinness Nambrew Natbrew Sechaba SBM Solibra Zambrew Source: Bloomberg. Vetiva Estimates Per Capita Capacity Levels Lower than international averages The ten foremost Brewers in Africa are estimated to produce about 45m hectolitres annually. Income vs. This is much lower relative to international per capita capacity averages and indicates growth potential. population.

AFRICAN BREWERIES FY’08 SALES GROWTH (%) Sales Growth 30.000 60 4.7% 29.1% 7.7% 11. many times in strong double digits. Vetiva Estimates Value Beckons! A comparison of the brewers across Africa in terms of market capitalisation per hectolitre produced reveals a largely unexplored and undervalued market in certain countries. Imara Research 6 . Imara Research.6% 5.000 80 6. Despite slowing sales growth and sometimes decline in developed countries across the world. This is representative of an industry that is largely in the rapid growth stage and holds potential for much more growth especially in the light of currently low penetration levels.9% EABL Guinness NamBrew NB Natbrew SABMiller Sechaba SBM Solibra ZamBrew Source: Company Financials.000 Per Capita Income Per Capita Consumption 140 12. Bloomberg. especially in Kenya and Nigeria.PER CAPITA INCOME VS.000 40 2.000 120 Per Capita Income (US$) Consumption in Litres 10.0% 12.3% 19.5% 27. African brewers have continued to record double digit growth in sales and increased volumes.000 100 8.000 20 0 Zim babwe Kenya Nigeria Nam ibia Zam bia South Africa Botswana Morocco Cote D'Ivoire Zam bia - Source:CIA Factbook.1% 5. African brewers have continued to record growth in turnover.3% 15. PER CAPITA CONSUMPTION 14.

Northern Uganda. Nigerian Breweries and Guinness for the Nigerian market. production trials have commenced in Nebbi. production volumes are on the increase and this has enabled the Company hedge against escalating imported barley prices. This highlights again the attractiveness of the Sub Saharan brewery market. Delta Breweries is clearly the cheapest at $22 per HL while NB and Guinness lie somewhat in between at $335 and $339 per hectolitre. In this regard. COMPARISON MARKETS BETWEEN KENYAN AND NIGERIAN BREWERY Certain parallels lie between the Nigerian and Kenyan markets. a 13% increase relative to the previous year’s output. 7 . Imara Research. especially on account of the attractiveness of the East African region for barley cultivation. Similar to the Nigerian market. East African Malting Limited (EAML) has a malted barley plant and succeeded in producing 33. EABL has majority foreign shareholding. EABL also has backward integration policies in place with over 400 contracted farmers. and market leaders. The Company which has a Malting subsidiary.000 tons of malt in 2008. cheaper than SAB Miller and SBM of Morocco at c. Nigerian Breweries and Consolidated Breweries. Guinness. held by the Diageo Group. Although this does not fully meet the brewing requirements of the Company. large Diaspora inflows.VALUATION PER HL VS VOLUME GROWTH (US$/Litre) 35 700 Mkt Cap/HL 30 Sales Growth 600 Sales Growth 2008 (%) Market Cap/hl (US$) 25 20 15 10 5 0 500 400 300 200 100 - Source: Bloomberg. However. Both have played host to an emerging middle class and a rapid growth in consumption volume growth. considering the current Valuation per hectolitre. financial reform and deregulation and infrastructure rehabilitation and expansion. and we have identified some of these parallels herewith (using East African Breweries Limited (EABL) as a proxy for the Kenyan market). Vetiva Estimates Sales growth across Africa in 2008 has remained largely robust. which again presents a similarity with the Nigerian market majors. industrialisation. $600/hl.

driven mainly by Heavy Fuel Oil (HFO) price increases. energy costs were a serious challenge for EABL. same as the top 3 players in the Nigerian brewery industry. Guinness. 8 . EABL also has nil gearing with a strong dividend policy. Nigerian Breweries and Consolidated Breweries.Same as with the Nigerian market.

as well as the cultural tendency of Nigerians to throw parties for several reasons. controlling circa 85% of the Sector’s production volumes. severally ascribed to as a ‘pseudo duopoly’) on account of the significant size and influence of the two leaders (Nigerian Breweries and Guinness) in the Industry relative to several other much smaller fringe players. Guinness and International Breweries. beers and malt drinks amongst others and in some cases. besides NB. and has benefitted from significant foreign direct investment inflows in recent times.03% Premier Breweries. thus. new entrants and small firms oftentimes find themselves highly disadvantaged. 2009 One year Three years Nil Three months FY'07 Q2'09 FY'08 One year Nil Three months Source:Vetiva Research 9 . Players in the sector are engaged in the brewing.51% Golden Guinea. success in the industry is highly predicated on marketing ability. sales and distribution of alcoholic and non alcoholic beverages such as stout. predicated on improving economic conditions.25% Intl. which has resulted in a shift in demand patterns from the locally brewed products to the more modern bottled products. the Nigerian economy continues to play host to accelerated urbanization and the consequential modern lifestyle. The Nigerian Brewery Industry is a highly active sector. There are seven listed Companies in the highly concentrated Sector with the leaders.0. BREAKDOWN OF BREWERIES SECTOR BY MARKET CAPITALIZATION Others Jos Intl. Brand loyalty is another key factor. Owing to the highly asset intensive with heavy economies of scale alongside the aforementioned. Growth in the sector is also largely skewed to marketing and branding prowess.05% Others-0. there also exist several unlisted brewers operating in Nigeria such as Consolidated Breweries and Sona Breweries amongst others resulting in about 11 brewers in all. Of the listed players.98% Source: Vetiva Research Breweries Champion Breweries Plc Golden Guinea Breweries Guinness Nigeria Plc International Breweries Plc Jos International Breweries Nigerian Breweries Premier Breweries Last Released Result FY'07 Not released since 2005 Q3'09 Q1'08 As at August 31. the strength of the distribution network and extensive advertising expenditure. Breweries– 1. Besides this is the general perception that Nigerians are happy people.THE NIGERIAN BREWERY SECTOR IN VIEW The Nigerian business climate has proven favourable to the Brewery industry over the years with the major players reporting increasing patronage and high profit levels year after year. The growth of the sector over the years has been strong. even longer time periods to betray previously established brand loyalties. soft drinks. requiring significant periods of time to develop and as it appears. This has to a large extent ensured that the volumes and thus market share has remained with the most technologically advanced manufacturers with cutting edge technology and up to date expertise. The Brewing process is highly technical and hugely capital intensive.02% NB –65. the other brewers have failed to regularly publish performance scorecards and have lagged behind their peers in this regard. However.0. This has resulted in a steady and sustained decline in the demand for traditional beers. Breweries– 0.72% Guinness – 32. generating a steady demand for the modern and easily accessible beers. bottling. In addition to the re emergence of the once eroded middle class. improved product quality and the marketing activities of manufacturers.42% Champion Breweries– 0. Alcohol consumption is considered a social activity in Nigeria with every festive/social activity taken as an opportunity to indulge in extensive consumption. followed by Mexico and Venezuela). (A recent survey of over 65 countries published in the UK’s New Scientist Magazine suggests that Nigeria has the highest percentage of happy people. growing disposable income.

especially in the light of the recent economic challenges facing Nigerians. We premise this growth on the significant improvements in macroeconomic indices which have precipitated a renewed demand for alcohol and non alcoholic volumes. consumers drink to drown their fears and anxieties and in times of excitement. As shown by the scorecards of major players in recent times. The resilient and largely inelastic demand profile of the Sector’s products inspires volume growth irrespective of the economic climate. (mostly in the past two/ three financial years). the industry continuously plays host to new entrants as well. (new consumers) whose demand compensates for the marginal loss in sales volumes occasioned by declining disposable income. New brands. Also contributing are the highly flexible and far reaching distribution networks which have ensured that the market leaders continue to hold sway. We note that consumption is directly linked to individual lifestyles and so. 10 .Worthy of note is the defensive nature of the Brewery Industry’s products viz its ability to grow sales volumes despite over riding economic considerations. we believe with an understanding and appreciation of the opportunities inherent within the Nigerian market. though volume consumed may be dependent on economic fortunes. This has also translated into increased revenue for the Brewery Industry. The perception is that in times of depression. Improved quality of products and the ability of the leading companies to react innovatively to consumer needs has enabled them stay ahead of competition. thus positively impacting sales volumes within the industry. the Sector has continued to witness strong growth especially in the alcoholic products markets. have made their entrance into the Nigerian Brewery Market and it is our expectation that they would continue to intensify competition and result in increased sensitivity marketing activities from companies. which will also fuel growth. they also drink to express their joy.

Although this cultural effect cannot be overemphasized. relative to other foreign markets where demand is mostly premised on earnings and thus has been on the decline.U U. Thus the failure of the recent economic slowdown to significantly impact the sector’s demand has again reiterated the uniqueness of emerging markets such as Nigeria’s and awakened investor interest once again in the industry. This has necessitated the Brewers to continually seek measures by which to expand and increase production and match demand with supply.0 percent and we opine that consumption volumes will continue to grow as new consumers continue to make their entrance into Industry. We believe that the increasing population promises a steady pipeline of consumers for the Sector’s products and necessitates growth levels. at the barest minimum. Increasing health awareness. Third is the identified Nigerian market. many of whom seek solace for the many economic and social challenges in alcohol. at least commensurate with that of the population. POPULATION DISTRIBUTION% <15 YEARS Japan E. we recognise significant capacity additions and attempts to consolidate market presence by the major players. Second is increasing international pressure. The Nigerian market for Brewery products has proven largely defensive and resilient to economic challenges. we opine has reduced the demand for locally brewed beers and created an additional market for premium brewed beers such as the leading breweries currently have the capacity to brew and distribute. we believe it helps explicate some of the uniqueness and divergences in the demand patterns of the Nigerian market.K China USA World India Africa Asia Nigeria 13% 16% 18% 19% 20% 28% 32% 41% 27% 45% Source: World Population Data Sheet 2008 11 . Nigeria has been estimated severally to have a population growth of 3. Although they appear unfazed at present.THE EVOLUTION OF THE BREWERY SECTOR We have adduced the changing face of the Nigerian Breweries Sector to various factors referenced below: First is the increasing population & bottom heavy demographics. We retain our optimism in the Brewery Sector premised on the observed proactivity of key players within the market. Youth under the age of 15 represents 45% of Nigerian’s population and a potential market for the brewery sector. education and rural-urban migration. This is further buttressed by the very social and festive nature of a significant portion of the Nigerian populace. and our belief in their ability to return strong earnings as clear cut opportunities still exist in the Nigerian market despite the steady incursion of foreign brewers. We opine that the significant incursions of global players such as Castel of France and SABMiller who have a presence in the African breweries market into the Nigerian space have somewhat threatened and awakened incumbent players from their previous inactivity.

000 2004A 2005A 2006A 2007A 2008A 2009F NB GUINNESS Avg.V Guinness Nigeria Plc Diageo Nigerian Breweries 50. we note that this may be slightly challenged as firms resort largely to internally generated cash flows in the face of tightening credit lines.000 150.80 special) for the most recent financial year (FY’08).00 ordinary and N6.000 45.000 90. Both Company earnings have grown consistently and potentials remain strong. Most of these companies have recorded falling margins and profitability under the weight of infrastructural deficiencies and increased operating expenses. These dividend payments represent 100% and 75% payout ratios respectively.80 as dividend (comprising N6.10% Source:Vetiva Research 12 .000 60.V 54.50% 46.65 as dividends for the 2008 financial year. Breweries Parent Company Foreign Stake Consolidated Breweries Heineken N.000 135. In our opinion.000 165. All the aforementioned companies have significant foreign stakes. This is further evidenced by post FY’08 scorecards which have continued to show remarkable growth in both top and bottom lines. Turnover and Earnings for NB and Guinness have grown at a combined CAGR of 18% respectively over the past 5 years. the liberal dividend policy is certain. fully paid out its earnings to investors as dividend while Guinness paid out a total of N12.000 105. to continue as the multinational nature of their ownership ensures that dividends are repatriated to serve the interest of the parent companies. 5 yr Turnover CAGR 18% Consistent Dividend Payout The Brewery Sector has consistently rewarded its investors over the years with attractive dividend payouts. in the past two financial years.000 75. However. Consolidated Breweries (an unlisted player) recently paid out N7.000 120. BREWERIES SECTOR TURNOVER N(millions) 180. commendable especially when viewed relative to the broad performance of companies in the real sector.03% Heineken N.INVESTMENT HIGHLIGHTS Strong Turnover and Earnings Growth The Brewery Sector has rewarded investors with robust growth rates. NB has consistently.

5 litres by 2012 and even higher post 2012 as the Industry grows nearer to its maturity stage.00 4.00 3. It is our opinion that in the near term.4 Zambia Kenya Zimbabwe South Africa Botswana Namibia Average 44.3 91. This is further reiterated by Nigeria’s demographics which lend credence to our earlier optimism.1 Source: Bloomberg.00 2.50 3. AFRICAN BREWERS: CONSUMPTION PER CAPITA (Litres Per Person) Morocco 4.00 EPS DPS 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 Source: Company Financials Source: Company Financials Unsaturated Market The market for alcoholic and non alcoholic beverages in Nigeria is relatively unsaturated and holds some potential for the discerning producer. the Nigerian market remains largely unsaturated.7 18.00 1.9 Nigeria 10.00 5.00 3.0 Cote D’Ivoire 8.00 0.00 2.50 0. Nigeria’s per capita beer consumption stands at approximately 10 litres pp in 2008 and we anticipate a further growth in consumption to about 13. with the exception of the Middle East (which is significantly low owing to its Islamic leaning). Imara Research.00 7. Vetiva Estimates 12. Relative to other African and emerging economies.00 1.4 12.GUINNESS NIGERIA PLC EPS VERSUS DPS (N) NIGERIAN BREWERIES PLC EPS VERSUS DPS (N) 8. lowest of all regions.00 2003 2004 EPS DPS 4. The African region is credited with an average per capita beer consumption of 6 litres.2 119.50 2.00 0.50 1.7 13 . there exists significant headroom for growth in sales volumes and profit margins.0 119.00 6.

which has to no small degree influenced our optimism. key technical partnerships and adequate corporate governance structures in place. favourable track record. remain the sector’s largest and profitable players. Low alcohol penetration relative to other African countries and emerging economies around the world: Resurging nightlife in major cities Niger Delta unrest and militancy impacting oil production volumes and FG revenue. NEGATIVE Poor infrastructural development Declining purchasing power Increasing inflation INTERNAL Strengthening and increasing oil prices Strong relationship of big brewers with parent companies inspiring technical expertise.Qualitative factors Our optimism will not be well justified if it lies bereft of an analysis of the quality of management and business model employed by the Industry’s market leaders. Culture driven consumption. Swot Analysis Of Nigerian Brewery Sector POSITIVE Bottom heavy demographics Growing Industrialisation. Strong brand essence of key players products Improved Macro-Economic indices Backward Integration utilising local sorghum grains Increasing presence of foreign players to spur capacity expansion in the Sector. Both companies which have over the years enjoyed and continue to enjoy a good management. Banking reforms likely to impact credit and short term funding Volatile foreign exchange rates Increasing commodity and raw material prices Poor power supply and exorbitant costs of alternative power supply EXTERNAL 14 .

At the time.BACKWARD INTEGRATION TAKES CENTRE STAGE In the early 1980’s. utilizes malted barley. the Government announced its intention to impose the policy of backward integration in which agro industries such as breweries would be required to source their raw materials within the Country. in 1984. However. the brewery industry alone was credited with the importation of grains worth about 140 million Naira. Like NB. Resulting from its erstwhile limited use. Clearly. NB currently has sorghum farms and has engaged farmers from whom it off takes sorghum for its several brewing plants spread across the country. This precipitated an over fifty percent reduction in the number of brewers in Nigeria over time from 34 in 1984 to 16 in 2002. brewers had to seek a viable alternative and sorghum was discovered to have good malting qualities. sorghum production still remained in the hands of small. in a bid to stimulate the growth of the local industry. produced mostly by small famers and consumed as a food alternative in northern Nigeria. Sorghum had been hitherto cultivated as a subsistent crop. compelling Nigerian brewers to look inwards and modify their value chains to incorporate substitute raw materials in their brewing process. both industry leaders. Guinness on the other hand. the company sources most of its raw materials locally by developing local sorghum seeds for farmer groups and locating appropriate farm marketing channels. the Nigerian Government in 1988. the grains were being sourced from several European Union countries. They were also required to establish farms as a prerequisite for import licence allocations from the Government. Nigerian Breweries Plc and Guinness Nigeria Plc survived this blitz in the Nigerian business terrain. 15 . maize and hops as raw materials for its brewing process. With the anticipated ban of barley and maize imports by 1988. uneducated farmers scattered across different parts of the country. banned the importation of several grains such as barley and wheat. rice. The crop experienced a sudden change in status becoming an industrial raw material for Nigerian brewers. However. The existing breweries were compelled to compete for this limited commodity and smaller brewers either folded up or were acquired and absorbed by bigger and stronger breweries. sorghum.

This stability was however somewhat threatened by a return to the pre-existing Wholesale Dutch Auction System by the new Governor of the CBN. We have previously been faced with the reality of declining earnings quality from the stables of several manufacturers. exchange rates eventually regained some level of stability. Exchange Rates: The final months of 2008 witnessed a severe unexpected erosion of the Naira. in the face of prevailing economic challenges. we highlight that the core challenges remain. the defensiveness of the Sector relative to the economy. following which we have witnessed a continued depreciation in the Naira. reiterating our erstwhile cautious optimism. with the onset of the Retail Dutch Auction system.com 16 . howbeit. has been brought to the fore in recent times by the commendable performance of some players within the sector. The brewers for instance have to manage the exchange rate volatility. EXCHANGE RATE MOVEMENT (USD VS NAIRA) 160 Exchange Rate 150 140 130 120 110 Dec-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Source: www.SECTOR CHALLENGES The Nigerian Real Sector is currently beset with multi faceted challenges. a ripple effect of the present economic malaise the Nigerian economy (of which the real sector is a subset) presently contends with.oanda. and no assurance that this will not continue in the near term. previously put in place by the Central Bank of Nigeria (CBN). The vulnerability of manufacturing companies earnings to exchange rates movements cannot be over emphasised as many of their raw material inputs as well as production costs are directly impacted by the exchange rate volatility. expected to reflect in the costs of raw materials such as barley and hops. Although.

to some extent. in competition with the Big players will find adequate quantities of sorghum to meet present demand. individual faith and lifestyle restrictions advocated by some religions against alcohol consumption has served to somewhat limit the growth of the sector’s volumes. High Operational Costs: Power generation in Nigeria remains a significant challenge to the operations of the brewers in Nigeria. smaller players. Religious Faith And Healthy Consumption Although. a declining consumption of alcohol is being experienced. Another challenge is the increasing desire for healthy foods and drinks by some individuals. We hope this will bring some respite to the currently exorbitant power costs of Nigerian Breweries and improve profitability. Lagos. Guinness and Nigerian Breweries appear to have successfully mitigated against a significant portion of the exchange rate risk by their backward integration arrangements. exorbitant increases in the prices of grains and distribution costs on the back of spiking diesel prices. This. Guinness also faced the power generation challenge and is currently deploying gas powered generating plants at its Benin and Lagos plants. Nigerian Breweries recently disclosed that c. Besides power. as well as the Northern region which is largely Muslim (some of the Northern States have adopted the Sharia Islamic code which frowns strongly at alcoholic consumption). may continue to limit the consumption of alcoholic products as several health campaigns advocate for reduced alcohol intake. and further considering the limited sources of sorghum and the ability of the big players to effectively cultivate and demand for the same. we opine may remain relatively exposed. With increasing proportions of the populace seeking solace in various religions. In the Southern and Eastern parts of Nigeria which are largely Christian.7% of turnover was expended on alternative power generation in FY’08. although market leaders. it is highly uncertain that the fringe players. other operational challenges include the dearth of good road networks and distribution infrastructure. typical consumption levels are likely to be negatively impacted. and reducing profitability. 17 . Besides this. the sector has witnessed continued growth in sales volumes. significantly increasing the Company’s operating costs. Consequently. we opine. These pose significant threats and continue to challenge the operational efficiency of the real sector and brewers in Nigeria. CET Power Projects Limited recently received a licence from the Nigerian Electricity Regulatory Commission (NERC) for a 5MW off grid independent power plant for the Nigerian Breweries plant in Iganmu. considering that the quality of final produce depends largely on the nature of starch utilised. as they still import and depend largely on barley as a mainstay of production. However.Drilling down to the Brewery Sector. except they opt to utilise local sources of starch for the fermentation and brewery process at the risk of a lower quality produce. they may still suffer the risks of some exposure. religious faith is growing and with this growth.

The Company which controls a large portion of the African market finally commenced operations in Nigeria. noted the spike in commodity (barley) prices alongside crude oil prices. after months of speculations and rumours in the industry about its eventual entry. Uganda and Zambia. However.06%. As we had earlier posited. in a bid to ease what would otherwise be a very difficult entry into an already established Nigerian market. between April and July 2009. Malawi. Lesotho. we opined that significant expansions’ and capital expenditures in the Breweries sector were not likely in the near term. The Company which is one of the world’s largest breweries has several investments across the world. The decline in oil prices ensured a commensurate decline in commodity prices such as barley. we also note brewers’ continued exposure to raw materials such as barley and hops for the flavour of its brewed products.Increasing Raw Material Input Costs Although. This resulted in a decrease in input costs for the brewers. Tanzania.indexmundi. We had in earlier reports. BARLEY PRICES ON THE RISE ($ per metric tonne) Barley 160 140 120 100 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jun-09 Source: www. The Company is a strong player in the African breweries market with a presence in Angola. Perhaps this explains why the company has been seeking an inroad into the promising Nigerian market for several years. as well as planned entry strategies are presented below: SAB MILLER SAB Miller is a multinational brewer formed by the acquisition of Miller Breweries by South African Breweries in 2002. and was reflected in improved operating margins. 18 . as barley prices depreciated over 50% between July and December 2008. 2009 . thus necessitating our concern as to the sector’s exposure to raw material input prices. Ghana. Some of them are joining forces with already established fringe brewery players. with operations in six continents. although the raw material remains largely sorghum based. Mozambique. some of the market share currently accruing to the market leaders may be under threat in the near term as several multinational brewers are currently making steady incursions into the Nigerian market. we readily admit the success of backward integration in the Brewery Sector. Botswana. Swaziland. However. further assuming stability at prevailing growth rates.com UNVELING OF NEW PLAYERS In our recent breweries report. We premised this assumption on the fact that the various players had recently engaged in significant expansion and that the present capacity was adequate for the market at its present state. The Company holds controlling stakes in 4 of Africa’s 10 largest brewers (representing a strong presence in Africa’s fastest growing markets). ’Securing the Future’ dated February. and disclosed the existing backward integration strategy as a mitigating factor. we are faced with a Breweries Sector that appears to be presenting a new face and challenging the status quo which we had earlier assumed. barley costs have recorded an increase of 26. one for which we had highlighted the ability of sorghum to substitute for barley. Highlights of new Brewery entrants.

creating a potential need for healthy. This strategy has proven successful in previous market entry attempts made by the Company. it will not be making a frontal attack on the Lagos1 market. The Company had earlier acquired Pabod Breweries and Standard Breweries to help cushion its landing into the Nigerian market. Since acquiring Pabod. Pabod Breweries. in the recent disclosure of its acquisition. to compete with the existing premium beer brands. It further revealed its intention to utilise locally cultivated grains such as maize and cassava as raw materials for the production of cheap beer. who practice a very active social lifestyle. the Company recently acquired 100 percent of La Voltic. These brews are unregulated and could be largely unhealthy. The Company.000 hectolitres of alcohol by February 2010. Thus. The acquired company represents the Nigerian operation of Voltic International.Entry Strategy SABMiller had earlier in the year unveiled its Nigerian entry strategy and has since made its debut into the Nigerian market. in the East African markets of Kenya. choosing rather to make a subtle entry from the smaller cities. SABMiller has reintroduced many of the company’s older brands. and may roll out more products in the near future. (This represents an eight fold increase in capacity and production volumes). with an expansion target to produce about 250. a leading mineral water producer in Ghana. Lagos is Nigeria’s cosmopolitan commercial centre with an estimated population of 20 million people. including Grand Lager and Grand Malt (which have some market presence in the Port-Harcourt/South Eastern region). currently has a production capacity of 30.000 hectolitres. a strategy which the Company has already adduced to. which is one of the country’s largest markets. Sequel to its acquisition of the aforementioned breweries and further lending credence to its aggressive acquisition strategy. previously unaccounted for by current market leaders may represent a potential market for SAB Miller’s products. Acquisition! Acquisition!! Acquisition!!! In our opinion. 19 1 . According to the Company’s Management. (Voltic) has since spread to Nigeria with funding of $4 million from the Aureous West Africa Fund (AWAF). a bottled-water manufacturing company based in Lagos. The acquisition is with the intent to transfer the company’s plants to Port Harcourt. The market has historically shown in previous observed new product/company entry attempts. open a new production line there and begin manufacturing bottled water by August. the acquisition of existing breweries represents the best entry strategy for potential new entrants into the Nigerian breweries market. that it is more receptive of an existing brand/ company (Existing brand loyalty is very strong). and willingness to further acquire existing regional brewers. This class of consumers. cheap and affordable beers. ‘shepee’ and ‘’burukutu’ amongst others. beginning with a regional brewer status may enable SAB Miller establish a presence in the near term. Low income earners in Nigerians who can hardly afford premium beers have continued to produce local homemade brews ranging from ‘ogogoro’.

where there are customers. which will place them at an additional disadvantage to their already established competitors. it is not unlikely that such companies may choose to acquire product canning infrastructure. This will effectively restrict the Company to sales only through returnable bottles. by establishing factories and distribution outlets in the various regional locations across the country. ensuring that distribution costs are minimal. and can their products for ease of distribution. as well as enabling the adoption of a single pricing policy for each product in all geographical regions. The inability of new players to outlets and strategically located ensure uniform final costs are unwanted arbitrage opportunities also does little for brand loyalty. The outlets assures their products a sure marketing channel and distributor loyalty. an act which Existing distribution and ‘on sale’ outlets The ‘on sale’ outlets and strategically branded distribution outlets are put in place by many of the existing players. 20 . However. Packaging In the event that the new players choose to retain the bottled method of packaging for their products. to mitigate the aforementioned problems. successfully establish such distribution breweries will hamper their abilities to borne by consumers and may create for third party distributors. has already highlighted its inability to compete with the industry leaders in the canned packaging of its products as it cannot immediately afford the cost of setting up of a canning line.HURDLES TO PROFITABLE ROLL OUT BY NEW PLAYERS Price Consistency Industry leaders. design and distribution come with significant costs. Major players also equip several sales outlets with deep freezers and branded facilities with a salient understanding that such distributors will continue to distribute their products. NB and Guinness have successfully eliminated inconsistent base prices and likely arbitrage opportunities across geographical locations within the country. This ensures a significant presence in all the nooks and crannies. Pabod Breweries (newly acquired by SAB Miller). Another likely fallout of the packaging challenge is that potential consumers and retailers may be unwilling to incur costs to acquire the bottles (empties and crates) which are necessary to facilitate the demand for the Company’s products. and provides a defined and reliable distribution strategy for the Company’s products. we foresee significant difficulty as bottle production.

Location We note the predominance of brewery factories in the South Eastern part of the country. Aba Consolidated Breweries. Onitsha Nigerian Breweries. Ilesha. Awo Omamma Brewery Plants Pabod Breweries. LOCATION OF BREWERY PLANTS IN NIGERIA International Beer and Beverage Nigerian Breweries Nigerian Breweries Ibadan Jos Intl Breweries Standard Breweries Benue Breweries Edo Breweries Consolidated Breweries . Aba Nigerian Breweries . Company Reports 21 .Ijebu Ode Nigerian Guinness Breweries . A close look at the prominence of palm wine in the local culture provides some premise for the deep rooted and habitual consumption of beer and thus the concentration of brewers in the area and the market for their products. it is our opinion that the choice of location for the new breweries may make or mar their entry and eventual performance in the Nigerian market. and partly adduce this to the habits of the residents of these communities. Port-Harcourt Source: NSE. Champion Breweries . Ama Life Breweries Onitsha Golden Guinea Breweries. Ikeja Iganmu. International Breweries. Uyo Guinness Breweries Premier Breweries. Thus.

V sequel to an agreement in principle reached with Consolidated Breweries.04 billion respectively. with Turnover and After Tax Profits. however. an alcoholic beverage brewed under licence and the Hi-Malt brand.2 billion and N2. The acquisition of the shares in DIL/Maltex will enable the Company leverage on the brand resilience of Maltex which was the first malt product in the Nigerian market. Hi Malt. The Company paid out a total dividend of N7.shaping a niche. Ogun State and Awo Omamma. In a bid to further improve its current products mix. we opine will further boost the presence of the Company in the malted products segment in addition to its current malted product.. The Company has remained unshaken by the market majors. ‘The rest’ here was accounted for by the myriad of small brewers. The launching was considered highly successful. Maltonic amongst others. Consolidated Brewers. Guinness and ‘the rest’. Consolidated Breweries operates two breweries located in Ijebu Ode.. relative to N13.56 per share to its shareholders for the year ended 31st December 2008. The acquisition.2 billion respectively in the previous year. In recent times.5 billion and N3. with most of the listed players reporting unprofitable scorecards year after year as they bowed consistently under the weight of production costs and other operational challenges. increased its investment in the latter from 24. Vitamalt. The Company posted highly impressive financials for the period ended 31st December 2008.349. shaping a niche for itself in the low price segment of the beer market. activities around the unlisted brewers have necessitated a new thinking.00% to a controlling stake of 50. Heineken N. a non-alcoholic drink. with the magnitude of its success affirmed as Consolidated Breweries won the award for the best launch in Heineken Africa and Middle-East Region. Imo State. up until recently was defined as a ‘pseudo duopoly’. listed and unlisted. 22 . The Company recently introduced a new product “Turbo King” into the market. Nasmalt.RESURRECTION OF UNLISTED PLAYERS The Brewery Sector as we know it. Consolidated Breweries was incorporated in 1980 and is credited as the third largest brewer in Nigeria after NB and Guinness.05%. the Board recently sought the approval of the Company’s shareholders to acquire 323. Maltina and Amstel Malt (NB). comprising Nigerian Breweries. standing at N17. The Nigerian malted products market currently boasts of over 8 malt brands including Malta Guinness.410 ordinary shares of one naira (N1) each held by CFAO Nigeria Plc in DIL/Maltex Plc. The Company is involved in the brewing of its main brand “33” Export.

launching two new brands into the Nigerian drinks market. another dark ale. some of which are Kronenbourg Beer. market share and distribution. In line with this strategy. Benue Breweries Limited Together. in the malted drinks market. and Champ Malta. Wilfort Dark Ale. marketed under a franchise arrangement). Champion Lager Beer. Sun Top (a line of packaged juices. The Group practices a strategy of acquiring distressed companies and turning them around by investing modern technology and efficient management. Whilst. we have watched the Company emerge from its previously inactive state. we acknowledge that the two market leaders yet hold a strong grip on the market in terms of volumes. 23 . but the Company has embarked on several aggressive media campaigns to re-introduce itself into the market. quite like the previous Wilfort Dark Ale and Malta Gold.6% alcoholic product which enjoys a monopoly position in the small ale segment of the lager market. we opine that should Sona Breweries manage a very successful product launch. However. Uyo Life Breweries Company Limited. plastic and glass ware. it may yet prove successful in the reviving of its product lines and increasing the size of the pie. Tigre Bock. a 7. beverages. We are yet to ascertain if these newly launched products are intended to run simultaneous to previously running Wilfort and Maltonic.Sona Breweries.Redefining Flagging Business Sona Breweries is a member Company of the Sona Group which is in the business of manufacturing beer. the above mentioned breweries are responsible for the brewing of several alcoholic and non alcoholic products in the Nigerian Breweries market. Renowned brands from the stables of the parent Company include Maltonic (a malted drink). The products are Williams. although we do not see its products posing a threat to the ‘Big Two’ in the near term. the Group has stakes in several other fringe brewers in Nigeria such as International Beer and Beverage Industries (Nigeria) Limited (IBBI) Champion Breweries Limited. in the recent past.

has started domestic production of Beck’s in Nigeria in partnership with Champion Breweries. Recently. Nigerian Breweries and Guinness Nigeria may be in for some competition. InBev. Premier Breweries Plc The Company was incorporated in 1976 and subsequently listed on the floor of the NSE in 1988. following the banning of the importation of bottled beer and the high importation tariffs. staff right-sizing. Champion Breweries Plc Champion Breweries Plc was incorporated in July. The Company has indicated its raised funds from the Nigerian Capital Market in 2004 to strengthen its operations but the company appears to still be largely moribund with its facilities lying fallow and profitability very low.3 billion from the Nigerian Capital Market. The Company also operates under the umbrella of the Sona Group.50 131. bottling and marketing of Golden Guinea lager beer and Eagle Stout. Osun State. International Breweries Plc has a subsisting Technical Services Agreement with Brauhaase International Management GmbH (a wholly owned subsidiary of Warsteiner Group of Germany).92 5. the Company is engaged in the brewing.86 561. as well as the producing and marketing of Bergedorf premium lager beer and Bergedorf Malta under a franchise from Holsten Brauerei AG of Hamburg.0% equity in International Breweries Plc. Jos International Breweries Plc Jos International Breweries Plc (JIB) came into existence in 1975 following a tripartite investment agreement signed between the Government of Plateau State of Nigeria. Akwa Ibom State. Considering the financial and technical capabilities of InBev. In a move to rebuild the capital base of the Company and to carry out restructuring. which owns 60. It is located in Uyo.73 -118.36 . Some of the company’s products include Trophy Lager Beer and Beta Malt. Located in Aba.67 313. improvement and expansion of production facilities. 1974 and listed in September 1983 for the purpose of brewing and bottling lager and Champ Malta drinks.60 238.21 -361. the Danish firm of A/S Cerekem International Limited and the Industrialization Fund for Development Countries IFU. Golden Guinea Breweries Golden Guinea Breweries Plc was incorporated in September 1962 and subsequently listed in 1979. the Company recently successfully raised N1. It is located in Onitsha in Anambra State and was incorporated for the purpose of brewing alcoholic products. a global player in the alcoholic drinks market.92 735. 24 INTERNATIONAL BREWERIES Recent Results FY'08 Q3'08 Q1'08 FY'07 FY'06 Turnover (N mill) 931. who are global market leaders.05 PBT (N mill) 63. Its brewery is sited in Ilesa. Jos International Breweries Plc was incorporated and is involved in the brewing of Lager Beer in the brand names of ‘Rock’ and ‘Class’ as well as the production and sale of malted drink in the brand name of ‘Malt Royale’. The Company has been the Technical Partner of International Breweries Plc since inception and became the majority shareholder following the conclusion of the company’s public offering in 2007.MEET THE FRINGE PLAYERS International Breweries: The Company was incorporated in December 1971 primarily to carry out the business of brewing beer and non-alcoholic malt drinks.

25 . especially showing a strong resilience in view of the pressing entry attempts by many of global foreign players. Investment in Raw Materials •Increased Backward Integration (Sorghum Plantation) •Commissioning of Sorghum Malting Plant •Reduced dependence of imported barley 2. NIGERIAN BREWERIES.PRESENT TRENDS AMONGST KEY PLAYERS Having itemised the likely changes in the marginal players as well as key opportunities and challenges. industry pundits expected that it would step back on capital expenditure and looked to its full dividend payout policy as an indication of its preference to reward its shareholders and reap the dividends of its expansion. Innovation in Production •Canning of all product lines •Relaunch of Legend Extra Stout •Fortification of Maltina with calcium 4. in a simultaneously proactive and reactive move to stem an erosion of its current market share. We have noticed organic growth within the Industry.This further serves to reiterate the Company’s pride of place as market leader by volumes in the Brewery Industry. Increased Sales Volumes Following the completion of the multi billion naira Ama factory. this report will be incomplete should we fail to identify some of the other trends in the Breweries industry stewarded by the industry’s giants. especially from capacity additions and output and sales growth across the breadth of the Industry. with a capacity of 3 million hectolitres per annum and the recent successful amortization of the loan obtained by the Company in this regards. Expansion of Capacity •New Canning Line for Fayrouz in Ibadan •Reopening off Aba brewery with new production line •Commissioning of new brewery line in Kaduna 3. However.0 million hectolitres per annum. Nigerian Breweries’ has elected to continue its expansion programme.VALUE ADDITION THROUGH EXPANSION AND INNOVATION 1. the Company had a combined capacity of roughly 9. As at FY’08. Marketing and Distribution •Strengthening of distribution hubs • Aggressive on site marketing •Brand Promotional outreaches 5.

Fermentation. Nigerian Breweries recently commissioned a malting plant in Aba. The Aba Sorghum Malting Plant which was acquired two years ago was formerly known as the Universal Malting Plant and was incorporated in 2004 to produce and supply high quality malted sorghum for the food and beverage industry. positions NB to increase its market volumes significantly going forward as well as aid the reduction of operating costs. Aba and Kaduna. This helps provide some insight into the significance of NB’s multibillion naira investment in the Aba Malting Plant as it provides the basic raw material for the Brewing Process. we have identified two massive expansion projects undertaken by NB in recent times. the Company had committed about N10 billion to the Aba Malting plant project. Nigerian Breweries currently boasts of 5 brewing plants up and running. to assume the role of an African regional knowledge centre for sorghum research as well as to create sustainable employment through direct engagement in sorghum farming and other activities related to sorghum supply chain management. Brewing. The investment has as one of its objectives. 26 . Milling. Aba Malting Plant In furtherance of its commitment to its expansion plans. The malting process refers to the process of preparing grains for further processing and the commissioning of this plant we reckon. Mashing.Expansion Nigeria’s top most brewer has shown tremendous resilience in its position as a leader.5 million hectolitres for the 2008 financial year. The malting plant is an automated sorghum malting plant with cutting edge technology and is reputed to be the biggest of its kind in Africa and the world. sustaining an aggressive expansion programme to continually increase capacity. simultaneously installing canning lines for its various product lines. located in Lagos. Cooling. Ibadan. the Managing Director had disclosed that brewing capacity was a constraint in terms of volumes for the year. As at December 2008. In this light. Maturation (Racking) and Finishing (Filtering and Carbonation). one for its Fayrouz non-alcoholic line in Ibadan and another in Kaduna. Ama. The Company has added on several brewing lines. which is broken down into Malting. Following its most recent record sales of 8. THE BREWERY PROCESS Source: Vetiva Research The Malting Process represents the foremost step in the brewing process.

27% 30. It is our expectation that this would translate into increased revenues when production commences. We have approximated additional revenues from this plant per annum to add up to about N11.49% 27 . The fourth quarter is traditionally a festive period.94% 32.48% 27. (as shown in the table below) which historically returns the largest sales volumes in the year.80% 23.40% 23. The proposed expansion is expected to increase the company’s production capacity by an additional one million hectolitres (c.97% PBT 30.Expansion of Lagos Brewery Nigerian Breweries is currently expanding the capacity at its Lagos brewery with an additional line which is billed for commissioning in September 2009.58% 21.09% 16.63% 23.61% 23.22% 21.19% 24.06% 24. Period Q4'08 Q3'08 Q2'08 Q1'08 Q4'07 Q3'07 Q2'07 Q1'07 Q4'06 Q3'06 Q2'06 Q1'06 NB QUARTERLY CONTRIBUTION Turnover 29.69% 24.17% 35. just in time for the final quarter of the year.9 million cartons of Star Beer).73% 22.99% 23.58% 19.83% 28.13.51% 22.52% 22.65% 22.59% 24.26 billion per annum (at 80% capacity).

Benin (Southern) and Lagos (Western) parts of the country. and expectations are that this would continue to yield operating leverage to the firm.GROWING VOLUMES. and has recently 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. The deployment of the Systems Application and Products (SAP) operating system is also fallout of ongoing re-organisation processes. the Company had a combined capacity of roughly 4. STRENGTHENING PROCESSES The second largest Guinness market in the world has continued to pursue organic growth via an expansive strategy. The Company has revealed its current expansion attempts at both the Lagos and Benin breweries and it expected that this will yield additional volumes of at least a million hectolitres. extension into the canned segments market is expected to yield further growth. the Company recently closed down its Malta Guinness plant in Aba. deploying the production to the Lagos and Benin Breweries. Structural Re-organization Guinness has recently been involved in a reorganisation of its processes. the Company is not resting on its oars. 28 .0 million hectolitres per annum and remains an undisputed leader in the stout market category. That notwithstanding. As at FY’08. Its reorganisation recently involved the offer for sale of its administrative offices in Ikeja and plans are on to relocate the administrative functions elsewhere. Besides this. arrangements to deploy gas plants at its Benin Brewery have reached an advanced stage and it is expected that the deployment would yield operating leverage for the company and improve erstwhile impressive margins. However. Besides the capacity expansion. increasing price and output simultaneous to an over haul of its operations.GUINNESS. owing to its current overhauling of operations. Expansion The company previously operated from 3 plants located in Aba (Eastern). strengthening its existing brand portfolio.

Vetiva Research AGAINST THE TIDE.BREWERS SHOW RESILIENCE In recent times. We had earlier adduced to this flight to quality and the position remains unchanged. Vetiva Research 29 . This is more evident especially in the heat of the most recent Banking Sector reforms which has precipitated yet another bearish run.60 0. SECTORAL RETURNS (YTD)(%) Based on September 24 prices Food and Beverages Building Materials Petroleum Insurance Conglomerates Breweries Banking -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Source: NSE.40 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Source: NSE.40 BREWERIES INSURANCE BANKING 1.80 0.20 Brewery Sector continues to lead market as flight to quality strengthens 1.00 Divergence of Brewery Sector from broader market 0.BREWERIES VS FINANCIAL SERVICES VS NSE ALSI (Rebased 02/01/09) NSE ALSI 1. especially in the wake of prevailing uncertainty in the Financial/Banking System.MARKET UPDATE . the Brewery Sector has played host to renewed investor interest in a flight to quality.

462 36. Maltina Strawberry. NB fortified Maltina with Calcium in 2008 and successfully completed the canning of all its products. the Ama Brewery in 2003. Its initial paid up capital on incorporation in 1972 was N3 million and as at 31st December 2007.LEADING THE PACK .30 2010F 4. namely Maltina Classic.00 57.00 459. The Company re-launched Heineken Lager in June 1998 and Legend Foreign Extra Stout in 2008.73 2010F 203.NIGERIAN BREWERIES PLC Company History Nigerian Breweries Plc (“NB”) was incorporated in Nigeria on 16 November 1946 under the name Nigerian Breweries Limited and commenced operations in 1949 at its Lagos brewery with the roll out of the first bottle of Star Lager Beer.00-65.28 5.949 25.382 25. In line with its ongoing brand development. The Company accounts for majority sales of beverage in the Nigerian brewery industry and has maintained the lead consistency over time.75 4. 30 . Ibadan in 1982.26 25.105 35. it had an authorised share capital of N4 billion and paid up capital of 7. Maltina Sip it (2005).25 31. and Amstel Malta (1994).V 16.62 14.02 12.7 8. However the operations at the Enugu brewery were discontinued in 2004 and the company presently has five operational breweries.9% Business Overview Nigerian Breweries has enjoyed an over 60 year brewing experience with the Nigerian brewing industry with a resulting bouquet of tested and trusted brands.40 3.50 each.61 Financials EPS DPS BVPS (N) EBITDA margin 2008A 3.V-16. Kaduna in 1963.651 26.38 10.3 7.74% Distilled Trading International B.084 43.7 7. which now has three varieties.74% Distilled Trading International B.31 12.V -37.11 17. These brands include: Star Lager beer (launched in 1949).00 Share Price Performance 6 Months (%) 12 Months (%) 68.68 2009F 174. Fayrouz (2006). The Aba brewery was commissioned in 1957.5 billion ordinary shares of N0. and Maltina with Pineapple. The ownership structure of the company as at the end of 2007 comprised Heineken Brouwerijen B.30 Nigerian Breweries Financial Summary Turnover (Nm) EBITDA PAT ROA(%) EV/EBITDA (x) P/BV(x) P/E(x) 2008A 145.04 14.36% Others 45.08 4.678 51.08 4. Its first brewery in Lagos commenced production in June 1949 and five other breweries were subsequently commissioned.778 25. Legend Extra Stout (1992). Maltina (1976).V.99 25.83 25.30 2009F 4.40 4.862 30.047 30.36% Others-45.65 Heineken Brouwerjen B. The company is a subsidiary of Heineken N.9% Summary Current Pric e (N) Fair Value Range(N) Market Cap (N) Billion Free Float (%) 55. Gulder Lager Beer (1970).V 37. Enugu in 1993 and the largest brewery in Nigeria and one of the most modern in the world.

and marking the successful completion of the canning of all its products.54%. ownership of premium brands and strong market presence. the upswing in barley prices in Q2’09 was fully shielded by the full integration of malted sorghum into NB’s production process as well as the recent commissioning of the malted sorghum plant in Aba. had proven inadequate to meet the existing demand for the company’s products. the rollout of cans for its Gulder. PBT Margin improved by over 300 bps relative to Q2’08. Thus.79%. North. Nigerian Breweries is the bigger of the two leaders in the breweries industry. 31 . NB recently embarked on an aggressive expansion plan designed to strengthen its current market position and support the Federal Government’s vision of promoting investment in the country. The MD of Nigerian Breweries had earlier disclosed that the company’s commendable 8. The Company’s production process is largely dependent on raw materials such as sorghum and barley (especially since the ban of barley was lifted). The results reflected the success of the company at strengthening its internal processes for greater efficiency. propelled NB further ahead in the market. largely due to consistent product quality. The canning of its products range which began in early 2008. As regards its recently released Q2’09 results. Lagos. as the Company gained significant market share.The Company’s stake in the brewed products market has continued to grow. Its long standing presence in the Nigerian market has seen it evolve into a responsive brewer with a deep understanding of the Nigerian consumer.40 million hectoliters production level (for the 2008 full year). The company has also showed strong commitment to constant innovation completing in Q1 2009. East. INVESTMENT HIGHLIGHTS Nigerian Breweries stands out on account of its strong market presence. West. new brew houses in Lagos and Kaduna as well as a new bottling line in Aba. we expect recent capacity additions across the value chain to help improve subsisting production capacity in order to close the demand/ supply mismatch identified by the company. relative to the same period last year. improved product packaging and the launch of all its products in cans. from 26. a new canning facility and bottling line for Fayrouz in Ibadan. Fayrouz and Maltina brands. a process which it had earlier embarked upon. We believe the brewer presents a commendable and sustainable business model with its strategically located breweries and distribution centres across the country. (The price of barley appreciated 34. with leading market share in the lager market. the Company grew top and bottom lines by 22% and 37% respectively. NB has an enviable distribution network. Central. It also showed a QoQ improvement of 0.67% to 29. And so. and South. with its sales regions classified into divisions namely. This has led to multi million naira investments in the new malting plant and lager production line in Aba. comprising 147 key distributors and wholesalers across Nigeria.5% between April and June 2009 alone).

we also believe that on the back of current expansion plans and anticipated volume additions.08 billion and After Tax Earnings of N30.38 billion in FY’09. NB PROFITABILITY MARGINS (%) 60% Gross Margin 50% EBITDA Margin PAT 40% 30% 20% 10% 0% 2006 2007 2008 2009F 2010F 2011F Source: Company Financials 32 . beyond the absolute figures.9 billion by 2011. since the start of the 2009 financial year.The company’s performance has showed strong growth in margins. Although we believe that at its current price.08. which yields an attractive forward dividend yield of 6. Earnings Forecast and Valuation It is our expectation that the Company will record a turnover of N174.8% It is also our expectation after due consideration of prior performance that. This translates to an EPS and DPS of N4. highlighting the likely impact of factors such as deteriorating security concerns. the Company’s Management has again expressed its cautionary stance as regards its ability to continue to exhibit this positive trend. Although. earnings will grow at a compounded rate of 21% over the next 5 years to N57. an improvement we have partially attributed to the numerous operating and distribution enhancement strategies effected in different areas of the company’s operations since 2008. we premise our optimism that NB can continue to maintain its current margins on its strong operating leverage and focused management. the current global situation and the devaluation of the Naira. subsequently impressive scorecards will justify the upward increases in investor’s pricing of the stock. NB is approaching full value in the near term. QoQ.

including the recent commissioning of an ultra modern sorghum malting plant located in Aba.51% growth which represents the lowest growth in turnover q-o-q since FY’06. a strategic production and distribution hub for the company. indicative of the success of the Company’s improved cost management. 33 TURNOVER AND NET INCOME Naira Million Turnover Net Income 82.691 68. We adduce to rapid volumes growth by the Company in recent times sequel to the commissioning of the Ama factory. It recorded a 21.69 billion in Q2’08. NB has successfully mitigated against this by reason of its strong presence across the value chain (it is involved in all the stages from cultivating sorghum to distribution. positively yielding decreased production costs. Despite the highly challenging environment and higher input costs. enabling it attain significant operating leverage) and in the Nigerian market. This enabled the Company access its primary raw material input at reduced costs. PBT grew at a faster 36. Operating profit advanced 39% to N24.6bn relative to a 21. than previously.855 Q2’09 Q2’08 12.053 16. the decline in turnover growth may be as a result of comparison with the most recent year’s volumes and reflective of the slight threats posed by consumers’ more circumspect spending in the light of the challenged disposable income levels. to widespread increases in the cost of raw material inputs. Highlights of the company’s most recent scorecard (Q2’09) are presented below. to ensure the steady supply of malted sorghum for the company’s operations.5% growth in turnover. despite increases in raw material inputs and energy costs over time (energy costs stood at 7% of sales as at FY’08). This acquisition we believe was made. turnover growth recorded a slight decline relative to our expectation.59 billion from N17.FINANCIAL REVIEW Nigerian Breweries (NB) has proven largely resilient to recent multifaceted challenges prevalent in the real sector ranging from tightening credit lines. several factors are responsible for this feat. In our opinion.8% to N24. In direct contrast with the aforementioned performance measures (PBT and PAT). thus. FY’08 and subsequent quarterly scorecards released amidst the challenging environment have served to reiterate our opinion on this resilience.337 Source: Vetiva Research & NSE . The Company’s most recent scorecard (Q2’09) showed PBT growing at a more rapid growth rate relative to previous comparable period and immediate past period. both challenges reflective of the worldwide economic slowdown. Despite the harshness of the immediate operating environment. NB: PRESENCE ACROSS THE VALUE CHAIN CULTIVATION OF SORGHUM ON SORGHUM FARMS BREWERY PROCESS MARKETING AND DISTRIBUTION OF FINAL PRODUCTS Margins have continued to show marked improvement. Continued expansion of turnover by volume as against price driven growth which has been consistent with the Company over time.

9% and 16. The Total Assets turnover grew from 1.15 times in 2008.Ratio Analysis 1. In 2008 however. impacting the Gross Margin to 48. 3. 34 . Profitability Analysis In terms of profitability. was fully repaid in 2007. the Current Ratio declined steeply from 1.8 percent in 2007 and PAT margins from 7. premised on a 300 bps reduction in distribution and administrative costs relative to 2007. we adduce this decline to a reduction in the Company’s cash and bank balances.3% in 2008. However. The company has shown sustained growth in its profit margins between 2003 and 2007. reflecting the company’s ability to effectively convert its inventory to sales.8% and 17. resulting in a commensurate decline in turnover days from 52 days to 46 days. However. indicating better management of creditors and simultaneous reduction in debts outstanding during the period. in the year under review. The company has taken advantage of its market leadership position to increase profit made significant returns on its shareholders funds. Although this represents a departure from the typically upward incline. This is in spite of the competition from Guinness and other fringe players in the industry. The Company’s receivable days has declined from 20 days in 2006 to 10 days in 2008.9% to 25. also relative to FY’07. representing a negative working capital position.90 times in 2006 to 7. while Payable Days has increased from 59 days to 65 days. the Profitability margins improved from 24. relative to previous periods as well as a 44% increase in creditors and accruals.4 percent in 2003 to 17 percent in 2007. recorded in the previous years.2% relative to 24.3%. Inventory turnover increased from 6.74 times in FY’08.79 times and 0. and has consistently demonstrated its ability to meet short term obligations when they fall due. also precipitated a decline in Quick and Cash Ratios respectively. Liquidity The Company has previously displayed an above average management of its liquidity position.2 percent in 2003 to 25. This combination. Activity/Asset Utilisation NB’s utilisation ratios show the company’s improving position over time. reflective of the ability of the company to harness sales through its fixed assets. there was a marked increase in Cost of Sales as a percentage of sales from 47.08 times in 2006 to 1. this was mitigated by the reduction in distribution and administrative costs.08 times and 0.54 times respectively in FY’07 to 0. from 0.36 times in FY’07 to 0. NB has maintained a highly profitable business with its Gross Margin hovering around the 50 percent mark between 2003 and 2007. Leverage NB remains fully equity financed sequel to the full repayment of the loan obtained for the construction of the Ama Brewery.04% to 51. 4. it is indicative of improving working capital management. 2.88 times in 2008. Overall. Repayment for the loan which secured in xxx. Operating margin improved to 25. In the immediate past year. growing PBT margins from 13.01 times in FY’08. representing a negative working capital position.7 percent.7% respectively for PBT and PAT.

18 billion and a 25% CAGR in After Tax Earnings. These assumptions provide guidance for our forecast from 2009 – 2011.33% on the 10-year Federal Government (FGN) Bond in the month of August 2009 as our risk free rate.75 and N5.Our assumptions as regards expectations for NB’s operations and performance are stated below. In arriving at a fair value for Nigerian Breweries Plc we estimated Free Cash Flow (FCF) and PAT for the period between 2008 and 2012.1 bn in 2008 to N73. we assumed a terminal growth rate of 3.14-N66. Our valuation employs a Weighted Average Cost of Capital.9 based on the 5year historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE-ALSI).0%. Our forecast DPS for the forecast period 2009 to 2011 are N4. which is estimated using a beta value of 0.75 billion in 2007 to N232. Whilst we have identified the rising costs of prime raw materials such as barley. We expect NB to continue to grow its capacity.25 per share while the Price to Earnings multiple generates a N61. from N27.0%.5 bn in 2012. we also look to the malting of sorghum and the commissioning of the new malting plant to improve supply of malted sorghum and mitigate against aforementioned exorbitant barley costs and inspire the Gross Profit Margin at 50% through to 2012. The Company has maintained a Gross Profit Margin slightly over 50% over the past two historical years. WACC of 16. In our DCF valuation. especially in the light of threats from new players.82 billion to N66.19 billion in 2011. We assumed a market risk premium of 5%. We therefore place an ACCUMULATE recommendation on Nigerian Breweries with a 15% upside potential from its current price of N57. 35 . on account of the recent commissioning of a new line for Star in Aba and a new 1 million hectolitre line in Lagos due for commissioning in September.6bn in 2008 to N45. We hold this responsible for our current growth assumptions until 2011. further justifying our assumption of constant gross margins.11 per share. Our financial forecast assumes a 5 year CAGR of 20% from N111. coupon rate of 11.79 billion in 2011. We estimate a 24% CAGR for growth in Before Tax Earnings. we expect the Company to retain its current pricing policy and pass on the incidence of any increased costs to its consumer. inspiring a leap from N18.39 respectively. We have also assumed an effective taxation of 31%. We project FCF to grow from N20.08. A weighted average of the two valuation model indicates an average fair value of N65. It is our opinion that NB is currently running at 96% of capacity (approximately 9 million hectolitres installed capacity) and we anticipate a further increase. N4. especially taking advantage of the inelastic demand profile of its products.5%.89 billion in 2007 to N40. Our Discounted Cash Flow model values NB at a fair value range of N54. The unavailability of an expense and cost breakdown curtails our cost by cost justification. We also estimate PAT to grow from N25. We also estimate slightly stable EBITDA margins in excess of 30% going forward. Nonetheless.00 for NB.9bn at the end of 2012 at a 5 year CAGR of 25.

075.336 3.312 23.5 9.672.7 1.4) 39.2 (18.2) 35.336 3.852.788 3.702.781 4.469.0 (118.676.110 3.1 (27.8 7.0) 25.774.1 23.234.9) 18.863.0 15.418.509 43.544 51.650.4) 34.2 150.9) 70.781 4.298 58.6 4.110 3.772.295 37.0 12.3 (52.796.6) 16.205 14.3 7.6 52.471 51.8 50.658.2 4.412.974 2011 F 232.0 189.408 40.162.0 9.2 30.005 43.823.832.3 420.6 44.7 29.8 23.1) 11.4 16.0 54.3 16.585.781 4.4 (32.117.781 4.423.298 17.2) 16.561.445.791.9 34.899.0) 43.118 124.5 19.802.606 43.183 11.862.748.135 14.8 25.451 4.892.7 27.6 59.782.778.591 17.639 32.684.5 46.297.778.585.354 20.785 6.8 10.2) 50.444 36 .2) 36.0 72.037.1 (41.707.708 14.8 192.2) 30.322.263.568 7.591 36.568 7.2 20.667.0 16.6 2007 50.193.0 (103.533.8 39.0 23.0 62.155 18.100.548 2008 145.568 7.091.858.9) 59.8) 27.953.360 6.184.193.4 (512.443.0 27.413 2009 F 174.2 (48.125.105.360 6.530 14.3 75.469.747 30.781 4.310.0 209.8 4.875.1 741.954 44.756.459 33.5 52.6 (13.6 422.5 (25.8 30.5) 24.832.660.7) 10.0 995.6 (56.933.156.0 519.0 22.8 393.240 16.2 (41.325 27.6 (9.890.948.184 35.8 27.933.959.412 3.700.183 90.920.825.461.4 (35.3 (5.980.6 2009 F 67.4 (30.6 1.563.546 36.625.328.155 73.535.747 15.4 50.451 4.795.8 (74.1 201.823.847 18.9 69.990.084.548 3.304.5 17.708 113.862.118 14.657 2007 111.657 3.074 32.4 (40.3 37.7 229.949.1 36.5 37.5 2006 49.775.562 61.8 70.5 (11.3 27.678.0 54.314.357.0 16.2 (18.641.413.4) 113.2 67.948.204.875.3 36.5 27.613.506.7 12.562 17.0) 44.8) 40.1 220.301.651.920.781 4.8 44.5) 57.8) 99.076.405.223 3.100.386 27.4 104.4 57.074.0 43.9 4.6 172.671.222.3 8.223 3.907.703.0 (88.297.3 6.568 7.718.2 59.249 8.169.6 249.168.8 76.0 16.4) 30.345.5 123.6 4.8 2010 F 70.591.9 1.9 51.8 37.009.540 14.105.7 57.107.684.0 51.6 10.125.5 3.519 44.8 (34.6 57.9 43.594 11.9 113.900.974 3.949.INCOME STATEMENT (N'Mill) Turnover C ost of Sales Gross Profit Distribution& Adminsitrative C harges Core Operating Profit Other Income EBITDA Depreciation & Amortisation EBIT Interest (Paid) &Similar C harges Profit Before Taxation and Exceptional Income Exceptional Income Profit Before Taxation Taxation PAT Dividend NOPAT Retained Earnings BALANCE SHEET (N'Mill) Assets Fixed assets Investments Long Term Debtors and Prepayments Current Assets Stocks Debtors & Prepayments Deposits for Imports Investments in C ommercial Papers C ash and Bank balances Total Assets Liabilities C reditors &Accruals Taxation Bank Overdrafts Dividend Total Current Liabilities Long Term Liabilities Deferred Tax Liability Gratuity Total Liabilities Net Assets Unsecured convertible loan stock Deferred taxation Gratuity Total Long term liabilities Current Asset less cash Capital and Reserves Share capital Share premium Bonus issue reserve C apital Reserves General Reserve Shareholders' Equity Total Liabilities & Equity 2006 86.631 16.623 36.3 5.651.8) 85.818.557.960.5 20.0 180.5 25.3 90.796.895.469.2 7.249 75.4 2.0 24.0 822.9 2008 63.7 (8.316.850.568 7.7 40.618 14.785 29.245.453 3.6 4.288.871.242.785 6.7 2011 F 76.617.952 24.357.151.229 104.124.663.194.677.522 37.946.568 7.302 2010 F 203.741.1 3.847 66.931.5 (16.229 14.332.5 149.0 15.532 17.469.0 124.618 145.6 63.457.5) 18.787.942.720.053.

Nigeria attained the position of second largest Guinness market accounting for about 41% of Guinness Stout sales worldwide. The Company is investing huge resources into growing production and sales volume as well as into the continued improvement of its operations.73 6.00 25. Sequel to the 16% growth in sales recorded in 2007. a multinational beer.40 13.30 Guinness Guinness 46.58-149.007 16.77% Others 46. United States and Cameroun. Nigeria recently overtook Ireland as the world’s second largest Guinness market after Great Britain. a second in Benin in 1974 which was expanded further to accommodate a brewery for stout products in 1978. The ownership structure of the company as at the end of 2008 comprised: Guinness Overseas Limited (Foreign)-46. The Company produces five major brands: Guinness Extra Smooth.30 2010F 10.77% Others (Nigerian) -46. 7.200 25.74 17.94 5.28 Summary Current Pric e (N) Fair Value Range(N) Market Cap (N) Billion Free Float (%) 144.299 25. in the Eastern part of the country in 2004 to meet the growing demand for the company’s products.08 24. The company built its first brewery in Ikeja in 1962. Guinness has consistently won international recognition for its top performance in the Brewery industry.HOLDING FORT: GUINNESS NIGERIA PLC Guinness Nigeria Plc (“Guinness) was incorporated in Nigeria on 29 April 1950 and commenced operations in 1962 marking the opening of Guinness’s first brewery outside the United Kingdom and Ireland.168 11.10 5. Gordon’s Spark and Harp Lager.74 15.20 9.14 23. 37 .84 8. trading in over 180 markets around the world with operations in 7 key markets across the continents. Guinness Nigeria Plc operates under the Diageo Group.00 135.30 2009A 9.03% Atalantaf Limited (Foreign) -7.97 2009A 89. which is reputed as the place of its birth. Nigeria.72 6.861 17.745 13.04 Financials EPS DPS BVPS (N) EBITDA margin 2008A 8.173 20.489 16.04 6.18 7.50 21.629 30.51 28. The fourth Nigerian brewery was built in Ogba in Lagos in 1982 to brew Harp Lager Beer and was also expanded to include Guinness Stout while the final one was built in Aba. Diageo’s top markets for the Guinness brand are Great Britain. bottling and marketing of Guinness products and was subsequently listed on the Nigerian Stock Exchange in November 1985 under the Breweries Sector.90 6.541 14.37 28. Malta Guinness as well as Smirnoff.00 Share Price Performance 6 Months (%) 12 Months (%) 63. Guinness has enjoyed a commendable patronage and still enjoys significant market share in the Nigerian brewery sector.69 2010F 101. It was licensed to operate as a brewery carrying out the business of brewing.39 213. wine and spirits company.2% Although with significant roots in Ireland.2% Financial Summary Turnover (Nm) EBITDA PAT ROA(%) EV/EBITDA (x) P/BV(x) P/E(x) 2008A 69.148 26.03% Operations Atlantaf Ltd. The Guinness factory located in Nigeria was the first Guinness brewery to be located outside the United Kingdom.

Guinness is approaching full value in the near term. and consequently showing a positive. Nigeria represents a key Diageo market. Malta Guinness and Smirnoff Ice amongst others. Earnings Forecast and Valuation Our FY’10 forecast for Turnover and PAT stands at N101. The Company’s stock has received considerable and sustained investor following in recent times. which we believe would continue to inspire sustained demand relative to the declining demand being reported in developed economies. earnings will grow at a compounded rate of 15% over the next 5 years to N35.INVESTMENT HIGHLIGHTS Guinness is a premium brewer of alcoholic and non alcoholic drinks and proudly holds the strategic position as second largest brewer in Nigeria by reason of its market share. We also lend our optimism to the bottom heavy and growing demographics of the country.14 respectively. Harp Lager. The Company has made concerted efforts to achieve operational efficiency by implementing stringent waste reduction strategies. current expansion plans slated for deployment in Benin and Lagos in 2010 through to 2011.63 billion and N16. Strong earnings and dividend yield. very much in line with the tradition of the Brewery Sector leaders.86 and N8. the company recently overtook its Irish counterpart to emerge the second largest market for Guinness products worldwide. We expect a stronger earnings profile in the medium to longer term. In confirmation of its premier status. Guinness’s brand portfolio includes Guinness Foreign Extra Stout. 38 . optimizing resource utilization and improving its Procurement functions. infrastructural challenges notwithstanding. It is also our expectation after due consideration of prior performance that. we believe will justify the upward increase in investor’s pricing of the stock. (an additional million litres) and subsequent encouraging scorecards. However.3 billion by 2013. We believe though. on the back of these improvements We remain optimistic in the performance of the Company going forward. A subsidiary of the Diageo Group. recently overtaking Ireland to emerge second largest Guinness market worldwide. The Company recently shut down operations at its Aba plant. gaining over 80% from its Year Low Value. that in the light of previous positive investor sentiments. We acknowledge the ongoing deployment of gas plants at both the Benin and Lagos plants as well as the attendant potential reduction in power costs.00 billion respectively and we estimate EPS and DPS for FY’10 of N10. Guinness has succeeded in defending its income from the threats of a highly volatile operating environment . Guinness Nigeria Plc is the second largest brewer in the Nigerian brewery industry and is a clear leader in the stout market. Guinness Extra smooth. noteworthy divergence from the Broader Market. we believe this is in line with its intentions to achieve an efficient asset portfolio and expansions are currently ongoing at the Benin and Ogba plants.

03% and 17. however. Before and After Tax Earnings grew by a much slower 11. Relative to the performance all through the 2008/9 financial year where Earnings growth exceeded growth in Turnover owing to operational efficiency flowing from stringent waste reduction strategies and optimal resource utilization.172 13. This impacted the Company’s administrative costs negatively and lowered profit margins as is reflected in the above text. The Company has recently faced challenges with staffing costs and is reported to have increased salaries by 14% and has plans to implement a subsequent pay increase.148 69. Before Tax and After Tax Margins both declined YoY from.11% (PBT) and 17.15% (PAT) to 21. Highlights of the company’s most recent scorecard (FY’08/9) are presented below In congruence with its Q3’08/9 performance. the Company grew its top line by 28.861 FY’08 Source: Vetiva Research & NSE 39 .9%.541 FY’09 11. PBT and PAT margins also recorded declined from 25.GUINNESS PROFITABILITY MARGINS (%) 60% Gross Margin 50% EBITDA Margin PAT 40% 30% 20% 10% 0% 2006 2007 2008 2009F 2010F 2011F Source: Company Financials FINANCIAL REVIEW Quite contrary to what was reflected in the Q3’09 results.17% respectively. TURNOVER AND NET INCOME Naira Million Turnover Net Income 89. this performance seemed rather extraneous. the Company’s most recent scorecard (FY’08/9) showed PBT growing at slower rate relative to Turnover. QoQ.7% respectively.30% and 15. 24.1% and 14. reflecting some pressure on the company’s costs. In a departure from the defensive tradition of the brewers.18% respectively in FY’08/09. We believe the recent shut down of operations at its Aba plant and the successful deployment of resources to the Lagos and Benin breweries respectively in line with the Company’s intentions to achieve an efficient asset portfolio may have resulted in additional distribution costs from Lagos and Benin to the Eastern hub further depressing previous margins.

However.1 billion to N5. We expect the Company’s performance to improve in future years on the back of ongoing expansions.In the period under review. the increase in debtors outstanding could not offset the significant increase in short term borrowings. We remain optimistic in the performance of the Company going forward. while trade Debtors doubled from N3.3 billion reflecting a less stringent debt collection policy and an increase in the debtors’ collection period. 40 . which we opine would impact turnover growth. infrastructural challenges notwithstanding. we expect Guinness to continue to post steady Top and Bottom line growth and sustain current margins on the back of its strong brand portfolio and aggressive marketing drive. We also lend our optimism to the bottom heavy and growing demographics. as well as increased operational efficiency.1 billion as at FY’09.2 billion to N6.5% from N15. We acknowledge the ongoing deployment of gas plants at both the Benin and Lagos plants and the attendant potential reduction in power costs. The aforementioned challenges notwithstanding. inspiring the massive erosion of the firm’s working capital position. the Company’s cash and bank balances recorded a significant decline of 61.

42x. GP margin improved slightly from 48.0% in 2007. Given the Company’s reliance on equity and short term financing rather than long term debt. from 30.5% in 2008. Profitability Analysis A diagnosis of Guinness profitability shows an appreciable performance in cost control. 2. we further decomposed Guinness’s 5-year average Return On Assets (ROA) of 17. On the other hand. Despite the onset of an unfavourable economic and operating environment in 2008. the Company has reduced them significantly (measure d as a percentage of total liabilities and equity). PBT and PAT margins grew rapidly from 21.0x in 2008. This implies that more potential exists for efficient asset utilisation so as to precipitate increased ROA. Solvency Guinness has reduced its Debt to Equity ratio from 12 % in 2003 to Nil in 2007. Highly commendable is the trend in the Quick Ratio as it has remained above the theoretical safe benchmark of 1. we consider the company highly solvent and conservative in terms of its financing strategy.10x times and 0.00x. Guinness’ performance has beat that of NB to second place 4. Operating Ratio also improved from 27.30 times and 0.1% in 2006 to 48.50 times respectively. However.2% in 2006 to 23. However. Liquidity Guinness has maintained an enviable liquidity position growing its liquidity position year on year and increasingly showing its ability to meet short term obligations when they occur.3% and 13. The company recorded effective working capital management as well as growing profit margins which led to the growth in ROE from 24.46x to 1. a more effective working capital management and greater margin improvement could serve as key drivers of ROE.67 times to 1.8% and 17.9% respectively in 2006 to 24.1% to reveal an increasing fixed asset turnover and declining current asset turnover. 41 . The Quick and Cash ratios also decreased marginally from 1. in terms of its short term liabilities.1% in 2008 on the back of effective cost management. the Company has no long term liability in its books. Asset Utilisation and Activity The Asset Utilisation and Activity ratios show commendable and efficient utilization of its assets. the company’s Current Ratio decreased slightly from 1.Ratio Analysis 1. and in due consideration of its interest cover. Relative to its liquidity position in 2006. However. Thus. on a comparative analysis of the past five years.5% in 2008. 3.3% in 2006 to 25.8x in 2006 to 39.85% in 2006 to 29. This is further substantiated by the Times Interest Cover which also recorded a leap from 7.2% in 2008.

WACC of 16.9 based on the 5year historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE-ALSI).39 per share while the Price to Earnings multiple generates a N154.20 respectively. N9. coupon rate of 11. we readily admit efforts of the Company at improving margins. and likely increases in power costs. In our DCF valuation. The recent deployment of gas powered generating plants at the Benin and Lagos brewing plants should lend to decreased production costs. N10. the Company would maintain Gross Margins in the range of 50%.5 billion in 2012. We also lend some of our credence to the recent defensiveness of the Sector and the strength of Guinness’ brands. It is our expectation that in spite of raw material costs on the increase. These assumptions provide guidance for our forecast from 2010 – 2012.9 billion in 2008 to N20.50. Assumptions The Company has maintained a Gross Profit Margin slightly exceeding 50% over the past two historical years. especially in the light of threats from new players. Our Discounted Cash Flow model values Guinness at a fair value range of N135.Our assumptions as regards expectations for Guinness’s operations and performance are stated below. from N14.6 billion and a 15% CAGR in After Tax Earnings.7 billion in 2012. on account of the ongoing capacity expansion at the Lagos and Benin breweries.8 billion to N29. We assumed a market risk premium of 5%. A weighted average of the two valuation model indicates an average fair value of N148. It is our expectation that Guinness will continue to grow its capacity. we estimate a 12% CAGR for growth in Before Tax Earnings.33% on the 10-year Federal Government (FGN) Bond in the month of August 2009 as our risk free rate. Our valuation employs a Weighted Average Cost of Capital.53 and N12. We project FCF to grow from N16.59-N149. It is our opinion that Guinness is currently running at 85% of capacity (approximately 5 million hectolitres installed capacity) and we anticipate a further increase. we assumed a terminal growth rate of 3. In arriving at a fair value for Guinness Plc. and whilst we have identified the rising costs of prime raw materials such as barely. Our financial forecast assumes a 5 year Turnover CAGR of 17% from N69. We also estimate slightly stable EBITDA margins of about 28-30% going forward. which is estimated using a beta value of 0.2 billion in 2008 to N127.59 bn in 2010 to N29.27 bn in 2013. we estimated Free Cash Flow (FCF) and PAT for the period between 2010 and 2013. Our forecast DPS for the forecast period 2010 to 2012 are N8.04 per share. We therefore place a NEUTRAL recommendation on Guinness at its current price of N144. We hold this responsible for our current growth assumptions until 2012. 42 .5%.14.50 for Guinness.52 .0%. inspiring a leap from N11.

933 3.610 201 42.546 147 1.818 20.856) 2009 F 90.850 2.577 21.670 18.861 (8.900 16.337 110 16.722 4.997) 7.914 16.136 59.303 83.662 26 22.546 25.007 41.611) 33.809 2.385) 19.721 6.144) 28.901 (2.562 (7.602 29.669 8.400 74.633) 2.125 268 30.145 3.462 27.949 (1.168 (3.316 108 12.462 49.581 17.021 5.617) 2.845) 25.774 103.163) 16.773 8.180 (54.266 12.977) 2010 F 104.790 14.036 103.909 (6.884 (4.243) 17.450 450 53.723 191 47.232 38.495 8.481 11.714 12.416 71.256 12.673) BALANCE SHEET (N'Mill) Assets Fixed assets Investments Long Term Debtors and Prepay ments C urrent Assets Stocks Debtors & Prepayments Deposits for Imports Investments in C ommercial Papers C ash and Bank balances Total Assets Liabilities C reditors &Accruals Taxation Bank Overdrafts C urrent Portion of Term Loan Total Current Liabilities Long Term Liabilities Deferred Tax Liability Term Loan Provision for liabilities &charges Total Long Term Liabilities Net Assets Capital and Reserves Share C apital Share Premium Bonus Issue Reserves Revaluation Reserves Revenue Reserve Shareholders' Equity Total Liabilities& Equity 2.107) 43.064) 20.540) 2.480 8.223 6.568 6.156 3.006 (13.193) 10.939 13.230) (6.437 11.532 182 29.807 (6.867 8.674 43 .324 110 14.354 371 16.600 39.818 74.190 49.437 (3.720) 2007 62.170 (4.878 2011 F 53.965 93.991 16.834) (4.546 147 3.045 211 38.224) (7.809 737 1.455 13.393 12.500 3.705 798 25.781) (5.123 5.533 5.540) 1.580 20.564 (14.850 737 1.674 18.198 23.334) 28.008 38.202 39.811 14.016 38.581 71.500 20.745 5.INCOME STATEMENT (N'Mill) Income Turnover Cost of Sales Gross Profit Distribution& Adminsitrative C harges Advertising& Promotion Expenses C ore Operating Profit Other Income EBITDA Depreciation & Amortisation EBIT Interest (Paid) &Similar C harges Interest Receiv ed Profit Before Taxation and Exceptional Income Exceptional Income Profit Before Taxation Taxation PAT Dividend 2006 53.948 (8.546 35.546 45.551) 764 11.036 590 1.875 (7.585) 32.842 34.971 32.247) 25.153 34.000 21.546 147 1.000 5.121 (5.507 (14.656 737 1.704 11.119 (1.227 (1.647 3.876) 23.591 (47.764) 14.852) 27.114 2010 F 47.336 (1.167 22.921 30.006 29.535) 2011 F 119.265 (34.546 30.669 45.273) 14.730 18.874 20.577 83.013 25.875 23.620 8.640 7.758 4.232) 11.713 (12.173) 50.164) 20.502) (8.231 51 13.013 (4.349) 16.867 36.558 33.637) 2008 69.042 (437) 1.886 4.758 4.981 3.677) 12.072) 14.807 (62.294 (1.280 36.060 55.587 7.656 2009 F 42.167 93.991 (2.878 737 1.605 29.884 14.440 (4.495 40.697 55.090 2.546 147 1.637 (10.971 (5.691 (6.546 51.170 28.952) (9.007 30.299) 57.773 49.093 (5.168 20.173 (35.901 14.410 9.546 147 1.948 15.197 14.484 (11.652 (27.902 20.224 (1.114 737 1.126) 17.546 147 1.948 59.948 27.909 20.

It is our expectation that this. we opine that expected funding for some of these new entrants might be respectively affected. further heightened by current reforms ongoing in the Banking Sector and expectations of a stricter risk management structure within the Sector. we look to commendable quarterly result declarations from NB as well as Guinness. of the incursion of foreign brewers such as SAB Miller on the present configuration of the Brewery Sector. it is our expectation. with respect to market share. Despite the economic challenges. currently the country’s third largest brewer). We also expect ongoing expansion programmes by NB and Guinness to yield strong volumes and increased profitability. we are strongly optimistic in the Brewers and their ability to weather the storm. as well as impressive dividend declarations from these two will further spur increased demand for Brewery stocks. such as tight liquidity. In terms of stock market activity as regards equities within the Sector. We also look to the release into the market of the smaller sized bottles of Turbo King (a stout brand produced by Consolidated Breweries. we look to see the effects if any. However. The recent launch of the brand’s bigger stout bottle was reported as largely successful. We foresee that the incursion of foreign brewers may in the medium to longer term. In summary. We expect the Big 2 to continue to increase their market share on the back of product diversification and proven expertise in the face of strengthening competition. We believe that investors would continue to seek value in the Breweries Sector and other FMCG stocks on the back of sustained demand and growth. profit margins and customer brand loyalty would change somewhat . We also anticipate that the brewery majors would be able to sustain existing profit margins. 44 . on the back of established operating leverage.SUMMARY We expect a highly active Brewery Sector going forward especially on the back of the growing presence of new entrants SABMiller and Castel. Having identified the latent challenges militating against the real sector. that the current picture of the industry. having identified the present forces impacting on the Brewery Sector. Demand is set to grow as population is also on the increase and penetration levels remain low. bring about changes in the current structure of the Sector. we expect that the ‘flight to safety’ will prevail until much of the uncertainty currently pervading the Financial Sector fades. Thus.

Reduce and Sell. Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential return of between 10% and 20% is expected to be realized between the current price and analysts’ target price. Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where potential return of between -10% and -20% is expected to be realized between current price and analysts’ target price.10% is expected to be realized between current price and analysts’ target price.. 45 . Sell/Underweight recommendation refers to stocks that are highly overvalued but with weak fundamentals and where potential return in excess of or equal to -20% is expected to be realized between current price and analysts’ target price. Accumulate. Neutral/Hold recommendation refers to stocks that are correctly valued with little upside or downside where potential return of between +/. Neutral.INVESTMENT RECOMMENDATIONS Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy. Buy/Overweight ≥ +20% expected absolute price performance Accumulate +10% to +20% expected absolute price performance Neutral/Hold +/-10% range expected absolute price performance Reduce -10% to -20% expected absolute price performance Sell/Underweight ≥ -20% expected absolute price performance Definition of Ratings Buy/Overweight recommendation refers to stocks that are highly undervalued but with strong fundamentals and where potential return in excess of or equal to 20% is expected to be realized between the current price and analysts’ target price.

All investors are solely responsible for their investment decisions. Thus. market indices. Any investments discussed may not be suitable for all investors and the reader(s) should independently determine their suitability and evaluate the investment risks associated with such investments. This document is for information purposes only and for private circulation. No portion of this document may be reprinted. industry cycles. a conflict of interest may arise that could affect the objectivity of this report. in some cases. estimates or opinions expressed in this report. Vetiva Research is disseminated and available primarily electronically. Consequently.Disclosures Section Analyst Certification All of the views expressed in this report articulate the research analyst(s) opinions/views regarding the companies. Vetiva Capital Management Limited is a Dealing Member of the Nigerian Stock Exchange and is registered with the Securities & Exchange Commission to conduct Financial Advisory. Any ratings. Other Disclosures A reference to a particular investment or security in this report should not be deemed an investment proposition nor should it be interpreted as a recommendation to buy. It is noteworthy to mention that Vetiva Capital Management Limited does and seeks to do business with companies covered in its research reports. forecasts. 46 . and. The value. Additional information on recommended securities/instruments is available on request. The analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations. sold or redistributed without the written consent of Vetiva Capital Management Limited. price or income from investments mentioned in this report may fall as well as rise due to economic conditions. All rights reserved. Brokerage & Dealing and Trusteeship business in Nigeria. reasonable and fair. in printed form. Fund/Portfolio Management. No reliance should be placed on the accuracy. industries or markets discussed in this report. Disclaimer Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings. securities. © 2009 Vetiva Capital Management Limited. fairness or completeness of the information contained in this report as it has not been verified by the research analyst(s) involved or the companies whose securities have been referred to except as otherwise disclosed. operational or financial conditions of companies or other factors. sell or hold such an instrument. Vetiva Capital Management Limited and its employees shall not accept liability for any loss arising from the use of this document or its contents in making investment decisions or recommendations. It is also instructive to note that a Company’s past performance is not necessarily indicative of its future performance as estimates are based on assumptions that may or may not be realized. forecasts. estimates and opinions also contained herein are objective. estimates and opinions set forth in this document constitute the analyst(s) position as at the date of the report and may not necessarily be so after the report date as they are subject to change without notice. no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.

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