Nigerian Breweries: Earnings set to surge this year despite shock to global food & energy prices

By David Whitehouse
Posted on Thursday, 10 March 2022 10:39

Empty beer bottles are seen at the Bature brewery in Abuja
Empty beer bottles are seen at the Bature brewery in Abuja REUTERS/Afolabi Sotunde

Nigerian Breweries shares remain undervalued as the stock market has yet to fully price in prospects for recovery in 2022 sales and profit, according to research from Chapel Hill Denham.

“There is a mispricing that should be corrected over the next 12 months,” Chapel Hill Denham analyst Tajudeen Ibrahim writes in a research note. Earnings per share (EPS) is set to surge 92.4% this year, Ibrahim argues, exceeding the Bloomberg consensus estimate for a 63% increase. Heineken has a majority stake of 56% in Nigerian Breweries.

The shock to global energy and food prices triggered by Russia’s invasion of Ukraine has divided the world into two groups of companies: those who have pricing power in an inflationary environment, and those who do not.

The size and youthfulness of the Nigerian market means that Nigerian Breweries company is likely to be able to make price increases stick. Research from Oxford Economics published this month shows that the Nigerian beer market was worth $2.29bn in 2019, making it Africa’s second-largest market behind South Africa and putting it ahead of Hungary and Bulgaria combined.

  • Nigeria’s young population raises the prospect that the country will climb from its current position of 30 out of 70 global markets surveyed by Oxford Economics: the median age in Nigeria is 18.1, compared with 26.7 years in South Africa.

The country’s beer market fundamentals remain strong with high growth potential, the company said in its earnings presentation. It also pointed to the prospect that consumer spending ahead of elections in 2023 may increase. Still, country volatility in Nigeria remains a high risk due to macro-economic indicators, security and infrastructure, the company said.

  • The Chapel Hill Denham research notes that currency volatility is a downside risk to earnings. Currency losses climbed  48% to N7bn ($16.9m) in 2021,  due to payments for imported materials.

Price increases

Full-year 2021 revenue increased 30% to 437.2b naira, while net income increased 72% to 12.9b naira. Sales volumes of the Tiger brand almost doubled in 2021, implying relatively strong competition for Budweiser, the premium beer from rival International Breweries, the research says. Low and no alcohol beers volumes also grew by about 15%.

Chapel Hill Denham sees revenue increasing by 28% this year, as volume growth accelerates to 22.3% from 13%-14% in 2021. The volume growth estimates are based on guidance from management and other industry sources, according to the research. The company is expanding production capacity at its Ama factory and is likely to benefit from “firm” pricing. Nigerian Breweries “is on standby” for further price increases” in 2022 to avoid margin erosion, the note says.

  • The research forecasts that the earnings before interest, taxes depreciation and amortisation (EBITDA) margin will rise slightly to 19.1% in 2022, from 18.9% in 2021.
  • Debt is also moving in the right direction. Chapel Hill Denham sees interest expenses falling 10% this year after N95bn of debt was repaid in 2021.
  • The shares currently trade around N48 apiece, while Chapel Hill Denham has a target price of 77.61, increased from the previous 75.19.
  • The research sees a prospective 2022 dividend yield of 6.3%.

Bottom line

Nigeria’s demography means it would take a massive economic shock to arrest growth in beer demand.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options