NIGERIA – After analysing the strong growth of the value segment in Nigeria’s beer sector, along with International Breweries Plc’s impressive volume and earnings growth over the past three years, analyst at Renaissance Capital have stated that the company will likely face headwinds going forward.
They stressed that the impressive volume and earnings growth are fully priced in at current levels placed a SELL rating on the stock and a trading price of N27 per share.
They added that the value sector within the Nigerian beer market experienced a 40 per cent volume in 2011-2013, mainly due to the challenging consumer environment.
“Until recently, we believed that we would see some consumer respite as consumer confidence indicators released by the Nigerian government looked to have bottomed, thus we expected growth to pick up across the other beer segments.
However, with the worsening macro climate, we continue to believe the value segment will experience higher growth rates than the mainstream and premium categories, “they noted.
The analysts added that the growth of the value segment has not gone unnoticed with the larger brewers such as Nigerian Breweries Plc and Guinness Nigeria Plc, who are shifting capacity to create competing brands.
“From a three-product sector in 2011, there are now six products, and we expect more to come to market.
Furthermore, with the consolidation of Nigerian Breweries and Consolidated Breweries, which has a 38 per cent market share in the value segment, we expect spare capacity at Nigerian Breweries to shift towards the value segment. With its dominant market share, we think it will become more difficult for incumbent players such as IB to gain significant ground.
”International Breweries has built a 2.5 per cent market share in Nigeria in just three years; however, with installed capacity of 650,000 hl, the company is already reaching full capacity utilisation.
We believe that capacity expansion plans are under way, but that there will be a pick-up in advertising and distribution spend as IB enters new territories in Nigeria, which will impact margins.
Furthermore, with the anticipated devaluation in the currency, and International Breweries importing 80 per cent of its raw materials, gross margins will face pressure.
“We initiate coverage on International Breweries with a SELL rating as we believe growth is priced in at current levels with the stock trading at a price earning ratio (P/E) of 31.3 and 27.1 for FY15 and FY16, respectively, on our estimates, “they stated.