BY CHARLES ABUEDE
In spite of the tough business environment in Nigeria, Nigerian brewers have unrelentingly kept up the momentum in growing their top and bottom-line numbers while competing with some selected emerging and frontier market peers like India (179.2x), China (77.2x), Kenya (32.8x) and Ghana (5.5x) in terms of the average industry price-to-earnings (P/E) ratio at 34.5x in 2021.
For this year, the industry has been projected to report an average P/E ratio of between 15x and 23x which will be a further improvement from the pre-pandemic levels.
However, in the face of the sugar tax imposed by the federal government on brewers in Nigeria, consumer goods analysts project revenue in the brewery sector to grow 12.3 percent year on year, while profit before tax will print ahead by 59.7 percent year on year in 2022 as a result of modest economic growth, increased social function and modest price adjustments, especially on non-alcoholic brands in Nigeria.
Although there are four brewers quoted on the Nigerian bourse, it is interesting to note that Nigeria remains the major market for these companies. A review of the industry in 2021 saw revenue of brewers printing at N780 billion and being the highest on record, rejuvenated after the pandemic-induced contraction in 2020 where the industry reported N578.2 billion in total revenues. The growth, according to Afrinvest research analysts, was buoyed by the positive spill-over effect of the stimulus injection of close to N2.8 trillion between 2020 and 2021, including the full resumption of social activities.
Meanwhile, the cost of sales and margins of these brewers became pressured to N527.6 billion and 67.6 percent in that order as a result of the exchange devaluation effect, which saw the naira devalued by eight percent to N410.40 to the dollar, raising inflation, which has found comfort over the economy of Nigeria averaging 17 percent in 2021, bottlenecks on logistics and the imposed excise charges of N0.40 per centilitre on beer; N1.50 per centilitre on wines and N2 on every centilitre on spirits. Also, the industry’s profit before tax saw a rebound to near pandemic levels by 636.1 percent to N29.5 billion in 2021 from N5.5 billion the prior year.
Looking ahead into the 2022 operating year, consumer goods analysts at Afrinvest Research and Consulting have posited that, “In FY:2022, we estimate industry revenue and pre-tax profit would grow by 12.3 percent year on year and 59.7 percent year on year respectively. This we expect to be driven by the modest economic growth outlook of 2.9 percent, increased social functions, modest price adjustment especially on non-alcoholic brands, and low COVID-19 risk.
“However, potential downside risks to these projections include high inflationary pressure on the cost of production and consumer’ wallet, potential reduction in sales due to the pass-through effect of the new sugar tax, and resurgence in COVID-19 disruption. Based on our valuation outcome, we rate the shares of Nigerian Breweries and Guinness Nigeria a “BUY” and a “HOLD” respectively, as their closing share prices of N40.45 and N71 on March 31, 2022, represent a discount of 43.7 percent and 8 percent to our target prices. However, International Breweries shares remain “UNRATED” due to the company’s multiyear costs and leverage challenges and negative net income position.”
According to these experts, the industry players are likely to continue operating sub-optimally due to both supply and demand-side pressures and as a result of the weak expectation of the economy over the medium term. Jointly, the supply-side pressures include exchange volatility, power supply shortages; crises in major agrarian raw material bases, among others while the demand-side may emanate from the expectation of high inflation in the absence of any major reform that could help bridge the demand and supply mismatch across major sectors of the economy, such as weak volume growth which may have a direct negative impact on the utilisation of capacity.