Capital Bancorp Plc (Member of The Nigerian Stock Exchange)

Capital Bancorp Plc (Member of The Nigerian Stock Exchange) 114135 EQUITY RESEARCH REPORT NIGERIAN BREWERIES PLC December 4, 2014 Recommendation SELL Target Price (N) N141.19 Current Price (N) 170.50 Upside/(Downside) (17.19%) Company Statistics Symbol NB Date of Incorporation November 16 th, 1946 Date of Listing September 5 th,1973 Year End December Sub-Sector Beverages- Brewers/Distillers 52 weeks High/Low N189.00/N140.00 Market Cap 1,289,441,105,656.00 Outstanding Shares 7,562,704,432 Nominal Value (N) 0.50k Trailing EPS (N) 3.94 Trailing P/E 40.64 YTD Return (%) 1.37 BVPS (N) 14.86 ROA (%) 17.04 ROE (%) 38.34 PB Value (x) 11.30 Dividend (Yield) 2.81% HIGHLIGHTS Nigerian Breweries Plc., the pioneer and largest brewing company in Nigeria was incorporated in 1946. In June 1949, the Company recorded a landmark when the first bottle of STAR larger beer rolled off its Lagos Brewery bottling lines. This first brewery in Lagos has undergone several optimization processes.. In 1957, the company commissioned its second brewery in Aba. Kaduna Brewery was commissioned in 1963 while Ibadan Brewery came on stream in 1982. In 1993, the company acquired its fifth brewery in Enugu. In October 2003, a sixth brewery, sited at Ameke, in Enugu State was commissioned and christened Ama Brewery. Ama Brewery is today, the biggest and most modern brewery in Nigeria. In October 2011, Nigerian Breweries acquired majority equity interests in Sona Systems Associates Business Management Limited, (Sona Systems) and Life Breweries Limited from Heineken N.V. This followed Heineken s acquisition of controlling interests in five breweries in Nigeria from Sona Group in January 2011. Historical performance analysis shows that Nigerian Breweries has consistently registered a modest Year-on-Year top line growth, averaging 13.09% over a 5-Year period.. Though the Company s PBT and PAT dropped slightly in 2012, it still recorded a growth rate 10.73% and 11.46% for PBT and PAT respectively in the last five years. NB Plc. released unaudited Q3, 2014, wherein revenues rose 2.3% YoY to N194.7bn while PBT and PAT were 10.5% and 11.3% YoY at N42.6bn and 29.8bn respectively. Based on our analysis and valuation of the shares of Nigerian Breweries, we place a SELL recommendation at a Fair Price of N141.19 Financial *Q3,2014 2013 2012 2011 2010 2009 Highlights N N N N N N Turnover ('000) 194,739,091 268,613,518 252,674,213 211,071804 185,862,785 164,206,848 PBT ('000) 42,583,465 62,240,317 55,624,366 56,397,878 44,880,248 41,399,796 Net Income ('000) 29,826,935 43,080,349 38,042,714 38,050,756 30,332,118 27,910,091 EPS 3.94 5.70 5.03 5.03 4.01 3.69 DPS 1.25 4.50 3.00 1.25 3.54 1.80 MPS 160.11 167.90 147.00 94.42 77.10 53.00 BVPS 14.13 14.86 12.36 10.28 6.63 6.16 *The Q3, 2014 represents the recently released unaudited result CBP Equity Research Page 1

Nigerian Breweries Plc is a subsidiary of Heineken N.V. of the Netherlands, which holds a 54.09% interest in the equity of Nigerian Breweries Plc. BACKGROUND INFORMATION Nigerian Breweries Plc., the pioneer and largest brewing company in Nigeria was incorporated in 1946. In June 1949, the Company recorded a landmark when the first bottle of STAR larger beer rolled off its Lagos Brewery bottling lines. This first brewery in Lagos has undergone several optimization processes. In 1957, the company commissioned its second brewery in Aba. Kaduna Brewery was commissioned in 1963 while Ibadan Brewery came on stream in 1982. In 1993, the company acquired its fifth brewery in Enugu. In October 2003, a sixth brewery, sited at Ameke, in Enugu State was commissioned and christened Ama Brewery. Ama Brewery is today, the biggest and most modern brewery in Nigeria. Operations in the old Enugu Brewery were discontinued in 2004 following the completion of Ama Brewery. An ultra-modern malting plant was acquired in Aba in 2008. The Company has an increasing export business that dates back to 1986. The current export destinations are the United Kingdom, European Union and the West-African sub-region. The Company was listed on the floor of the Nigerian Stock Exchange in 1973. As at December 31 st, 2013, it had a market capitalization of N1.3 trillion, making it the second largest company in Nigeria. The Principal activities of the Company remained brewing, marketing and selling of larger, stout, non-alcoholic malt drinks and soft drinks In October 2011, Nigerian Breweries acquired majority equity interests in Sona Systems Associates Business Management Limited, (Sona Systems), with two breweries in Ota and Kaduna, and Life Breweries Company Limited (Life Breweries) with a brewery in Onitsha. Sona Systems and Life Breweries were merged into an enlarged Nigerian Breweries in the middle of 2012. Another malting plant was acquired in Kaduna as a result of the acquisitions/mergers. As a major brewing concern, Nigerian Breweries Plc. encourages the establishment of ancillary businesses. These include manufacturers of bottles, crown corks, cartons, plastic crates and service providers such as hotels/clubs, distributors, transporters, event managers, advertising and marketing communication agencies amongst others. Nigerian Breweries has consistently been honored with awards relating to capital market matters including amongst others, The NSE President s Merit Award in the Brewery Sector, the NSE Quoted Company of the year Award CBP Equity Research Page 2

During the year 2013, NB introduced malt drink, Maltina, in PET bottles, the first of its kind in Nigeria. Fayrouz, rolled out new exotic flavor, adding to the existing pineapple and pear flavours. and the NSE CEO s Distinguished Award (Compliance) for Listed Companies. The Company is also a recipient of many other awards for its operations and high quality brands, including the Nigerian Industrial Standards Award. PRODUCTS LINES/BRANDS Nigerian Breweries Plc. has a rich portfolio of high quality brands: - Star lager beer was launched in 1949 - Gulder lager beer launched in 1970 - Maltina was introduced in 1976-1n 1992, Legend Extra Stout came into the market - Amstel Malta followed in 1994 - Heineken larger beer was re-launched into the Nigerian market in 1998 - Maltina Sip-it, packaged by Tetrapacks was launched in 2005 - Fayrouz, the non-alcholic drink introduced in 2006 - Climax, a herbal energy drink was launched in 2010 - Following the acquisition of Sona Systems and Life Breweries in 2011, Goldberg lager, Malta Gold and Life Continental lager were added to the brand portfolio Continuous investment in the company s production facilities as well as the distribution network has kept the Company constantly on top in making quality products available to its teeming consumers. SWOT ANALYSIS Strengths: - Good brands portfolio - Increased production capacity and operating efficiencies - Strong promotional and community based projects which makes customers remain loyal to products - Diversified and international management - Stable dividend payment Weaknesses: - Shortage of local raw materials Opportunities: - Commitment to maintaining the leadership position in the industry is unflinching - Large market size - Good government policy on the Breweries Sector - Focused on continued market expansion and growth in selected markets within Nigeria and other African countries - Stable macro-economic environment CBP Equity Research Page 3

Threats: - Intense competition within the industry - Security challenges in the Northern part of the country - High cost of energy - Poor infrastructure - High commodity prices for raw materials DIRECTORS INTERESTS Directors interests in the share capital of the Company were as follows as at February 12 th, 2014 Name Position Number of shares Chief Kolawole B. Jamodu, OFR Chairman 431,704 Mr. Nicolaas A. Vervelde CEO Nil Mr. Olusegun Adebanji Non-Executive 200,000 Mr. Walter L. Drenth Marketing Director Nil Mr. Hubert I. Eze Sales Director 41,383 Mr. Victor Famuyibo HR Director 16,653 Mr. Jasper C. Hamaker Finance Director Nil Mr. Sijbe Hiemstra Non-Executive Nil Mr. Thomas A.de Man Non-Executive Nil Mr. Frank N.Nweke II ** Non-Executive 1,900 Mrs. Ifueko M.Omoigui Okauru Non-Executive 35,992 Mr. Atedo N.A.Peterside, CON Non-Executive 12,500,000 Mr. Hendrick A. Wymenga Technical Director Nil ANALYSIS OF FINANCIALS Trends in Turnover and Earnings Growths Nigerian Breweries (NB) has maintained a positive turnover growth momentum in the last five years. The Company grew its top line from N164.21bn in 2009 to N268.61bn in 2013, translating to a 5-Year CAGR of 13.09%. The Company has also seen its bottom line grow in recent times though it experienced a marginal decline in 2012. Between 2009 and 2013, NB s PAT grew from N27.91bn to N43.08bn, representing a CAGR of 11.46%. However, in the recently released Q3, 2014 result, Turnover went up by 2.33% to N194.74bn from N190.30bn in the corresponding period of 2013. The CBP Equity Research Page 4

Company s PAT during the period shot up by 11.29% to N29.83bn.and this could be attributed to the Company s ability to manage its Operating Expenses(OE), which dropped by 0.96% to N50.14bn. We estimate NB s Turnover for the FY 2014 to be N259.65bn and PAT to get to N39.77bn. Year-on-Year, the Return on Equity (ROE) has not been impressive. From 60.46% in 2010, ROE nose-dived to 38.34% in 2013. PBT Margin dropped from 26.72% in 2011 to 22.01% in 2012 before inching up to 23.17% in 2013. PAT Margin also moved up from 15.06% in 2012 to 16.04% in 2013. Return on Assets (ROA) also moved Northwards in 2013 by 13.63% from 15.00% in 2012 to 17.04% in 2013. CAPITAL STRUCTURE Total Shareholders' fund (SHF) of NB grew from N46.57bnbn in 2009 to N112.36bn in 2013, representing a 5-Year CAGR of 24.63%. Total Assets also grew 23.98% from N106.99bn in 2009 to N252.76bn in 2013. The Company s level of efficency in its asset utilization has not been impressive. This is reflected in the total assets turnover ratio which came down from 1.62x in 2010 to 0.90x in 2011 but climbed up again to 1.06x in 2013. However, current asset turnover has been on a rising path from 4.36x in 2009 to 5.93x in 2013. This implies that the company has been more efficient in its use of current assets than in fixed assets. Moreover, NB s operational costs thread a growth path of 18.23% CAGR, as Opex-to-Sales ratio averaged CBP Equity Research Page 5

24.12% from 2009 to 2013. The total assets of NB were financed by a mix of Liabilities and Equity in the proportion of 55.55% and 44.45% respectively. The total debt ratio, which is a proportion of the Company s total assets financed by long and short term liabilities, went down to 55.55% in 2013 from 63.16% in 2012. NB has not experienced a good working capital over the years as the working capital position has always been in negative and on the rising path. The Company has seen its working capital position rose from a negative N4.69bn in 2009 to N55.01bn in 2013, translating to a 5-Year CAGR of 85.07%. Besides, the current ratio and quick-ratio as at December 2013 stood at 0.45x and 0.25x respectively. The short-term liabilities stood at N100.30bn, accounting for 71.44% of the total liabilities, while the long-term liabilities N40.10bn, accounting for 28.56% of the total liabilities. LIQUIDITY NB's liquidity trend has not experienced a stable performance in the last five years. The level of Current Assets maintained in 2009 could cover 88.92% of its current obligations. However, this depreciated to 45.15% in 2013. Without taking the level of inventory into consideration, NB's current assets were 24.57% of its current liabilities in 2013, a decrease of 33.77% from the 37.10% figure of 2012. Relative to 2009, NB maintained high cash and bank balances in 2012 but went up to N9.53bn in 2013. As a corollary, could pay off only 9.50% of its current liabilities with its most liquid asset-cash. CBP Equity Research Page 6

An analysis of the cash flow statement shows that the net cash flow from operating activities increased by 70.28% from N55.89bn in 2012 to N95.17bn in 2013. The net cash outflow from investing activities came down from a negative figure of N37.22bn in 2012 to a negative N32.51bn in 2013.The cash and cash equivalents as at December 31 st, 2013 stood at N9.53bn. SHAREHOLDERS' RETURNS Records of shareholder returns have been rather impressive. Earnings Per Share (EPS) consistently increased from 2009 to 2013. The EPS grew from N3.69 in 2009 to N5.70, translating to a 5-Year CAGR of 41.82%. The Net Asset per Share (NASP) grew at an average of N10.06. NB also has a good dividend history. In 2009, the Company paid N1.80 as dividend and this increased to N4.50 in 2013. An interim dividend of N1.25 had already been paid by the Company. ----------We arrive at a value of N141.19, which is our fair value. We therefore place a SELL on Nigerian Breweries Shares Valuation Methodologies, Assumptions and Ratings To arrive at the intrinsic value for NB, we employed the Relative Valuation Model (P/E Multiple, P/S Multiple and the P/BValue) and the Dividend Yield Model.. Our risk-free rate is 12.17% (premised on 30-year FGN Bond), a risk premium of 6.65% and a beta of 0.988. The CAPM-derived cost of equity is 18.35%. We adopted a terminal growth rate of 6.50% consistent with our perceived growth potential of the Company as well as forecast long run economic growth rate. Using 7,562.70mn shares in issue, the P/E Multiple N130.71, P/S Model generates N136.21, P/BV generates N130.79. The Dividend Yield Model generates N161.29, while the Enterprise Value Model generates N167.90 Premised on the above analysis, coupled with appropriate consideration of comparable pricings and attached weights, our fair value for NB gives N141.19. This implies that the current price is at 20.55% premium to valuation. We therefore place a SELL recommendation on NB s shares CBP Equity Research Page 7

Ratings Specification BUY: Fair value of the stock is above the current market price by at least 15 percent HOLD: Fair value of the stock ranges between -15 percent and 15 percent from the current market price. SELL: Fair value of the stock is more than 15 percent below the current market price. NB PLC S KEY RATIOS RATIO ANALYSIS 2010 2011 2012 2013 Growth Performance Turnover Growth 13.19% 13.56% 19.71% 6.31% Operating Profit Growth 7.93% 25.42% 14.57% 7.06% Pre-tax Growth 8.41% 25.66% (1.37%) 11.89% Post-tax Growth 8.68% 25.45% (0.02%) 13.24% Total Assets Growth 6.92% 106.05% 7.61% (0.34%) Shareholders' Funds Growth 7.73% 55.02% 20.15% 20.24% Profitability Gross Margin 46.90% 52.00% 49.65% 50.81% Operating Margin 24.19% 26.72% 25.57% 25.75% Net Profit Margin 16.32% 18.03% 15.06% 16.04% Return on Equity (RoE) 60.46% 48.92% 40.71% 38.34% Return on Asset (RoA) 26.52% 16.14% 15.00% 17.04% Operating Efficiency Cost-Income Ratio 22.85% 25.45% 24.87% 25.83% Asset Utilization Rate 1.62 0.90 1.00 1.06 Cost of sales/turnover 24.19% 26.72% 25.57% 25.75% Liquidity Current Ratio 0.90 0.63 0.65 0.45 Acid Test Ratio 0.42 0.39 0.37 0.25 Operating Cash flow / EBIT 0.87 0.96 0.86 1.38 Debtors collection period (in days) 12.66 1.25 1.30 1.04 Creditors Deferral Period - 136.91 129.10 24.86 Inventory Holding Period (in days) 78.52 79.66 70.73 57.02 CBP Equity Research Page 8

Disclaimer & Disclosure The value of any investment is subject to fluctuations, i.e. may arise and fall. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of investment to increase or decrease. Hence investors may not get back the full value of their original investment. This document is not an offer to buy or sell any security. This document does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The appropriateness of a particular investment will depend on an investor s individual circumstances and objectives. The investments and shares referred to in this document may not be suitable for all investors. This document is based on information Capital Bancorp Plc received from publicly available reports and industry sources. Capital Bancorp Plc may not have verified all of this information with third parties. Neither Capital Bancorp Plc nor its advisors, shareholders, directors or employees can guarantee the accuracy, reasonableness or completeness of the information received from any sources consulted for this publication, and neither Capital Bancorp Plc nor its advisors, shareholders, directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document. This document is not to be relied upon and should not be a substitute for the exercise of independent judgment. This document includes certain statements, estimates and projections with respect to the anticipated future performance of securities listed on the Nigerian Stock Exchange and as to the market for these shares. Such statements, estimates and projections are based on information that we consider reliable and may reflect various assumptions made concerning anticipated economic developments, which have not been independently verified and may or may not prove correct. No representation or warranty is made as to the accuracy of such statements, estimates and projections or as to their appropriateness for the purpose intended and it should not be relied upon such. Opinions expressed are current opinions as of the date appearing on this material only and may change without notice. Other third parties may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysis who prepared them. CBP Equity Research Page 9