Nigerian Breweries Plc Beer for the bear market

Nigerian Breweries Plc Beer for the bear market Equity Research Wole Famurewa +234 802 319 3780 wolefamurewa@bankphb.com Temitayo Orekoya +234 708845 8120 temitayoorekoya@bankphb.com

Table of Content Investment Summary 2 Company Overview Background 3 Product Brands 4 Distribution Chain 5 Management 6 Shareholder Structure 6 Price Performance 6 Financial Analysis and Forecast 7 Assumptions 8 Valuation 10 Financials 11

Nigerian Breweries Plc Beer for the bear market Report date 18 July 18th July 2008 Target Price NGN 65.95 Current Price NGN 51.00 Enterprise Value (DCF) NGN bn 491.6 Common share outstanding 7.6bn Market Capitalisation NGNbn 387.6 Change from 52-week High -9% Change from 52-week low 26% Web www.nbplc.com Share Price performance 1 Week 0.0% 1 month 2.0% 3 month 0.0% Year to date 4.1% 3 months Stock performance Investment Summary In this report, we initiate coverage on Nigerian Breweries Plc (NB Plc), Nigeria's largest brewer, attaching a BUY rating to the stock with a 29% upside potential over the next 12 months. Our bullish view is predicated on NB's dominant market position and consistent growth in the light of Nigeria's relatively low beer consumption per capita. Moreover, the value of Nigerian Breweries shares have been relatively stable during the recent bear market. Nigerian Breweries PZ Industries Guinness Nigeria Flour mills Nigeria Dangote Sugar Dangote Flour International Brew -40% -35% -30% -25% -20% -15% -10% -5% 0% Our fair valuation of NGN65.95 (compared to its market price of NGN51) is based on free cash flow (FCF) estimates from 2008 to 2017. We project FCF to grow from NGN32bn in 2008 to NGN65bn in 2017. We assume that revenue will double by the year 2017 to NGN253.2bn from NGN111.7 bn in 2007. We estimate PAT to grow from NGN18.9bn in 2007toN54.3bnattheendof2012ata5year CAGR of 23.4%. Year Revenue EBITDA Net Income EPS DPS Pay out Ratio P/E Div Yield ROE 2006 86.3 22.8 10.90 144.14 120.0 83% 35.4 2.4% 30.1% 2007 111.7 32.6 18.94 250.48 159.0 63% 20.4 3.1% 53.9% 2008E 138.3 43.5 26.35 348.42 243.9 70% 14.6 4.8% 61.2% 2009E 167.5 54.4 34.02 449.87 314.9 70% 11.3 6.2% 63.8% 2010E 198.3 65.9 42.10 556.72 389.7 70% 9.2 7.6% 63.9% 2011E 224.0 74.4 47.48 627.88 439.5 70% 8.1 8.6% 59.2% 2012E 253.2 84.3 53.97 713.61 499.5 70% 7.1 9.8% 56.0% 2

Company Overview Figure 1 60 55 50 45 NB Price Performance - Year to date Background Nigerian Breweries (NB Plc) is a subsidiary of the Dutch brewer, Heineken. The company is Nigerian s pioneer and largest brewer with current annual production capacity estimated at 10 mn hectolitres. Founded in 1946, NB operates 5 breweries in Nigeria. The first was commissioned in Lagos in 1949 and four others have subsequently been established in Aba (1957), Kaduna (1963), Ibadan (1982), Enugu (1993) and Ama (2003), providing a geographical spread across the country, albeit bias for cities in the southern part of Nigeria. 40 300 250 200 150 100 50 0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Figure 3 Major player in the Nigerian Brewery sector with strong selling brands Figure 2 86.3 10.90 111.7 Revenue 138.3 167.5 Net Income 198.3 224.0 253.2 18.94 26.35 34.02 42.10 47.48 53.97 2006 2007 2008E 2009E 2010E 2011E 2012E 120.0 Dividend per share 2006-2012E 159.0 243.9 314.9 389.7 439.5 499.5 2006 2007 2008E 2009E 2010E 2011E 2012E NB along with Guinness Nigeria constitutes a formidable oligopoly in the Nigerian beer market, with an 80% combined market share. Over the years, NB has launched a series of alcoholic and non alcoholic brands carefully crafted for the Nigerian consumer these includes Star Lager Beer, the company s flagship product. Others include Gulder Larger Beer, Heineken (Larger), Maltina (Malt drink in four variants - Maltina Classic, Maltina Strawberry, Maltina Exotic and Maltina with Pineapple) and Legend Extra Stout. Listed on the Nigerian Stock Exchange in 1990, NB is one of the most capitalised and actively traded companies outside the banking and insurance sectors. As at December 2007, the company had 131,026 shareholders. Heineken N.V. of Holland has a majority shareholding of 54.1%. In its resolve to maintain leadership of the beer market, NB launched the local production of the Heineken brand, an International high quality premium beer, in 2004. This marked the highpoint of a two-year process to position Heineken, which was previously imported into the country, as a locally produced brand. Currently, the company produces Heineken beer in its new state of the art brewery in Ama (Enugu State, South-East Nigeria). In addition, NB recently introduced MALTINA SIP-IT, a variant of Maltina in a Handy Pack. One of the latest additions to NB's product range is the new Gulder Max - a stronger, darker and higher gravity brewed variant of the regular Gulder with a 6.5% alcoholic content. The introduction of GulderMax was designed to strengthen the existing brands and to increase the beer options as obtained elsewhere in the world. Despite its rapid growth in recent years, NB is noted for its efficient cost management, an effort that contributed to the liquidation of the company's huge debt profile in 2006 and won the company an award for the best cost saving companywithin the Heineken group. 3

Company Overview Product Brands Starbeer has assumed the image and stature ofanational icon. A beer associated with brightness, social fun, high quality taste and style - a world-class brand brewed by Nigerian Breweries Plc(NB Plc). Star was introducedinto thenigerian marketin1949as the first indigenous beer brand. The beer market had hitherto been dominated exclusively by imported brands. Shortly after its entry into the market, the beer quickly overcame the problems of market acceptance. Star is largely responsible for the growth of the Nigerian indigenous beer industry. The popularity gave other prospective investors courage to consider the establishment of new breweries. Gulder Lager Beer was introduced in 1970 and then relaunched in 1972. Gulder was introduced on a platform of uniqueness and distinction for the confident, socially active consumer driven by a desire for success. Gulder comes packaged in a unique brown 60cl bottle (at the time of launch, the only brown bottle in Nigeria) with 5.2% alcohol content. The beer is made from malted barley, hops and water with a distinctively bitter taste. Gulder is available in many arts of West Africa, specifically Ghana, Republic of BeninandTogo.ItisalsoexportedtotheUnitedKingdom. Maltina is Nigeria s premier malt drink is now available in four varieties (Maltina classic, Maltina strawberry, Maltina exotic and Maltina with pineapple) Amstel Malta is a non-alcholic malt beverage, meaning it is brewed from barley, hops, yeast, and water much like beer.cornandcaramelcolormayalsobeadded. Legend Extra stout brand now re-launched in a brand new and fashionable packaging. The new Legend Extra Stout now comes with a new attractive body and neck Label. For the first time in the brand s history, a back label has also been introduced. The back label provides detailed information about the brand, such as ingredients, alcoholic contents etc. A unique, bottom-fermenting alcoholic beverage produced from sorghum malt, sorghum and maize and flavored with a natural stout aroma compound with 7.4% alcohol content. 4

Company Overview The Distribution Chain The company delivers its products through 147 key distributors and wholesalers (2006: 149). NB does not own and is not liable for the logistics related to the distribution of its products. It key distributors are carefully selected to ensure that the company's products are available across Nigeria. Figure 4. Nigerian Breweries Plants across Nigeria Kaduna Brewery Established in 1963 Estimated pop: 6.1mn; 4.3% of Total population. Currently extending the brewing plant. Ibadan Brewery Established in 1982 Estimated pop: 5.6mn; 3.9% of Total population. Tank room expansion and Fayrouz production. Also the production of Can STAR Lagos Brewery Established in 1949 Estimated pop: 9.0mn; 6.3% of Total population. Currently extending the brewing plant. Enugu Brewery and AMA Brewery Established in 1993 and 2003 respectively Estimated pop: 3.3mn; 2.3% of Total population. Currently extending the brewing plant. Aba Brewery Established in 1957 Estimated pop: 2.8mn; 2.0% of Total population. A new bottle line and the restart of beer production 5

Company Overview Management Nigerian Breweries s eleven-member board comprises the Chairman, Chief K.B. Jamodu, the Managing Director/Chief Executive Officer, M. J. Herkemij (Dutch) and nine others - O.S. Adebanji, Dr. O. O. Ajayi, Prof. (Mrs) J.O.Akande, W.Fijnaut (Dutch), E. E. Imoagene, L. Le Couedic (French), Th. A. de Man (Dutch), E. J. van Willegen (Dutch), I. E. Yamson (Ghanaian). Shareholder structure Figure 5. Heineken N.V., 54% Estimated Free Float 46% Price performance Figure 6 PricePerformance -Year to date Vs the NSE 60 55 50 45 40 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 6

Financial analysis and forecasts Figure 7 Nigerian Breweries Revenue, EBITDA and PAT for the years 2006A to 2012E Thousands 0.3 0.25 0.2 0.15 0.1 0.05 0 2006 2007 2008 2009 2010 2011 2012 Revenue 86.3220 111.748 138.308 167.460 198.251 224.036 253.173 EBITDA 22.8343 32.6068 43.5046 54.4385 65.9382 74.3501 84.3234 PAT 10.9005 18.9428 26.3617 34.0757 42.2227 47.6861 54.2643 Over the five-year period Dec 2003 to Dec 2007, NB has delivered the following key financial metrics: - Revenues have grown from NGN73.6bn at YE03 to NGN111.7bn in 2007, a CAGR of 8.% over the five-year period. - EBITDA doubled from NGN15bn at YE03 to NGN32bn in 2007, a CAGR of 11.6% over the five-year period. - PAT increased from NGN5.1bn at YE03 to NGN18.9bn in 2007, a CAGR of 38% over the five-year period. In the following section, we summarise the underlying assumptions for valuation model. Revenue Table 1. Revenue growth Chart 2006A 2007A 2008E 2009E 2010E 2011E 2012E Nigeria 86.1 111.5 138.3 167.5 198.3 224.0 253.2 Export 0.2 0.2 0.0 0.0 0.0 0.0 0.0 Revenue 86.3 111.7 138.3 167.5 198.3 224.0 253.2 We forecast the group s total revenue rising at a CAGR of 17.8% (2007-2012E), from NGN111.7bn in 2007 to NGN253.2bn by 2012E. Our model on NB only assumes organic growth in Nigeria. The key drivers of these assumptions are as follows: 7

Assumptions Our financial forecast is based on the following assumptions Beer consumption per capita innigeria increases from8.4 litres in 2007 to 13.2litresin2012E(aCAGRof9.4%) Beer consumption in Nigeria rises from 14.0mn hectolitres in 2007 to 24.9mn hectolitres in 2012E(a CAGR of 12.2%) NB s market share remains unchanged at 53.5% NB s output rises from our estimated 7.5mn hectolitres in 2007 to 13.3mn hectolitres in 2012E(a CAGR of 12.2%) We assume that the average price of beer per litre rises from approximately NGN149 in 2007E to NGN190 in 2012E, representing a price CAGR of 5.0%. Costs We do not have a detailed break down on the cost of goods sold relating to NB business and have therefore made the following assumptions with regards to gross profit. Gross profit NB s pricing policy has been to pass on raw material price increases to its customers in order to maintain its margin. Historically, NB has derived a gross profit margin in excess of 50%. We have assumed that gross profit margin will remain at historic levels of 50%. SG&A Tax Margins SG&A costs have historically been tightly controlled and risen in line with inflation (CPI). Given the lack of detail on operating costs we have taken a conservative approach and assumed that SG &A will rise at a rate of 500 basis point above our forecast inflation rate. We have assumed a corporate tax rate of 30% and an additional 2% educational levy into our model from 2008. NB s pricing policy is to pass on raw materials increases to its customers. Demand for beer has been relatively inelastic to minor price increases. We assume that the company continues to maintain gross margins of 50% and EBITDA margins greater than 30%. 8

Assumptions Figure 8 Profitability Margins Gross EBITDA NET 51.36% 52.96% 50.00% 50.00% 50.00% 50.00% 50.00% 26.45% 12.63% 29.18% 31.45% 32.51% 33.26% 33.19% 33.31% 16.95% 19.06% 20.35% 21.30% 21.29% 21.43% 2006 2007 2008 2009 2010 2011 2012 We forecast total gross profit rising at a CAGR of 16.4% (2007-2012) from NGN59.2bn in 2007A to NGN126.6bn by 2012E. This implies that the gross profit margin remains flat at 50%. EBITDA rises from NGN32.6bn in 2007A to NGN84.3bn by 2012E, a CAGR of 20.9% (2007-2012E), maintaining the EBITDA margin marginally above 30% throughout the forecast period. Profit after tax increases from NGN18.9bn in 2007A to NGN54.3bn by 2012, a CAGR of 23.4%.(2007-2012E). EPS rises from NGN2.50 in 2007A to NGN7.17 by 2012, a CAGR of 23.4%(2007-2012E). Capex We estimate that NB is currently running at 75% of capacity (7.5mn hectolitres of approximately 10mn hectolitres installed capacity). Management has announced that it is currently optimising its facility, which will translate into an additional 20% capacity (i.e. 12mn hectolitres of estimated installed capacity). We believe that this will be sufficient under our current growth assumptions until 2010. NB have not disclosed any plans to increase installed capacity as yet, but we assume that this decisionwillhavetobemadeoverthenext18months. We have therefore make the following assumptions: NB increases its installed capacity by 5mn hectolitres in 2011 and 2016. We assume a cost of NGN3.5bn per 1mn hectolitre of increased capacity at current prices. Maintenance capex of 4% of sales. 9

Valuation In arriving at a fair value for Nigerian Breweries Plc we estimated Free Cash Flow (FCF) and PAT for the period between 2008 and 2017. We project a FCF to grow from NGN32bn in 2008 to NGN65bn in 2017. We assume that revenue, will growth at a rate slightly lower than GDP and double by the year 2017 to NGN253.2bn from NGN111.7 in 2007. We estimate PAT to grow from NGN18.9bn in 2007 to N54.3bn at the end of 2017ata5yearCAGRof23.4%. In our DCF valuation, we assumed a terminal growth rate of 3.0%. A Weighted Average Cost of Capital, WACC of 14.8%, which is estimated using a beta value of 0.8 based on the 5-year historical returns on the company share price and the Nigerian Stock Exchange All Share Index (ASI), coupon rate of 10% on the 1-year Federal Government (FGN) Bond issued in the month of June, 2008 as our risk freerateand amarketriskpremiumof6%. We used 7.6bn ordinary Sharesin issue at the date of this valuation. Our Discounted Cash Flow model values NB at NGN65.9 per share while the Price to Earnings multiple generates a NGN61.11 per share. A weighted average of the two valuation model indicates a NGN65.00 12 month target price for Nigerian Breweries. Our forecast DPS for the forecast period 2008 to 2012 are NGN2.43, NGN3.14, NGN3.89, NGN4.39 and NGN4.99 respectively. We therefore place a BUY recommendation on Nigerian Breweries with a 29% upside potential from its current price of NGN51. Figure 9 30.1% 14.4% 53.9% 20.7% ROE ROA 61.2% 63.8% 63.9% 59.2% 56.0% 23.6% 24.9% 25.3% 24.0% 23.1% 2006 2007 2008E 2009E 2010E 2011E 2012E Working capital and cash flow Working capital is a strong indicator of the efficiency of a firm. The inventory turnover ratio, is a good instrument for assessing the effectiveness of working capital management it shows how fast/often companies are able to get their goods completely off the shelves. Generally, a high inventory turnover ratio is good for business. In the BRIC (Brazil, Russia, India and China), inventory turnover ratio, ITR for brewery companies ranges between 10x and 12x. NB in 2007 has grown its ITR to 6.9x from 6.8x in 2006, which compare favourably with its major competitor, Guinness, which has an ITR of 4.9x. We estimate that NBPlcwillimproveitsITRto10xby2017. The company s trading working capital is positive, as it secures creditor terms of approximately 65 days, but its trade debtors terms are 15 days. We assume that the dividend payout ratio of 70% is maintained looking forward. All capital expenditure needs are met from internally generated funds. NB maintains a positive cash position and no debt with a closing cash position. Q1 March 2008 Performance In its 1Q, 2008 results, in line with estimates, the company increased turnover 25.93% to NGN32.4 bn from NGN25.5bn over the same period in 2007. PAT grew 42.38% to NGN6.2bn on the back of increased sales and an aggressive restructuring of the business, which cut costs significantly and improved supply lines. NB s supeiror marketing and distribution strategy has helped the company maintain its position as a market leader in Nigeria s beer industry. The launch of Heineken, and Amstel Malta in 33cl can, re-launch of Gulder and Amstel Malta 33cl weresomeofthehigh points in 2007. The number of third party delivery trucks also grew from 500 to 700 units, which enhanced turnaround time. The company hope to challene Guinness Nigeria's dominance of the stout market, with the repackaging of its Legend extra stout. Amid growing competition, the parent company, Heineken N. V has committed significant resources to capacity improvement projects such as a new bottle line and the restart of beer production in Aba; tank room extension and Fayrouz production in Ibadan (South West Nigeria); extension of Lagos brewery plant (brew house, cellars and logistics master plan); extension of Kaduna brew house and installation of second line in Ibadan for the production of canned Star. Pre-result release expectation Based on aforementioned assumptions and a given the company s expansion projects, we estimate a post-tax profit of NGN12.5bn for the second quarter results, while we believe revenues should firm up to NGN65bn.ThisresultisdueforreleasebythethirdweekofJuly2008. 10

Financials NGN bn Table 2. Nigerian Breweries Summary Income Statement (Year Ending December Nbn) 2006A 2007A 2008E 2009E 2010E 2011E 2012ECAGR 2007-2012 Total Revenue 86.3 111.7 138.3 167.5 198.3 224.0 253.2 17.8% Growth y-o-y 7.7% 29.5% 23.8% 21.1% 18.4% 13.0% 0.0% COGS 42.0 52.6 69.2 83.7 99.1 112.0 126.6 19.2% Gross Profit 44.3 59.2 69.2 83.7 99.1 112.0 126.6 16.4% Margin 51.4% 53.0% 50.0% 50.0% 50.0% 50.0% 50.0% Opex costs 21.5 26.6 25.6 29.3 33.2 37.7 42.3 9.7% EBITDA 22.8 32.6 43.5 54.4 65.9 74.4 84.3 20.9% Margin 26.5% 29.2% 31.5% 32.5% 33.3% 33.2% 33.3% D&A 6.0 5.5 5.8 6.2 6.7 7.9 9.1 10.6% EBIT 16.8 27.1 37.7 48.2 59.2 66.5 75.2 22.6% Margin 19.5% 24.3% 27.3% 28.8% 29.9% 29.7% 29.7% Net Financial Income -0.5 0.5 1.1 1.9 2.9 3.7 4.6 54.7% PBT (Norm) 16.4 27.9 38.8 50.1 62.1 70.1 79.8 23.4% Margin 19.0% 24.9% 28.0% 29.9% 31.3% 31.3% 31.5% Other Income 0.1 0.2 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PBT 16.4 27.9 38.8 50.1 62.1 70.1 79.8 23.4% Margin 19.0% 24.9% 28.0% 29.9% 31.3% 31.3% 31.5% Taxation 5.5 8.9 12.4 16.0 19.9 22.4 25.5 23.4% ETR 33.7% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% PAT 10.9 18.9 26.4 34.1 42.2 47.7 54.3 23.4% Margin 12.6% 17.0% 19.1% 20.3% 21.3% 21.3% 21.4% EPS 144.14 250.48 348.58 450.58 558.31 630.55 717.54 23.4% % Y-o-Y 32.1% 73.8% 39.2% 29.3% 23.9% 12.9% 13.8% DPS 120.00 159.00 221.27 286.02 354.40 400.26 455.48 23.4% % Y-o-Y 0.0% 32.5% 39.2% 29.3% 23.9% 12.9% 13.8% 11

Financials $ mn Table 4. Nigerian Breweries Summary Income Statement (Year Ending December $ mn) 2006A 2007A 2008E 2009E 2010E 2011E 2012ECAGR 2007-2012 Nigeria 662.5 878.1 1,265.4 1,584.3 1,782.8 2,000.3 2,260.5 20.8% Growth y-o-y 0.0% 32.5% 44.1% 25.2% 12.5% 12.2% 13.0% Total Revenue 664.0 879.9 1,265.4 1,584.3 1,782.8 2,000.3 2,260.5 20.8% Growth y-o-y 0.0% 32.5% 43.8% 25.2% 12.5% 12.2% 13.0% COGS 323.0 413.9 632.7 792.2 891.4 1,000.2 1,130.2 22.3% Gross Profit 341.0 466.0 632.7 792.2 891.4 1,000.2 1,130.2 19.4% Margin 51.4% 53.0% 50.0% 50.0% 50.0% 50.0% 50.0% Opex costs 165.4 209.3 234.7 277.1 298.5 336.3 377.4 12.5% EBITDA 175.6 256.7 398.0 515.0 593.0 663.8 752.9 24.0% Margin 26.5% 29.2% 31.5% 32.5% 33.3% 33.2% 33.3% D&A 46.2 43.3 53.0 58.9 60.5 70.4 81.4 13.5% EBIT 129.4 213.4 345.0 456.1 532.4 593.4 671.5 25.8% Margin 19.5% 24.3% 27.3% 28.8% 29.9% 29.7% 29.7% Net Financial Income -3.9 4.1 9.7 17.9 26.0 32.7 41.0 58.6% PBT (Norm) 126.4 219.5 354.7 474.1 558.4 626.1 712.5 26.6% Margin 19.0% 24.9% 28.0% 29.9% 31.3% 31.3% 31.5% Other Income 0.9 2.0 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PBT 126.4 219.5 354.7 474.1 558.4 626.1 712.5 26.6% Margin 19.0% 24.9% 28.0% 29.9% 31.3% 31.3% 31.5% Taxation 42.6 70.3 113.5 151.7 178.7 200.4 228.0 26.5% ETR 33.7% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% PAT 83.9 149.2 241.2 322.4 379.7 425.8 484.5 26.6% Margin 12.6% 17.0% 19.1% 20.3% 21.3% 21.3% 21.4% EPS 1.11 1.97 3.19 4.26 5.02 5.63 6.41 26.6% % Y-o-Y 0.0% 77.9% 61.7% 33.7% 17.8% 12.1% 13.8% DPS 0.92 1.25 2.02 2.71 3.19 3.57 4.07 26.6% % Y-o-Y 0.0% 35.6% 61.7% 33.7% 17.8% 12.1% 13.8% 12

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