Brewers On The Rise

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Brewers on the Rise

29 September 2009
Executive Summary
Validation. Recent events have clearly validated our earlier expressed and continued optimism in the Brewery Sector. In our Chronicles of 2008 as well as our subsequent Securing the Future and Revived Spirits reports published in December 2008, February 2009 and August 2009 respectively, we expressed our confidence in Nigerian Brewers and their ability to move against the markets then bearish trend. Our views have been proven right as the Brewery Sector has continued to reveal significant divergence against the broader market. Flight to Safety: Manufacturing Companies Hold the Ace. In the face of sustained uncertainty surrounding stocks in the Financial Service Sectors due to the current Banking Sector reforms, investors have shown a preference for shares in companies producing consumer goods as in the Breweries, Food and Beverage and Conglomerate Subsectors. This level of investors predeliction continues to portray a positive prognosis for capital appreciation for investors in the Brewery Sector. Increased Multinational Presence. We had earlier opined in our outlook for 2009, that the Nigerian Brewery Sector would experience increased multinational presence on the back of the potentials of the Nigerian market. Beer Consumption per capita in Nigeria is currently quite low relative to other African countries and around the world. This opinion has held true as multinational brewers have been increasing their activities justifying the growth potentials of the market. Expansion, Innovation & Restructuring. The view amongst Industry operators is that industry capacity is inadequate to meet market potential demand. Consequently, the two market leaders have been expanding capacity as a first line strategy considering their market dominance to fight threats from new entrants. Focus is also on operational efficiency and innovation to ensure lower cost of production and a deeper market penetration Threat of New Entrants. The structure of the Nigerian Brewery Industry is a pseudo- duopoly, due to the large number of inactive and moribund companies that exist within the sector. Most of the key activities within the industry are attributable to the market leaders, NB and Guinness. However, in recent times, we have witnessed a resurrection of these erstwhile moribund companies, with many of them enjoying interests and financial injections, from new multinational entrants. Does this mark the onset of a paradigm shift? Our Optimism Remains. While we are conservative with our forecasts, analysis, and expectations, we remain largely optimistic; that despite the infrastructure challenges, as well as the erosion of disposable incomes faced by Nigerian consumers, the cultural and habitual premise of consumption in the brewery Industry as well as the observed bottom heavy and growing demographics will mitigate against these challenges to revenue and earnings growth. We remain overweight in the Nigerian Brewery Sector.
Industry Sector FMCG Breweries
Vetiva Equity Research Oluwakemi Owonubi Head, Research Division Gbadebo Bammeke Senior Analyst Adedoyin Adelakun Analyst Eloho Onwah Analyst Adesoji Solanke Analyst Uduakobong Equere Analyst Oluwaseun Oyegunle Analyst
Vetiva Capital Management Limited 266B Kofo Abayomi Street Victoria Island, Lagos Tel: +234-1-46175213 Fax: +234-1-4617524 Email: research@vetiva.com
September 2009
24 September 2009
TABLE OF CONTENTS
AFRICA IN PERSPECTIVE ...........................................................................................................3 THE NIGERIAN BREWERY SECTOR IN VIEW .................................................................................7 UNVELING OF NEW PLAYERS ................................................................................................... 18 RESURRECTION OF UNLISTED PLAYERS .................................................................................... 21 MEET THE FRINGE PLAYERS .................................................................................................... 24 PRESENT TRENDS AMONGST KEY PLAYERS ............................................................................... 25 THE EVOLUTION OF THE BREWERY SECTOR .............................................................................. 11 MARKET UPDATE - BREWERS SHOW RESILIENCE ....................................................................... 29 LEADING THE PACK - NIGERIAN BREWERIES PLC ...................................................................... 30 HOLDING FORT: GUINNESS NIGERIA PLC ................................................................................. 37 SUMMARY ............................................................................................................................. 42
AFRICA IN PERSPECTIVE
In recent times, Africa has been looked upon severally as an investment haven with limitless potentials, thus qualifying as a prime investment destination. Key drivers are strong consumption and bottom heavy demographics, urbanisation and industrialisation, growing levels of disposable income, stable leadership (with democracy gaining hold in most of its countries), strong economic growth (as against declines in the developed nations) and low penetration levels. Besides these, are the opportunities created by mono-product economies such as Nigeria seeking to re-strategise and diversify their GDP profiles. This theme has inspired increasing levels of Foreign Direct Investment (FDI) in recent times into emerging market nations and Africa at large. As potent as the argument is, the African Brewery industry highlights the case more succinctly and transparently than many other investment options. This highlights the Brewery Sector as an imperative investment class for insightful investors in Africa and likewise Nigeria and this report will attempt to highlight the basis for our unbridled optimism. Although this report discusses the Brewery Industry in Nigeria, we also attempt to draw parallels and otherwise between the Nigerian market and other African Brewery markets. Whilst we are not in doubt as to the striking effect the global credit crunch will have on consumption across the world, especially in more developed economies, we believe African consumption is likely to go against the trend. This is largely premised on the obvious dearth of credit in Africa, and where available, its limited availability, thus restraining growth significantly to the self sustaining and self financing abilities of Companies. Thus most growth in African economies is self funded rather than credit financed and this has to a large extent inhibited the growth of local brewers across Africa. This perhaps accounts for the significant stake of multinational parent brewers in Africas largest breweries. SAB Miller leads the pack, with controlling stakes in 4 African brewers, Diageo and Castel in 2 each and the O&L Group owning controlling stakes in 1. This breakdown perhaps also explains the aggression by SABMiller to commence operations in Nigeria, a country largely regarded as a highly profitable African brewery market.
Brewer Delta Corporation East African Breweries Limited Namibia Breweries Limited Nigerian Breweries Sec haba Breweries National Breweries Solibra Zambian Breweries Limited Country Zimbabwe Kenya Namibia Nigeria Botswana Zambia Cote d'Ivoire Zambia Parent Company SABMiller Diageo O&L Group Heineken SABMiller SABMiller Castel Castel SABMiller
Soc iete des brassieries du Maroc Morocc o
African Brewers: Investment Highlights

Company Country Parent Population(mn) Capacity (mhl) Production(mhl) Per Capita capacity (litres) Per Capita consumption Market Cap (US$) Per Capita GDP (US$) Capacity Utilisation(%) Delta EABL Guinness NamBrew NB Nigeria Diageo 144.00 4.70 3.76 2.78 2.70 1,357 1,703 99% 289 61.43 27.30 29.00 Namibia Nigeria Zimbabwe Kenya SABMiller 12.00 7.00 2.20 58.33 18.30 157 203 31% Diageo 37.00 5.80 4.70 15.68 12.70 1,145 1,477 81% 197 34.04 11.10 19.80 NatBrew SABMiller Sechaba SBM Solibra Zambrew South Cote Zambia Africa Botswana Morocco D'Ivoire Zambia SABMiller 2.00 2.50 2.40 125.00 119.20 248 6,940 100% 99 39.68 19.30 26.20 Castel 30.9 1.10 1.10 3.56 4.00 682 6,433 92% 620 563.64 5.90 50.00 Castel 20.60 2.00 1.80 9.71 8.90 387 1,153 92% 194 96.75 12.70 22.40 SABMiller 11.70 1.30 1.00 11.11 8.60 85 1,305 80% 65 50.30 7.60 25.30
O&L Group Heineken SABMiller SABMiller 2.10 3.00 2.50 142.86 119.70 123 3,725 83% 41 13.67 29.50 16.40 144.00 9.00 8.50 6.94 6.90 3,015 1,703 94% 335 37.22 29.60 29.40 11.70 1.50 1.50 12.82 12.40 50 1,305 97% 33 22.22 5.10 20.90 47.60 45.00 43.20 94.54 91.00 22,875 6,311 96% 508 11.30 15.00 19.40
Market Cap/hl ($) 22 Mkt Cap/Hectolitre 3.20 Sales Growth (%) EBITDA Margin 30.70 10.00
Source:Bloomberg, CIA factbook, Vetiva forecasts and estimates
Large Upside Potential Exists Consumption per capita in Africa is anywhere but near saturation, as with the exception of South Africa, Namibia and Botswana, consumption levels remain at very dismal levels. Considering the data presented below, this translates to an average per capita consumption of 10.4 litres per person for Africa. In comparison with that of more developed countries reveals significant upside potential, sometimes exceeding 8 multiples. Note that we have excluded South Africa, Botswana and Namibia from this analysis, as they have estimated per capita consumption levels of above 90 litres pp.
AFRICAN BREWERS: CONSUMPTION PER CAPITA

(Litres Per Person) Morocco4.0 Cote DIvoire 8.9 Nigeria 10.4 Zambia 12.4
Kenya 12.7 Zimbabwe South Africa Botswana Namibia Average 44.1

Source: Bloomberg, Imara Research, Vetiva Estimates
18.3 91.0 119.2 119.7
AFRICAN BREWERIES
Capacity/Production (Millions of Hectolitres)
12
Capacity
10
Production
0 NB Delta EABL Guinness Nambrew Natbrew Sechaba SBM Solibra Zambrew Source: Bloomberg, Imara Research, Vetiva Estimates
Per Capita Capacity Levels Lower than international averages The ten foremost Brewers in Africa are estimated to produce about 45m hectolitres annually. With an assumption that they currently produce at 90% capacity, this would put Africas total production capacity at 50 million hectolitres per annum. With the African population estimated at 1 billion, this translates to a per capita capacity of 5 litres per person. Further accounting for a significant Muslim (and mostly alcohol averse), population, inspires a per capita alcohol consumption of 10 litres per person for the continent. This is much lower relative to international per capita capacity averages and indicates growth potential. This is especially in the light of currently bottom heavy demographics which are beginning to come of age and translate into increased demand, mounting pressure on previously low capacity levels. Income vs. Alcohol Consumption A clear relationship exists between income levels and alcohol consumption as is exemplified by the chart below. Accounting for the skew in Morocco (by reason of a significantly higher Muslim population) as well as Namibia (a large proportion of sales is exported); one sees a patent relationship as consumption levels are largely premised on per capita income levels.
PER CAPITA INCOME VS. PER CAPITA CONSUMPTION

14,000
Per Capita Income Per Capita Consumption
140
12,000
120
Per Capita Income (US$)
Consumption in Litres
10,000
100
8,000
80
6,000
60
4,000
40
2,000
20
0
Zim babwe Kenya Nigeria Nam ibia Zam bia South Africa Botswana Morocco Cote D'Ivoire Zam bia
Source:CIA Factbook, Bloomberg, Imara Research, Vetiva Estimates
Value Beckons! A comparison of the brewers across Africa in terms of market capitalisation per hectolitre produced reveals a largely unexplored and undervalued market in certain countries. African brewers have continued to record double digit growth in sales and increased volumes, especially in Kenya and Nigeria. Despite slowing sales growth and sometimes decline in developed countries across the world, African brewers have continued to record growth in turnover, many times in strong double digits. This is representative of an industry that is largely in the rapid growth stage and holds potential for much more growth especially in the light of currently low penetration levels.
AFRICAN BREWERIES FY08 SALES GROWTH (%)
Sales Growth
30.7% 29.5% 27.3%
19.3%
15.0% 12.7% 11.1% 7.6% 5.1% 5.9%
EABL
Guinness NamBrew
NB
Natbrew SABMiller Sechaba
SBM
Solibra
ZamBrew
Source: Company Financials, Imara Research 6
VALUATION PER HL VS VOLUME GROWTH

(US$/Litre)
35 700
Mkt Cap/HL
30
Sales Growth
600
Sales Growth 2008 (%)
Market Cap/hl (US$)
25 20 15 10 5 0
500 400 300 200 100 -
Sales growth across Africa in 2008 has remained largely robust. However, considering the current Valuation per hectolitre, Delta Breweries is clearly the cheapest at $22 per HL while NB and Guinness lie somewhat in between at $335 and $339 per hectolitre, cheaper than SAB Miller and SBM of Morocco at c. $600/hl. This highlights again the attractiveness of the Sub Saharan brewery market.
COMPARISON MARKETS
BETWEEN
KENYAN
AND
NIGERIAN
BREWERY
Certain parallels lie between the Nigerian and Kenyan markets, and we have identified some of these parallels herewith (using East African Breweries Limited (EABL) as a proxy for the Kenyan market), and market leaders, Nigerian Breweries and Guinness for the Nigerian market. Both have played host to an emerging middle class and a rapid growth in consumption volume growth, large Diaspora inflows, industrialisation, financial reform and deregulation and infrastructure rehabilitation and expansion. EABL has majority foreign shareholding, held by the Diageo Group, which again presents a similarity with the Nigerian market majors, Guinness, Nigerian Breweries and Consolidated Breweries. Similar to the Nigerian market, EABL also has backward integration policies in place with over 400 contracted farmers, especially on account of the attractiveness of the East African region for barley cultivation. In this regard, production trials have commenced in Nebbi, Northern Uganda. The Company which has a Malting subsidiary, East African Malting Limited (EAML) has a malted barley plant and succeeded in producing 33,000 tons of malt in 2008, a 13% increase relative to the previous years output. Although this does not fully meet the brewing requirements of the Company, production volumes are on the increase and this has enabled the Company hedge against escalating imported barley prices. 7
Same as with the Nigerian market, energy costs were a serious challenge for EABL, driven mainly by Heavy Fuel Oil (HFO) price increases. EABL also has nil gearing with a strong dividend policy, same as the top 3 players in the Nigerian brewery industry, Guinness, Nigerian Breweries and Consolidated Breweries.
THE NIGERIAN BREWERY SECTOR IN VIEW

The Nigerian business climate has proven favourable to the Brewery industry over the years with the major players reporting increasing patronage and high profit levels year after year. In addition to the re emergence of the once eroded middle class, the Nigerian economy continues to play host to accelerated urbanization and the consequential modern lifestyle, which has resulted in a shift in demand patterns from the locally brewed products to the more modern bottled products. This has resulted in a steady and sustained decline in the demand for traditional beers, generating a steady demand for the modern and easily accessible beers. The Nigerian Brewery Industry is a highly active sector, severally ascribed to as a pseudo duopoly) on account of the significant size and influence of the two leaders (Nigerian Breweries and Guinness) in the Industry relative to several other much smaller fringe players. Players in the sector are engaged in the brewing, bottling, sales and distribution of alcoholic and non alcoholic beverages such as stout, beers and malt drinks amongst others and in some cases, soft drinks. There are seven listed Companies in the highly concentrated Sector with the leaders, controlling circa 85% of the Sectors production volumes. However, there also exist several unlisted brewers operating in Nigeria such as Consolidated Breweries and Sona Breweries amongst others resulting in about 11 brewers in all. Of the listed players, besides NB, Guinness and International Breweries, the other brewers have failed to regularly publish performance scorecards and have lagged behind their peers in this regard. The Brewing process is highly technical and hugely capital intensive, and has benefitted from significant foreign direct investment inflows in recent times. This has to a large extent ensured that the volumes and thus market share has remained with the most technologically advanced manufacturers with cutting edge technology and up to date expertise. Growth in the sector is also largely skewed to marketing and branding prowess, thus, success in the industry is highly predicated on marketing ability, the strength of the distribution network and extensive advertising expenditure. Brand loyalty is another key factor, requiring significant periods of time to develop and as it appears, even longer time periods to betray previously established brand loyalties. Owing to the highly asset intensive with heavy economies of scale alongside the aforementioned, new entrants and small firms oftentimes find themselves highly disadvantaged. The growth of the sector over the years has been strong, predicated on improving economic conditions, growing disposable income, improved product quality and the marketing activities of manufacturers. Alcohol consumption is considered a social activity in Nigeria with every festive/social activity taken as an opportunity to indulge in extensive consumption. Besides this is the general perception that Nigerians are happy people, as well as the cultural tendency of Nigerians to throw parties for several reasons. (A recent survey of over 65 countries published in the UKs New Scientist Magazine suggests that Nigeria has the highest percentage of happy people, followed by Mexico and Venezuela).
BREAKDOWN OF BREWERIES SECTOR BY MARKET CAPITALIZATION
Others Jos Intl. Breweries 0.42% Champion Breweries 0.51% Golden Guinea- 0.03% Premier Breweries- 0.02% NB 65.72% Guinness 32.25% Intl. Breweries 1.05% Others-0.98%
Source: Vetiva Research
Breweries Champion Breweries Plc Golden Guinea Breweries Guinness Nigeria Plc International Breweries Plc Jos International Breweries Nigerian Breweries Premier Breweries
Last Released Result FY'07 Not released since 2005 Q3'09 Q1'08
As at August 31, 2009 One year
Three years Nil Three months
FY'07 Q2'09 FY'08
One year Nil Three months

Source:Vetiva Research
Worthy of note is the defensive nature of the Brewery Industrys products viz its ability to grow sales volumes despite over riding economic considerations. The resilient and largely inelastic demand profile of the Sectors products inspires volume growth irrespective of the economic climate. The perception is that in times of depression, consumers drink to drown their fears and anxieties and in times of excitement, they also drink to express their joy. We note that consumption is directly linked to individual lifestyles and so, though volume consumed may be dependent on economic fortunes, the industry continuously plays host to new entrants as well, (new consumers) whose demand compensates for the marginal loss in sales volumes occasioned by declining disposable income. This has also translated into increased revenue for the Brewery Industry, especially in the light of the recent economic challenges facing Nigerians. New brands, we believe with an understanding and appreciation of the opportunities inherent within the Nigerian market, have made their entrance into the Nigerian Brewery Market and it is our expectation that they would continue to intensify competition and result in increased sensitivity marketing activities from companies, which will also fuel growth. As shown by the scorecards of major players in recent times, (mostly in the past two/ three financial years), the Sector has continued to witness strong growth especially in the alcoholic products markets. We premise this growth on the significant improvements in macroeconomic indices which have precipitated a renewed demand for alcohol and non alcoholic volumes, thus positively impacting sales volumes within the industry. Improved quality of products and the ability of the leading companies to react innovatively to consumer needs has enabled them stay ahead of competition. Also contributing are the highly flexible and far reaching distribution networks which have ensured that the market leaders continue to hold sway.
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THE EVOLUTION OF THE BREWERY SECTOR

We have adduced the changing face of the Nigerian Breweries Sector to various factors referenced below: First is the increasing population & bottom heavy demographics, Nigeria has been estimated severally to have a population growth of 3.0 percent and we opine that consumption volumes will continue to grow as new consumers continue to make their entrance into Industry. This has necessitated the Brewers to continually seek measures by which to expand and increase production and match demand with supply. Youth under the age of 15 represents 45% of Nigerians population and a potential market for the brewery sector. We believe that the increasing population promises a steady pipeline of consumers for the Sectors products and necessitates growth levels, at least commensurate with that of the population, at the barest minimum. Second is increasing international pressure. We opine that the significant incursions of global players such as Castel of France and SABMiller who have a presence in the African breweries market into the Nigerian space have somewhat threatened and awakened incumbent players from their previous inactivity. Although they appear unfazed at present, we recognise significant capacity additions and attempts to consolidate market presence by the major players. Third is the identified Nigerian market. The Nigerian market for Brewery products has proven largely defensive and resilient to economic challenges. This is further buttressed by the very social and festive nature of a significant portion of the Nigerian populace, many of whom seek solace for the many economic and social challenges in alcohol. Although this cultural effect cannot be overemphasized, we believe it helps explicate some of the uniqueness and divergences in the demand patterns of the Nigerian market, relative to other foreign markets where demand is mostly premised on earnings and thus has been on the decline. Thus the failure of the recent economic slowdown to significantly impact the sectors demand has again reiterated the uniqueness of emerging markets such as Nigerias and awakened investor interest once again in the industry. We retain our optimism in the Brewery Sector premised on the observed proactivity of key players within the market, and our belief in their ability to return strong earnings as clear cut opportunities still exist in the Nigerian market despite the steady incursion of foreign brewers. Increasing health awareness, education and rural-urban migration, we opine has reduced the demand for locally brewed beers and created an additional market for premium brewed beers such as the leading breweries currently have the capacity to brew and distribute.
POPULATION DISTRIBUTION% <15 YEARS
Japan E.U U.K China USA World India Africa Asia Nigeria
13% 16% 18% 19% 20% 28% 32% 41% 27% 45%
Source: World Population Data Sheet 2008
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INVESTMENT HIGHLIGHTS Strong Turnover and Earnings Growth
The Brewery Sector has rewarded investors with robust growth rates, commendable especially when viewed relative to the broad performance of companies in the real sector. Most of these companies have recorded falling margins and profitability under the weight of infrastructural deficiencies and increased operating expenses. Turnover and Earnings for NB and Guinness have grown at a combined CAGR of 18% respectively over the past 5 years. This is further evidenced by post FY08 scorecards which have continued to show remarkable growth in both top and bottom lines.
BREWERIES SECTOR TURNOVER N(millions)
180,000 165,000 150,000 135,000 120,000 105,000 90,000 75,000 60,000 45,000 2004A 2005A 2006A 2007A 2008A 2009F NB GUINNESS
Avg. 5 yr Turnover CAGR 18%
Consistent Dividend Payout
The Brewery Sector has consistently rewarded its investors over the years with attractive dividend payouts. NB has consistently, in the past two financial years, fully paid out its earnings to investors as dividend while Guinness paid out a total of N12.80 as dividend (comprising N6.00 ordinary and N6.80 special) for the most recent financial year (FY08). These dividend payments represent 100% and 75% payout ratios respectively. Both Company earnings have grown consistently and potentials remain strong. Consolidated Breweries (an unlisted player) recently paid out N7.65 as dividends for the 2008 financial year. In our opinion, the liberal dividend policy is certain, to continue as the multinational nature of their ownership ensures that dividends are repatriated to serve the interest of the parent companies. All the aforementioned companies have significant foreign stakes. However, we note that this may be slightly challenged as firms resort largely to internally generated cash flows in the face of tightening credit lines.
Breweries
Parent Company
Foreign Stake
Consolidated Breweries Heineken N.V Guinness Nigeria Plc Diageo Nigerian Breweries
50.50% 46.03%
Heineken N.V
54.10%
Source:Vetiva Research
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GUINNESS NIGERIA PLC

EPS VERSUS DPS (N)
NIGERIAN BREWERIES PLC

EPS VERSUS DPS (N)
8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2003 2004
EPS
DPS
4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
EPS
DPS
2005
2006
2007
2008
2003
2004
2005
2006
2007
2008
Source: Company Financials
Source: Company Financials
Unsaturated Market
The market for alcoholic and non alcoholic beverages in Nigeria is relatively unsaturated and holds some potential for the discerning producer. The African region is credited with an average per capita beer consumption of 6 litres, lowest of all regions, with the exception of the Middle East (which is significantly low owing to its Islamic leaning). It is our opinion that in the near term, there exists significant headroom for growth in sales volumes and profit margins. This is further reiterated by Nigerias demographics which lend credence to our earlier optimism. Nigerias per capita beer consumption stands at approximately 10 litres pp in 2008 and we anticipate a further growth in consumption to about 13.5 litres by 2012 and even higher post 2012 as the Industry grows nearer to its maturity stage. Relative to other African and emerging economies, the Nigerian market remains largely unsaturated.
AFRICAN BREWERS: CONSUMPTION PER CAPITA

(Litres Per Person) Morocco 4.0 Cote DIvoire 8.9 Nigeria 10.4 Zambia Kenya Zimbabwe South Africa Botswana Namibia Average 44.1
12.4 12.7 18.3 91.0 119.2 119.7
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Qualitative factors
Our optimism will not be well justified if it lies bereft of an analysis of the quality of management and business model employed by the Industrys market leaders, which has to no small degree influenced our optimism. Both companies which have over the years enjoyed and continue to enjoy a good management, favourable track record, key technical partnerships and adequate corporate governance structures in place, remain the sectors largest and profitable players.
Swot Analysis Of Nigerian Brewery Sector
POSITIVE
Bottom heavy demographics Growing Industrialisation; Culture driven consumption;
NEGATIVE
Poor infrastructural development Declining purchasing power Increasing inflation
INTERNAL
Strengthening and increasing oil prices Strong relationship of big brewers with parent companies inspiring technical expertise; Strong brand essence of key players products Improved Macro-Economic indices Backward Integration utilising local sorghum grains Increasing presence of foreign players to spur capacity expansion in the Sector; Low alcohol penetration relative to other African countries and emerging economies around the world: Resurging nightlife in major cities
Niger Delta unrest and militancy impacting oil production volumes and FG revenue; Banking reforms likely to impact credit and short term funding Volatile foreign exchange rates Increasing commodity and raw material prices Poor power supply and exorbitant costs of alternative power supply
EXTERNAL
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BACKWARD INTEGRATION TAKES CENTRE STAGE
In the early 1980s, the brewery industry alone was credited with the importation of grains worth about 140 million Naira. At the time, the grains were being sourced from several European Union countries. However, in a bid to stimulate the growth of the local industry, the Nigerian Government in 1988, banned the importation of several grains such as barley and wheat, compelling Nigerian brewers to look inwards and modify their value chains to incorporate substitute raw materials in their brewing process. Sorghum had been hitherto cultivated as a subsistent crop, produced mostly by small famers and consumed as a food alternative in northern Nigeria. However, in 1984, the Government announced its intention to impose the policy of backward integration in which agro industries such as breweries would be required to source their raw materials within the Country. They were also required to establish farms as a prerequisite for import licence allocations from the Government. With the anticipated ban of barley and maize imports by 1988, brewers had to seek a viable alternative and sorghum was discovered to have good malting qualities. The crop experienced a sudden change in status becoming an industrial raw material for Nigerian brewers. Resulting from its erstwhile limited use, sorghum production still remained in the hands of small, uneducated farmers scattered across different parts of the country. The existing breweries were compelled to compete for this limited commodity and smaller brewers either folded up or were acquired and absorbed by bigger and stronger breweries. This precipitated an over fifty percent reduction in the number of brewers in Nigeria over time from 34 in 1984 to 16 in 2002. Clearly, both industry leaders, Nigerian Breweries Plc and Guinness Nigeria Plc survived this blitz in the Nigerian business terrain. NB currently has sorghum farms and has engaged farmers from whom it off takes sorghum for its several brewing plants spread across the country. Guinness on the other hand, utilizes malted barley, sorghum, rice, maize and hops as raw materials for its brewing process. Like NB, the company sources most of its raw materials locally by developing local sorghum seeds for farmer groups and locating appropriate farm marketing channels.
15
SECTOR CHALLENGES
The Nigerian Real Sector is currently beset with multi faceted challenges, a ripple effect of the present economic malaise the Nigerian economy (of which the real sector is a subset) presently contends with. We have previously been faced with the reality of declining earnings quality from the stables of several manufacturers, and no assurance that this will not continue in the near term, in the face of prevailing economic challenges. Although, the defensiveness of the Sector relative to the economy, has been brought to the fore in recent times by the commendable performance of some players within the sector, we highlight that the core challenges remain, reiterating our erstwhile cautious optimism.
Exchange Rates:
The final months of 2008 witnessed a severe unexpected erosion of the Naira, howbeit, with the onset of the Retail Dutch Auction system, previously put in place by the Central Bank of Nigeria (CBN); exchange rates eventually regained some level of stability. This stability was however somewhat threatened by a return to the pre-existing Wholesale Dutch Auction System by the new Governor of the CBN, following which we have witnessed a continued depreciation in the Naira. The vulnerability of manufacturing companies earnings to exchange rates movements cannot be over emphasised as many of their raw material inputs as well as production costs are directly impacted by the exchange rate volatility. The brewers for instance have to manage the exchange rate volatility, expected to reflect in the costs of raw materials such as barley and hops.
EXCHANGE RATE MOVEMENT

(USD VS NAIRA) 160 Exchange Rate
150
140
130
120
110 Dec-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09
Source: www.oanda.com
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Drilling down to the Brewery Sector, although market leaders, Guinness and Nigerian Breweries appear to have successfully mitigated against a significant portion of the exchange rate risk by their backward integration arrangements, smaller players, we opine may remain relatively exposed, as they still import and depend largely on barley as a mainstay of production. Consequently, except they opt to utilise local sources of starch for the fermentation and brewery process at the risk of a lower quality produce, they may still suffer the risks of some exposure. However, considering that the quality of final produce depends largely on the nature of starch utilised, and further considering the limited sources of sorghum and the ability of the big players to effectively cultivate and demand for the same, it is highly uncertain that the fringe players, in competition with the Big players will find adequate quantities of sorghum to meet present demand.
High Operational Costs:
Power generation in Nigeria remains a significant challenge to the operations of the brewers in Nigeria. Nigerian Breweries recently disclosed that c.7% of turnover was expended on alternative power generation in FY08, significantly increasing the Companys operating costs, and reducing profitability. Guinness also faced the power generation challenge and is currently deploying gas powered generating plants at its Benin and Lagos plants. Besides power, other operational challenges include the dearth of good road networks and distribution infrastructure, exorbitant increases in the prices of grains and distribution costs on the back of spiking diesel prices. These pose significant threats and continue to challenge the operational efficiency of the real sector and brewers in Nigeria. Besides this, CET Power Projects Limited recently received a licence from the Nigerian Electricity Regulatory Commission (NERC) for a 5MW off grid independent power plant for the Nigerian Breweries plant in Iganmu, Lagos. We hope this will bring some respite to the currently exorbitant power costs of Nigerian Breweries and improve profitability.
Religious Faith And Healthy Consumption
Although, the sector has witnessed continued growth in sales volumes, individual faith and lifestyle restrictions advocated by some religions against alcohol consumption has served to somewhat limit the growth of the sectors volumes. In the Southern and Eastern parts of Nigeria which are largely Christian, as well as the Northern region which is largely Muslim (some of the Northern States have adopted the Sharia Islamic code which frowns strongly at alcoholic consumption), religious faith is growing and with this growth, to some extent, a declining consumption of alcohol is being experienced. With increasing proportions of the populace seeking solace in various religions, typical consumption levels are likely to be negatively impacted. Another challenge is the increasing desire for healthy foods and drinks by some individuals. This, we opine, may continue to limit the consumption of alcoholic products as several health campaigns advocate for reduced alcohol intake.
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Increasing Raw Material Input Costs
Although, we readily admit the success of backward integration in the Brewery Sector, we also note brewers continued exposure to raw materials such as barley and hops for the flavour of its brewed products, although the raw material remains largely sorghum based. We had in earlier reports, noted the spike in commodity (barley) prices alongside crude oil prices, one for which we had highlighted the ability of sorghum to substitute for barley, and disclosed the existing backward integration strategy as a mitigating factor. The decline in oil prices ensured a commensurate decline in commodity prices such as barley, as barley prices depreciated over 50% between July and December 2008. This resulted in a decrease in input costs for the brewers, and was reflected in improved operating margins. However, between April and July 2009, barley costs have recorded an increase of 26.06%, thus necessitating our concern as to the sectors exposure to raw material input prices.
BARLEY PRICES ON THE RISE

($ per metric tonne)
Barley
160
140
120
100
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jun-09
Source: www.indexmundi.com
UNVELING OF NEW PLAYERS

In our recent breweries report, Securing the Future dated February, 2009 , we opined that significant expansions and capital expenditures in the Breweries sector were not likely in the near term. We premised this assumption on the fact that the various players had recently engaged in significant expansion and that the present capacity was adequate for the market at its present state, further assuming stability at prevailing growth rates. However, we are faced with a Breweries Sector that appears to be presenting a new face and challenging the status quo which we had earlier assumed. As we had earlier posited, some of the market share currently accruing to the market leaders may be under threat in the near term as several multinational brewers are currently making steady incursions into the Nigerian market. Some of them are joining forces with already established fringe brewery players, in a bid to ease what would otherwise be a very difficult entry into an already established Nigerian market. Highlights of new Brewery entrants, as well as planned entry strategies are presented below:
SAB MILLER
SAB Miller is a multinational brewer formed by the acquisition of Miller Breweries by South African Breweries in 2002. The Company which is one of the worlds largest breweries has several investments across the world, with operations in six continents. The Company which controls a large portion of the African market finally commenced operations in Nigeria, after months of speculations and rumours in the industry about its eventual entry. The Company is a strong player in the African breweries market with a presence in Angola, Botswana, Ghana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Uganda and Zambia. The Company holds controlling stakes in 4 of Africas 10 largest brewers (representing a strong presence in Africas fastest growing markets). Perhaps this explains why the company has been seeking an inroad into the promising Nigerian market for several years.
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Entry Strategy SABMiller had earlier in the year unveiled its Nigerian entry strategy and has since made its debut into the Nigerian market. According to the Companys Management, it will not be making a frontal attack on the Lagos1 market, which is one of the countrys largest markets, choosing rather to make a subtle entry from the smaller cities. It further revealed its intention to utilise locally cultivated grains such as maize and cassava as raw materials for the production of cheap beer, to compete with the existing premium beer brands. This strategy has proven successful in previous market entry attempts made by the Company, in the East African markets of Kenya. Low income earners in Nigerians who can hardly afford premium beers have continued to produce local homemade brews ranging from ogogoro, shepee and burukutu amongst others. These brews are unregulated and could be largely unhealthy, creating a potential need for healthy, cheap and affordable beers. This class of consumers, previously unaccounted for by current market leaders may represent a potential market for SAB Millers products. Acquisition! Acquisition!! Acquisition!!! In our opinion, the acquisition of existing breweries represents the best entry strategy for potential new entrants into the Nigerian breweries market. The market has historically shown in previous observed new product/company entry attempts, that it is more receptive of an existing brand/ company (Existing brand loyalty is very strong). Thus, beginning with a regional brewer status may enable SAB Miller establish a presence in the near term, a strategy which the Company has already adduced to, in the recent disclosure of its acquisition, and willingness to further acquire existing regional brewers. The Company had earlier acquired Pabod Breweries and Standard Breweries to help cushion its landing into the Nigerian market. Sequel to its acquisition of the aforementioned breweries and further lending credence to its aggressive acquisition strategy, the Company recently acquired 100 percent of La Voltic, a bottled-water manufacturing company based in Lagos. The acquisition is with the intent to transfer the companys plants to Port Harcourt, open a new production line there and begin manufacturing bottled water by August. The acquired company represents the Nigerian operation of Voltic International, a leading mineral water producer in Ghana. The Company, (Voltic) has since spread to Nigeria with funding of $4 million from the Aureous West Africa Fund (AWAF). Pabod Breweries, currently has a production capacity of 30,000 hectolitres, with an expansion target to produce about 250,000 hectolitres of alcohol by February 2010. (This represents an eight fold increase in capacity and production volumes). Since acquiring Pabod, SABMiller has reintroduced many of the companys older brands, including Grand Lager and Grand Malt (which have some market presence in the Port-Harcourt/South Eastern region), and may roll out more products in the near future.
Lagos is Nigerias cosmopolitan commercial centre with an estimated population of 20 million people, who practice a very active social lifestyle. 19
HURDLES TO PROFITABLE ROLL OUT BY NEW PLAYERS
Price Consistency Industry leaders, NB and Guinness have successfully eliminated inconsistent base prices and likely arbitrage opportunities across geographical locations within the country, by establishing factories and distribution outlets in the various regional locations across the country, ensuring that distribution costs are minimal, as well as enabling the adoption of a single pricing policy for each product in all geographical regions. The inability of new players to outlets and strategically located ensure uniform final costs are unwanted arbitrage opportunities also does little for brand loyalty. successfully establish such distribution breweries will hamper their abilities to borne by consumers and may create for third party distributors, an act which
Existing distribution and on sale outlets The on sale outlets and strategically branded distribution outlets are put in place by many of the existing players. The outlets assures their products a sure marketing channel and distributor loyalty. Major players also equip several sales outlets with deep freezers and branded facilities with a salient understanding that such distributors will continue to distribute their products. This ensures a significant presence in all the nooks and crannies, where there are customers, and provides a defined and reliable distribution strategy for the Companys products. Packaging In the event that the new players choose to retain the bottled method of packaging for their products, we foresee significant difficulty as bottle production; design and distribution come with significant costs, which will place them at an additional disadvantage to their already established competitors. However, to mitigate the aforementioned problems, it is not unlikely that such companies may choose to acquire product canning infrastructure, and can their products for ease of distribution. Another likely fallout of the packaging challenge is that potential consumers and retailers may be unwilling to incur costs to acquire the bottles (empties and crates) which are necessary to facilitate the demand for the Companys products. Pabod Breweries (newly acquired by SAB Miller), has already highlighted its inability to compete with the industry leaders in the canned packaging of its products as it cannot immediately afford the cost of setting up of a canning line. This will effectively restrict the Company to sales only through returnable bottles.
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Location We note the predominance of brewery factories in the South Eastern part of the country, and partly adduce this to the habits of the residents of these communities. A close look at the prominence of palm wine in the local culture provides some premise for the deep rooted and habitual consumption of beer and thus the concentration of brewers in the area and the market for their products. Thus, it is our opinion that the choice of location for the new breweries may make or mar their entry and eventual performance in the Nigerian market.
LOCATION OF BREWERY PLANTS IN NIGERIA
International Beer and Beverage
Nigerian Breweries
Nigerian Breweries Ibadan
Jos Intl Breweries
Standard Breweries Benue Breweries
Edo Breweries Consolidated Breweries ,Ijebu Ode Nigerian Guinness Breweries , Ikeja Iganmu, International Breweries, Ilesha, Champion Breweries , Uyo Guinness Breweries Premier Breweries, Onitsha
Nigerian Breweries, Ama Life Breweries Onitsha
Golden Guinea Breweries, Aba Nigerian Breweries , Aba Consolidated Breweries, Awo Omamma
Brewery Plants
Pabod Breweries, Port-Harcourt
Source: NSE, Company Reports
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RESURRECTION OF UNLISTED PLAYERS

The Brewery Sector as we know it, up until recently was defined as a pseudo duopoly, comprising Nigerian Breweries, Guinness and the rest. The rest here was accounted for by the myriad of small brewers, listed and unlisted, with most of the listed players reporting unprofitable scorecards year after year as they bowed consistently under the weight of production costs and other operational challenges. In recent times, however, activities around the unlisted brewers have necessitated a new thinking. Consolidated Brewers- shaping a niche... Consolidated Breweries was incorporated in 1980 and is credited as the third largest brewer in Nigeria after NB and Guinness. Consolidated Breweries operates two breweries located in Ijebu Ode, Ogun State and Awo Omamma, Imo State. The Company has remained unshaken by the market majors, shaping a niche for itself in the low price segment of the beer market. Heineken N.V sequel to an agreement in principle reached with Consolidated Breweries, increased its investment in the latter from 24.00% to a controlling stake of 50.05%. The Company is involved in the brewing of its main brand 33 Export, an alcoholic beverage brewed under licence and the Hi-Malt brand, a non-alcoholic drink. The Company recently introduced a new product Turbo King into the market. The launching was considered highly successful, with the magnitude of its success affirmed as Consolidated Breweries won the award for the best launch in Heineken Africa and Middle-East Region. The Company posted highly impressive financials for the period ended 31st December 2008, with Turnover and After Tax Profits, standing at N17.5 billion and N3.04 billion respectively, relative to N13.2 billion and N2.2 billion respectively in the previous year. The Company paid out a total dividend of N7.56 per share to its shareholders for the year ended 31st December 2008. In a bid to further improve its current products mix, the Board recently sought the approval of the Companys shareholders to acquire 323,349,410 ordinary shares of one naira (N1) each held by CFAO Nigeria Plc in DIL/Maltex Plc. The acquisition of the shares in DIL/Maltex will enable the Company leverage on the brand resilience of Maltex which was the first malt product in the Nigerian market. The acquisition, we opine will further boost the presence of the Company in the malted products segment in addition to its current malted product, Hi Malt. The Nigerian malted products market currently boasts of over 8 malt brands including Malta Guinness, Maltina and Amstel Malt (NB), Vitamalt, Nasmalt, Maltonic amongst others.
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Sona Breweries- Redefining Flagging Business Sona Breweries is a member Company of the Sona Group which is in the business of manufacturing beer, beverages, plastic and glass ware. The Group practices a strategy of acquiring distressed companies and turning them around by investing modern technology and efficient management. In line with this strategy, the Group has stakes in several other fringe brewers in Nigeria such as International Beer and Beverage Industries (Nigeria) Limited (IBBI) Champion Breweries Limited, Uyo Life Breweries Company Limited. Benue Breweries Limited Together, the above mentioned breweries are responsible for the brewing of several alcoholic and non alcoholic products in the Nigerian Breweries market, some of which are Kronenbourg Beer, Tigre Bock, Champion Lager Beer, and Champ Malta. Renowned brands from the stables of the parent Company include Maltonic (a malted drink), Sun Top (a line of packaged juices. marketed under a franchise arrangement), Wilfort Dark Ale, a 7.6% alcoholic product which enjoys a monopoly position in the small ale segment of the lager market. However, in the recent past, we have watched the Company emerge from its previously inactive state, launching two new brands into the Nigerian drinks market. The products are Williams, another dark ale, quite like the previous Wilfort Dark Ale and Malta Gold, in the malted drinks market. We are yet to ascertain if these newly launched products are intended to run simultaneous to previously running Wilfort and Maltonic, but the Company has embarked on several aggressive media campaigns to re-introduce itself into the market. Whilst, we acknowledge that the two market leaders yet hold a strong grip on the market in terms of volumes, market share and distribution, we opine that should Sona Breweries manage a very successful product launch, it may yet prove successful in the reviving of its product lines and increasing the size of the pie, although we do not see its products posing a threat to the Big Two in the near term.
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MEET THE FRINGE PLAYERS

International Breweries: The Company was incorporated in December 1971 primarily to carry out the business of brewing beer and non-alcoholic malt drinks. Its brewery is sited in Ilesa, Osun State. In a move to rebuild the capital base of the Company and to carry out restructuring, staff right-sizing, improvement and expansion of production facilities, the Company recently successfully raised N1.3 billion from the Nigerian Capital Market. International Breweries Plc has a subsisting Technical Services Agreement with Brauhaase International Management GmbH (a wholly owned subsidiary of Warsteiner Group of Germany), which owns 60.0% equity in International Breweries Plc. The Company has been the Technical Partner of International Breweries Plc since inception and became the majority shareholder following the conclusion of the companys public offering in 2007. Some of the companys products include Trophy Lager Beer and Beta Malt. Golden Guinea Breweries Golden Guinea Breweries Plc was incorporated in September 1962 and subsequently listed in 1979. Located in Aba, the Company is engaged in the brewing, bottling and marketing of Golden Guinea lager beer and Eagle Stout, as well as the producing and marketing of Bergedorf premium lager beer and Bergedorf Malta under a franchise from Holsten Brauerei AG of Hamburg. Champion Breweries Plc Champion Breweries Plc was incorporated in July, 1974 and listed in September 1983 for the purpose of brewing and bottling lager and Champ Malta drinks. It is located in Uyo, Akwa Ibom State. Recently, following the banning of the importation of bottled beer and the high importation tariffs, InBev, a global player in the alcoholic drinks market, has started domestic production of Becks in Nigeria in partnership with Champion Breweries. Considering the financial and technical capabilities of InBev, who are global market leaders, Nigerian Breweries and Guinness Nigeria may be in for some competition. The Company also operates under the umbrella of the Sona Group. Jos International Breweries Plc Jos International Breweries Plc (JIB) came into existence in 1975 following a tripartite investment agreement signed between the Government of Plateau State of Nigeria, the Danish firm of A/S Cerekem International Limited and the Industrialization Fund for Development Countries IFU. Jos International Breweries Plc was incorporated and is involved in the brewing of Lager Beer in the brand names of Rock and Class as well as the production and sale of malted drink in the brand name of Malt Royale. The Company has indicated its raised funds from the Nigerian Capital Market in 2004 to strengthen its operations but the company appears to still be largely moribund with its facilities lying fallow and profitability very low. Premier Breweries Plc The Company was incorporated in 1976 and subsequently listed on the floor of the NSE in 1988. It is located in Onitsha in Anambra State and was incorporated for the purpose of brewing alcoholic products. 24
INTERNATIONAL BREWERIES Recent Results FY'08 Q3'08 Q1'08 FY'07 FY'06 Turnover (N mill) 931.92 735.60 238.86 561.67 313.05 PBT (N mill) 63.50 131.92 5.73 -118.21 -361.36
PRESENT TRENDS AMONGST KEY PLAYERS

Having itemised the likely changes in the marginal players as well as key opportunities and challenges, this report will be incomplete should we fail to identify some of the other trends in the Breweries industry stewarded by the industrys giants. We have noticed organic growth within the Industry, especially from capacity additions and output and sales growth across the breadth of the Industry.
NIGERIAN BREWERIES- VALUE ADDITION THROUGH EXPANSION AND INNOVATION
1. Investment in Raw Materials

Increased Backward Integration (Sorghum Plantation) Commissioning of Sorghum Malting Plant Reduced dependence of imported barley
2. Expansion of Capacity
New Canning Line for Fayrouz in Ibadan Reopening off Aba brewery with new production line Commissioning of new brewery line in Kaduna
3. Innovation in Production
Canning of all product lines Relaunch of Legend Extra Stout Fortification of Maltina with calcium
4. Marketing and Distribution

Strengthening of distribution hubs Aggressive on site marketing Brand Promotional outreaches
5. Increased Sales Volumes

Following the completion of the multi billion naira Ama factory, with a capacity of 3 million hectolitres per annum and the recent successful amortization of the loan obtained by the Company in this regards, industry pundits expected that it would step back on capital expenditure and looked to its full dividend payout policy as an indication of its preference to reward its shareholders and reap the dividends of its expansion. As at FY08, the Company had a combined capacity of roughly 9.0 million hectolitres per annum.This further serves to reiterate the Companys pride of place as market leader by volumes in the Brewery Industry. However, in a simultaneously proactive and reactive move to stem an erosion of its current market share, Nigerian Breweries has elected to continue its expansion programme, especially showing a strong resilience in view of the pressing entry attempts by many of global foreign players. 25
Expansion Nigerias top most brewer has shown tremendous resilience in its position as a leader, sustaining an aggressive expansion programme to continually increase capacity. Following its most recent record sales of 8.5 million hectolitres for the 2008 financial year, the Managing Director had disclosed that brewing capacity was a constraint in terms of volumes for the year. Nigerian Breweries currently boasts of 5 brewing plants up and running, located in Lagos, Ama, Ibadan, Aba and Kaduna. The Company has added on several brewing lines, one for its Fayrouz non-alcoholic line in Ibadan and another in Kaduna, simultaneously installing canning lines for its various product lines. In this light, we have identified two massive expansion projects undertaken by NB in recent times. Aba Malting Plant In furtherance of its commitment to its expansion plans, Nigerian Breweries recently commissioned a malting plant in Aba. The Aba Sorghum Malting Plant which was acquired two years ago was formerly known as the Universal Malting Plant and was incorporated in 2004 to produce and supply high quality malted sorghum for the food and beverage industry. The malting plant is an automated sorghum malting plant with cutting edge technology and is reputed to be the biggest of its kind in Africa and the world. As at December 2008, the Company had committed about N10 billion to the Aba Malting plant project. The investment has as one of its objectives, to assume the role of an African regional knowledge centre for sorghum research as well as to create sustainable employment through direct engagement in sorghum farming and other activities related to sorghum supply chain management.
THE BREWERY PROCESS
Source: Vetiva Research
The Malting Process represents the foremost step in the brewing process, which is broken down into Malting, Milling, Mashing, Brewing, Cooling, Fermentation, Maturation (Racking) and Finishing (Filtering and Carbonation). This helps provide some insight into the significance of NBs multibillion naira investment in the Aba Malting Plant as it provides the basic raw material for the Brewing Process. The malting process refers to the process of preparing grains for further processing and the commissioning of this plant we reckon, positions NB to increase its market volumes significantly going forward as well as aid the reduction of operating costs.
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Expansion of Lagos Brewery Nigerian Breweries is currently expanding the capacity at its Lagos brewery with an additional line which is billed for commissioning in September 2009. The proposed expansion is expected to increase the companys production capacity by an additional one million hectolitres (c.13.9 million cartons of Star Beer). It is our expectation that this would translate into increased revenues when production commences, just in time for the final quarter of the year. The fourth quarter is traditionally a festive period, (as shown in the table below) which historically returns the largest sales volumes in the year. We have approximated additional revenues from this plant per annum to add up to about N11.26 billion per annum (at 80% capacity).
Period Q4'08 Q3'08 Q2'08 Q1'08 Q4'07 Q3'07 Q2'07 Q1'07 Q4'06 Q3'06 Q2'06 Q1'06
NB QUARTERLY CONTRIBUTION Turnover 29.63% 23.59% 24.51% 22.27% 30.65% 22.99% 23.52% 22.83% 28.69% 24.61% 23.73% 22.97%
PBT 30.58% 21.06% 24.19% 24.17% 35.58% 19.22% 21.40% 23.80% 23.09% 16.48% 27.94% 32.49%
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GUINNESS- GROWING VOLUMES; STRENGTHENING PROCESSES
The second largest Guinness market in the world has continued to pursue organic growth via an expansive strategy, strengthening its existing brand portfolio; increasing price and output simultaneous to an over haul of its operations. As at FY08, the Company had a combined capacity of roughly 4.0 million hectolitres per annum and remains an undisputed leader in the stout market category. That notwithstanding, the Company is not resting on its oars, and has recently played host to several initiatives to cushion its market share from potential erosion and maintain its position relative to its peers in other countries around the world. Expansion The company previously operated from 3 plants located in Aba (Eastern), Benin (Southern) and Lagos (Western) parts of the country. However, owing to its current overhauling of operations, the Company recently closed down its Malta Guinness plant in Aba, deploying the production to the Lagos and Benin Breweries. The Company has revealed its current expansion attempts at both the Lagos and Benin breweries and it expected that this will yield additional volumes of at least a million hectolitres. Besides the capacity expansion, extension into the canned segments market is expected to yield further growth. Structural Re-organization Guinness has recently been involved in a reorganisation of its processes, and expectations are that this would continue to yield operating leverage to the firm. Its reorganisation recently involved the offer for sale of its administrative offices in Ikeja and plans are on to relocate the administrative functions elsewhere. The deployment of the Systems Application and Products (SAP) operating system is also fallout of ongoing re-organisation processes. Besides this, arrangements to deploy gas plants at its Benin Brewery have reached an advanced stage and it is expected that the deployment would yield operating leverage for the company and improve erstwhile impressive margins.
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MARKET UPDATE - BREWERS SHOW RESILIENCE

In recent times, especially in the wake of prevailing uncertainty in the Financial/Banking System, the Brewery Sector has played host to renewed investor interest in a flight to quality. We had earlier adduced to this flight to quality and the position remains unchanged. This is more evident especially in the heat of the most recent Banking Sector reforms which has precipitated yet another bearish run.
SECTORAL RETURNS (YTD)(%)

Based on September 24 prices
Food and Beverages
Building Materials
Petroleum
Insurance
Conglomerates
Breweries
Banking -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Source: NSE, Vetiva Research
AGAINST THE TIDE- BREWERIES VS FINANCIAL SERVICES VS NSE ALSI

(Rebased 02/01/09)
NSE ALSI 1.40 BREWERIES INSURANCE BANKING 1.20
Brewery Sector continues to lead market as flight to quality strengthens
1.00
Divergence of Brewery Sector from broader market
0.80
0.60
0.40 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Source: NSE, Vetiva Research
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LEADING THE PACK - NIGERIAN BREWERIES PLC

Company History
Nigerian Breweries Plc (NB) was incorporated in Nigeria on 16 November 1946 under the name Nigerian Breweries Limited and commenced operations in 1949 at its Lagos brewery with the roll out of the first bottle of Star Lager Beer. The company is a subsidiary of Heineken N.V. Its first brewery in Lagos commenced production in June 1949 and five other breweries were subsequently commissioned. The Aba brewery was commissioned in 1957, Kaduna in 1963, Ibadan in 1982, Enugu in 1993 and the largest brewery in Nigeria and one of the most modern in the world, the Ama Brewery in 2003. However the operations at the Enugu brewery were discontinued in 2004 and the company presently has five operational breweries. Its initial paid up capital on incorporation in 1972 was N3 million and as at 31st December 2007, it had an authorised share capital of N4 billion and paid up capital of 7.5 billion ordinary shares of N0.50 each. The ownership structure of the company as at the end of 2007 comprised Heineken Brouwerijen B.V -37.74% Distilled Trading International B.V-16.36% Others-45.9%
Summary Current Pric e (N) Fair Value Range(N) Market Cap (N) Billion Free Float (%)
55.00 57.00-65.00 459.047 30.00
Share Price Performance 6 Months (%) 12 Months (%)
68.25 31.61
Financials EPS DPS BVPS (N) EBITDA margin
2008A 3.40 3.40 4.26 25.30
2009F 4.08 4.08 4.99 25.30
2010F 4.75 4.28 5.83 25.30
Nigerian Breweries
Financial Summary Turnover (Nm) EBITDA PAT ROA(%) EV/EBITDA (x) P/BV(x) P/E(x)
2008A 145,462 36,778 25,651 26.3 7.62 14.11 17.68
2009F 174,084 43,862 30,382 25.7 8.02 12.04 14.73
2010F 203,678 51,105 35,949 25.7 7.38 10.31 12.65
Heineken Brouwerjen B.V 37.74%
Distilled Trading International B.V 16.36%
Others 45.9%
Business Overview
Nigerian Breweries has enjoyed an over 60 year brewing experience with the Nigerian brewing industry with a resulting bouquet of tested and trusted brands. These brands include: Star Lager beer (launched in 1949); Gulder Lager Beer (1970); Maltina (1976), which now has three varieties, namely Maltina Classic, Maltina Strawberry, and Maltina with Pineapple; Maltina Sip it (2005); Legend Extra Stout (1992); and Amstel Malta (1994), Fayrouz (2006). The Company re-launched Heineken Lager in June 1998 and Legend Foreign Extra Stout in 2008. In line with its ongoing brand development, NB fortified Maltina with Calcium in 2008 and successfully completed the canning of all its products. The Company accounts for majority sales of beverage in the Nigerian brewery industry and has maintained the lead consistency over time. 30
The Companys stake in the brewed products market has continued to grow, largely due to consistent product quality, improved product packaging and the launch of all its products in cans. The canning of its products range which began in early 2008, propelled NB further ahead in the market, as the Company gained significant market share. NB recently embarked on an aggressive expansion plan designed to strengthen its current market position and support the Federal Governments vision of promoting investment in the country. This has led to multi million naira investments in the new malting plant and lager production line in Aba, a new canning facility and bottling line for Fayrouz in Ibadan, new brew houses in Lagos and Kaduna as well as a new bottling line in Aba.
INVESTMENT HIGHLIGHTS
Nigerian Breweries stands out on account of its strong market presence. Its long standing presence in the Nigerian market has seen it evolve into a responsive brewer with a deep understanding of the Nigerian consumer. We believe the brewer presents a commendable and sustainable business model with its strategically located breweries and distribution centres across the country. Nigerian Breweries is the bigger of the two leaders in the breweries industry, with leading market share in the lager market, ownership of premium brands and strong market presence. As regards its recently released Q209 results, the Company grew top and bottom lines by 22% and 37% respectively, relative to the same period last year. The results reflected the success of the company at strengthening its internal processes for greater efficiency, a process which it had earlier embarked upon. PBT Margin improved by over 300 bps relative to Q208, from 26.67% to 29.79%. It also showed a QoQ improvement of 0.54%. NB has an enviable distribution network, comprising 147 key distributors and wholesalers across Nigeria, with its sales regions classified into divisions namely, Lagos, Central, East, West, North, and South. The company has also showed strong commitment to constant innovation completing in Q1 2009, the rollout of cans for its Gulder, Fayrouz and Maltina brands, and marking the successful completion of the canning of all its products. The Companys production process is largely dependent on raw materials such as sorghum and barley (especially since the ban of barley was lifted). Thus, the upswing in barley prices in Q209 was fully shielded by the full integration of malted sorghum into NBs production process as well as the recent commissioning of the malted sorghum plant in Aba. (The price of barley appreciated 34.5% between April and June 2009 alone). The MD of Nigerian Breweries had earlier disclosed that the companys commendable 8.40 million hectoliters production level (for the 2008 full year), had proven inadequate to meet the existing demand for the companys products. And so, we expect recent capacity additions across the value chain to help improve subsisting production capacity in order to close the demand/ supply mismatch identified by the company.
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The companys performance has showed strong growth in margins, QoQ, since the start of the 2009 financial year, an improvement we have partially attributed to the numerous operating and distribution enhancement strategies effected in different areas of the companys operations since 2008. Although, the Companys Management has again expressed its cautionary stance as regards its ability to continue to exhibit this positive trend, highlighting the likely impact of factors such as deteriorating security concerns, the current global situation and the devaluation of the Naira; beyond the absolute figures, we premise our optimism that NB can continue to maintain its current margins on its strong operating leverage and focused management.
Earnings Forecast and Valuation
It is our expectation that the Company will record a turnover of N174.08 billion and After Tax Earnings of N30.38 billion in FY09. This translates to an EPS and DPS of N4.08, which yields an attractive forward dividend yield of 6.8% It is also our expectation after due consideration of prior performance that, earnings will grow at a compounded rate of 21% over the next 5 years to N57.9 billion by 2011. Although we believe that at its current price, NB is approaching full value in the near term, we also believe that on the back of current expansion plans and anticipated volume additions, subsequently impressive scorecards will justify the upward increases in investors pricing of the stock.
NB PROFITABILITY MARGINS
(%)
60% Gross Margin 50% EBITDA Margin PAT
40%
30%
20%
10%
0% 2006 2007 2008 2009F 2010F 2011F Source: Company Financials
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FINANCIAL REVIEW
Nigerian Breweries (NB) has proven largely resilient to recent multifaceted challenges prevalent in the real sector ranging from tightening credit lines, to widespread increases in the cost of raw material inputs, both challenges reflective of the worldwide economic slowdown. FY08 and subsequent quarterly scorecards released amidst the challenging environment have served to reiterate our opinion on this resilience. Despite the harshness of the immediate operating environment, NB has successfully mitigated against this by reason of its strong presence across the value chain (it is involved in all the stages from cultivating sorghum to distribution, enabling it attain significant operating leverage) and in the Nigerian market.
NB: PRESENCE ACROSS THE VALUE CHAIN
CULTIVATION OF SORGHUM ON SORGHUM FARMS
BREWERY PROCESS
MARKETING AND DISTRIBUTION OF FINAL PRODUCTS
Margins have continued to show marked improvement, despite increases in raw material inputs and energy costs over time (energy costs stood at 7% of sales as at FY08), indicative of the success of the Companys improved cost management. The Companys most recent scorecard (Q209) showed PBT growing at a more rapid growth rate relative to previous comparable period and immediate past period, than previously. Highlights of the companys most recent scorecard (Q209) are presented below. Despite the highly challenging environment and higher input costs, PBT grew at a faster 36.8% to N24.6bn relative to a 21.5% growth in turnover. In our opinion, several factors are responsible for this feat, including the recent commissioning of an ultra modern sorghum malting plant located in Aba, a strategic production and distribution hub for the company. This acquisition we believe was made, to ensure the steady supply of malted sorghum for the companys operations. This enabled the Company access its primary raw material input at reduced costs, positively yielding decreased production costs. Operating profit advanced 39% to N24.59 billion from N17.69 billion in Q208. In direct contrast with the aforementioned performance measures (PBT and PAT), turnover growth recorded a slight decline relative to our expectation. It recorded a 21.51% growth which represents the lowest growth in turnover q-o-q since FY06. We adduce to rapid volumes growth by the Company in recent times sequel to the commissioning of the Ama factory, thus, the decline in turnover growth may be as a result of comparison with the most recent years volumes and reflective of the slight threats posed by consumers more circumspect spending in the light of the challenged disposable income levels. Continued expansion of turnover by volume as against price driven growth which has been consistent with the Company over time. 33
TURNOVER AND NET INCOME

Naira Million Turnover Net Income
82,691 68,053
16,855 Q209 Q208
12,337
Source: Vetiva Research & NSE
Ratio Analysis
1. Liquidity The Company has previously displayed an above average management of its liquidity position, and has consistently demonstrated its ability to meet short term obligations when they fall due. However, in the year under review, the Current Ratio declined steeply from 1.36 times in FY07 to 0.74 times in FY08, representing a negative working capital position. Although this represents a departure from the typically upward incline, recorded in the previous years, we adduce this decline to a reduction in the Companys cash and bank balances, relative to previous periods as well as a 44% increase in creditors and accruals, also relative to FY07. This combination, also precipitated a decline in Quick and Cash Ratios respectively, from 0.79 times and 0.54 times respectively in FY07 to 0.08 times and 0.01 times in FY08, representing a negative working capital position. 2. Profitability Analysis In terms of profitability, NB has maintained a highly profitable business with its Gross Margin hovering around the 50 percent mark between 2003 and 2007. In 2008 however, there was a marked increase in Cost of Sales as a percentage of sales from 47.04% to 51.3%, impacting the Gross Margin to 48.7 percent. However, this was mitigated by the reduction in distribution and administrative costs. The company has shown sustained growth in its profit margins between 2003 and 2007; growing PBT margins from 13.2 percent in 2003 to 25.8 percent in 2007 and PAT margins from 7.4 percent in 2003 to 17 percent in 2007. In the immediate past year, the Profitability margins improved from 24.9% and 16.9% to 25.8% and 17.7% respectively for PBT and PAT. This is in spite of the competition from Guinness and other fringe players in the industry. The company has taken advantage of its market leadership position to increase profit made significant returns on its shareholders funds. Operating margin improved to 25.2% relative to 24.3% in 2008, premised on a 300 bps reduction in distribution and administrative costs relative to 2007. 3. Activity/Asset Utilisation NBs utilisation ratios show the companys improving position over time. Inventory turnover increased from 6.90 times in 2006 to 7.88 times in 2008, resulting in a commensurate decline in turnover days from 52 days to 46 days, reflecting the companys ability to effectively convert its inventory to sales. The Companys receivable days has declined from 20 days in 2006 to 10 days in 2008, while Payable Days has increased from 59 days to 65 days, indicating better management of creditors and simultaneous reduction in debts outstanding during the period. Overall, it is indicative of improving working capital management. The Total Assets turnover grew from 1.08 times in 2006 to 1.15 times in 2008, reflective of the ability of the company to harness sales through its fixed assets. 4. Leverage NB remains fully equity financed sequel to the full repayment of the loan obtained for the construction of the Ama Brewery. Repayment for the loan which secured in xxx, was fully repaid in 2007. 34
Our assumptions as regards expectations for NBs operations and performance are stated below. These assumptions provide guidance for our forecast from 2009 2011. The Company has maintained a Gross Profit Margin slightly over 50% over the past two historical years, Whilst we have identified the rising costs of prime raw materials such as barley, we also look to the malting of sorghum and the commissioning of the new malting plant to improve supply of malted sorghum and mitigate against aforementioned exorbitant barley costs and inspire the Gross Profit Margin at 50% through to 2012. We also estimate slightly stable EBITDA margins in excess of 30% going forward. The unavailability of an expense and cost breakdown curtails our cost by cost justification. Nonetheless, we expect the Company to retain its current pricing policy and pass on the incidence of any increased costs to its consumer, especially taking advantage of the inelastic demand profile of its products, further justifying our assumption of constant gross margins. We have also assumed an effective taxation of 31%. Our financial forecast assumes a 5 year CAGR of 20% from N111.75 billion in 2007 to N232.19 billion in 2011; We estimate a 24% CAGR for growth in Before Tax Earnings, from N27.82 billion to N66.18 billion and a 25% CAGR in After Tax Earnings, inspiring a leap from N18.89 billion in 2007 to N40.79 billion in 2011. It is our opinion that NB is currently running at 96% of capacity (approximately 9 million hectolitres installed capacity) and we anticipate a further increase, on account of the recent commissioning of a new line for Star in Aba and a new 1 million hectolitre line in Lagos due for commissioning in September. We expect NB to continue to grow its capacity, especially in the light of threats from new players. We hold this responsible for our current growth assumptions until 2011. In arriving at a fair value for Nigerian Breweries Plc we estimated Free Cash Flow (FCF) and PAT for the period between 2008 and 2012. We project FCF to grow from N20.1 bn in 2008 to N73.5 bn in 2012. We also estimate PAT to grow from N25.6bn in 2008 to N45.9bn at the end of 2012 at a 5 year CAGR of 25.0%. In our DCF valuation, we assumed a terminal growth rate of 3.5%. Our valuation employs a Weighted Average Cost of Capital, WACC of 16.0%, which is estimated using a beta value of 0.9 based on the 5year historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE-ALSI), coupon rate of 11.33% on the 10-year Federal Government (FGN) Bond in the month of August 2009 as our risk free rate. We assumed a market risk premium of 5%. Our Discounted Cash Flow model values NB at a fair value range of N54.14-N66.25 per share while the Price to Earnings multiple generates a N61.11 per share. A weighted average of the two valuation model indicates an average fair value of N65.00 for NB. Our forecast DPS for the forecast period 2009 to 2011 are N4.08, N4.75 and N5.39 respectively. We therefore place an ACCUMULATE recommendation on Nigerian Breweries with a 15% upside potential from its current price of N57.
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INCOME STATEMENT (N'Mill) Turnover C ost of Sales Gross Profit Distribution& Adminsitrative C harges Core Operating Profit Other Income EBITDA Depreciation & Amortisation EBIT Interest (Paid) &Similar C harges Profit Before Taxation and Exceptional Income Exceptional Income Profit Before Taxation Taxation PAT Dividend NOPAT Retained Earnings BALANCE SHEET (N'Mill) Assets Fixed assets Investments Long Term Debtors and Prepayments Current Assets Stocks Debtors & Prepayments Deposits for Imports Investments in C ommercial Papers C ash and Bank balances Total Assets Liabilities C reditors &Accruals Taxation Bank Overdrafts Dividend Total Current Liabilities Long Term Liabilities Deferred Tax Liability Gratuity Total Liabilities Net Assets Unsecured convertible loan stock Deferred taxation Gratuity Total Long term liabilities Current Asset less cash Capital and Reserves Share capital Share premium Bonus issue reserve C apital Reserves General Reserve Shareholders' Equity Total Liabilities & Equity
2006 86,322.1 (41,990.0) 44,332.1 (27,506.6) 16,825.5 123.0 16,948.4 16,948.4 (512.2) 16,469.3 16,469.3 (5,535.7) 10,933.6 (9,075.1) 11,412.7 1,858.5 2006 49,677.9 1,222.8 50,900.7 12,671.8 4,772.2 150.3 7,162.0 24,756.3 75,657
2007 111,748.3 (52,563.9) 59,184.4 (32,076.8) 27,107.6 249.5 27,357.0 27,357.0 519.3 27,823.7 27,823.7 (8,933.5) 18,890.2 (18,942.9) 18,423.6 2007 50,194.6 422.4 50,617.0 16,156.8 7,585.8 393.0 15,795.8 39,931.3 90,548
2008 145,461.8 (74,561.9) 70,899.8 (34,314.2) 36,585.8 192.3 36,778.1 36,778.1 741.3 37,469.5 37,469.5 (11,818.0) 25,651.5 (25,651.5) 24,959.9 2008 63,557.7 229.6 63,787.2 20,741.5 3,850.0 15,613.3 420.7 40,625.4 104,413
2009 F 174,084.0 (88,782.8) 85,301.2 (41,641.0) 43,660.1 201.9 43,862.0 43,862.0 822.8 44,684.6 44,684.6 (13,852.2) 30,832.4 (30,832.4) 30,009.6 2009 F 67,091.6 172.2 67,263.8 25,304.6 4,234.9 4,053.0 12,445.5 46,037.9 113,302
2010 F 203,678.0 (103,875.8) 99,802.2 (48,907.2) 50,895.0 209.9 51,105.0 51,105.0 995.6 52,100.5 52,100.5 (16,151.2) 35,949.4 (35,949.4) 34,953.8 2010 F 70,117.0 180.8 70,297.8 30,871.6 4,658.4 2,703.0 16,443.0 54,676.0 124,974
2011 F 232,193.0 (118,418.4) 113,774.6 (56,074.5) 57,700.1 220.4 57,920.6 57,920.6 1,204.6 59,125.2 59,125.2 (18,328.8) 40,796.4 (40,796.4) 39,591.7 2011 F 76,791.0 189.8 76,980.8 37,663.3 6,124.3 5,405.8 23,457.0 72,650.5 149,631
16,345.2 4,288.1 3,242.1 23,875.5
17,946.2 7,297.6 4,169.7 29,413.5
25,863.0 9,245.5 19,667.0 54,775.5
20,718.5 9,707.8 27,533.7 57,960.0
22,168.8 10,193.2 30,310.0 62,672.0
23,720.6 10,702.9 34,892.9 69,316.3
8,785 6,747 30,623 36,249 8,785 6,747 15,532 17,594
11,360 6,591 36,005 43,183 11,360 6,591 17,952 24,135
14,110 3,298 58,074 32,229 14,110 3,298 17,408 40,205
14,223 3,562 61,522 37,708 14,223 3,562 17,785 29,540
14,336 3,847 66,519 44,118 14,336 3,847 18,184 35,530
14,451 4,155 73,471 51,618 14,451 4,155 18,606 43,788
3,781 4,568 7,354 20,546 36,249 75,657
3,781 4,568 7,325 27,509 43,183 90,548
3,781 4,568 7,240 16,639 32,229 104,412
3,781 4,568 7,312 23,295 37,708 113,453
3,781 4,568 7,386 27,954 44,118 124,974
3,781 4,568 7,459 33,544 51,618 145,444
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HOLDING FORT: GUINNESS NIGERIA PLC

Guinness Nigeria Plc (Guinness) was incorporated in Nigeria on 29 April 1950 and commenced operations in 1962 marking the opening of Guinnesss first brewery outside the United Kingdom and Ireland. It was licensed to operate as a brewery carrying out the business of brewing, bottling and marketing of Guinness products and was subsequently listed on the Nigerian Stock Exchange in November 1985 under the Breweries Sector. The company built its first brewery in Ikeja in 1962, a second in Benin in 1974 which was expanded further to accommodate a brewery for stout products in 1978. The fourth Nigerian brewery was built in Ogba in Lagos in 1982 to brew Harp Lager Beer and was also expanded to include Guinness Stout while the final one was built in Aba, in the Eastern part of the country in 2004 to meet the growing demand for the companys products. Guinness Nigeria Plc operates under the Diageo Group, a multinational beer, wine and spirits company, trading in over 180 markets around the world with operations in 7 key markets across the continents. Diageos top markets for the Guinness brand are Great Britain, Nigeria, United States and Cameroun. The Guinness factory located in Nigeria was the first Guinness brewery to be located outside the United Kingdom. The ownership structure of the company as at the end of 2008 comprised: Guinness Overseas Limited (Foreign)-46.03% Atalantaf Limited (Foreign) -7.77% Others (Nigerian) -46.2%
Financial Summary Turnover (Nm) EBITDA PAT ROA(%) EV/EBITDA (x) P/BV(x) P/E(x) 2008A 69,173 20,168 11,861 17.20 9.72 6.74 17.97 2009A 89,148 26,745 13,541 14.90 6.73 6.74 15.69 2010F 101,629 30,489 16,007 16.10 5.94 5.40 13.28 Summary Current Pric e (N) Fair Value Range(N) Market Cap (N) Billion Free Float (%) 144.00 135.58-149.39 213.200 25.00
Share Price Performance 6 Months (%) 12 Months (%)
63.08 24.04
Financials EPS DPS BVPS (N) EBITDA margin
2008A 8.04 6.00 25.299 25.30
2009A 9.18 7.50 21.37 28.30
2010F 10.84 8.14 23.51 28.30
Guinness
Guinness 46.03%
Operations
Atlantaf Ltd. 7.77%
Others 46.2%
Although with significant roots in Ireland, which is reputed as the place of its birth, Guinness has enjoyed a commendable patronage and still enjoys significant market share in the Nigerian brewery sector. Nigeria recently overtook Ireland as the worlds second largest Guinness market after Great Britain. The Company produces five major brands: Guinness Extra Smooth, Gordons Spark and Harp Lager, Malta Guinness as well as Smirnoff. Sequel to the 16% growth in sales recorded in 2007, Nigeria attained the position of second largest Guinness market accounting for about 41% of Guinness Stout sales worldwide. The Company is investing huge resources into growing production and sales volume as well as into the continued improvement of its operations. Guinness has consistently won international recognition for its top performance in the Brewery industry.
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INVESTMENT HIGHLIGHTS
Guinness is a premium brewer of alcoholic and non alcoholic drinks and proudly holds the strategic position as second largest brewer in Nigeria by reason of its market share. A subsidiary of the Diageo Group, Nigeria represents a key Diageo market, recently overtaking Ireland to emerge second largest Guinness market worldwide. Strong earnings and dividend yield; very much in line with the tradition of the Brewery Sector leaders, Guinness has succeeded in defending its income from the threats of a highly volatile operating environment . Guinness Nigeria Plc is the second largest brewer in the Nigerian brewery industry and is a clear leader in the stout market. In confirmation of its premier status, the company recently overtook its Irish counterpart to emerge the second largest market for Guinness products worldwide. Guinnesss brand portfolio includes Guinness Foreign Extra Stout, Harp Lager, Guinness Extra smooth, Malta Guinness and Smirnoff Ice amongst others. The Company recently shut down operations at its Aba plant; we believe this is in line with its intentions to achieve an efficient asset portfolio and expansions are currently ongoing at the Benin and Ogba plants. The Company has made concerted efforts to achieve operational efficiency by implementing stringent waste reduction strategies, optimizing resource utilization and improving its Procurement functions. The Companys stock has received considerable and sustained investor following in recent times, gaining over 80% from its Year Low Value, and consequently showing a positive, noteworthy divergence from the Broader Market.
Earnings Forecast and Valuation
Our FY10 forecast for Turnover and PAT stands at N101.63 billion and N16.00 billion respectively and we estimate EPS and DPS for FY10 of N10.86 and N8.14 respectively. It is also our expectation after due consideration of prior performance that, earnings will grow at a compounded rate of 15% over the next 5 years to N35.3 billion by 2013. We believe though, that in the light of previous positive investor sentiments, Guinness is approaching full value in the near term. However, current expansion plans slated for deployment in Benin and Lagos in 2010 through to 2011, (an additional million litres) and subsequent encouraging scorecards, we believe will justify the upward increase in investors pricing of the stock. We acknowledge the ongoing deployment of gas plants at both the Benin and Lagos plants as well as the attendant potential reduction in power costs. We expect a stronger earnings profile in the medium to longer term, on the back of these improvements We remain optimistic in the performance of the Company going forward, infrastructural challenges notwithstanding. We also lend our optimism to the bottom heavy and growing demographics of the country, which we believe would continue to inspire sustained demand relative to the declining demand being reported in developed economies. 38
GUINNESS PROFITABILITY MARGINS

(%)
60% Gross Margin 50% EBITDA Margin PAT
40%
30%
20%
10%
0% 2006 2007 2008 2009F 2010F 2011F Source: Company Financials
FINANCIAL REVIEW
Quite contrary to what was reflected in the Q309 results, the Companys most recent scorecard (FY08/9) showed PBT growing at slower rate relative to Turnover, reflecting some pressure on the companys costs. Highlights of the companys most recent scorecard (FY08/9) are presented below In congruence with its Q308/9 performance, the Company grew its top line by 28.9%, however, Before and After Tax Earnings grew by a much slower 11.1% and 14.7% respectively. Relative to the performance all through the 2008/9 financial year where Earnings growth exceeded growth in Turnover owing to operational efficiency flowing from stringent waste reduction strategies and optimal resource utilization, this performance seemed rather extraneous. In a departure from the defensive tradition of the brewers, Before Tax and After Tax Margins both declined YoY from, 24.11% (PBT) and 17.15% (PAT) to 21.30% and 15.18% respectively in FY08/09, QoQ, PBT and PAT margins also recorded declined from 25.03% and 17.17% respectively. The Company has recently faced challenges with staffing costs and is reported to have increased salaries by 14% and has plans to implement a subsequent pay increase. This impacted the Companys administrative costs negatively and lowered profit margins as is reflected in the above text. We believe the recent shut down of operations at its Aba plant and the successful deployment of resources to the Lagos and Benin breweries respectively in line with the Companys intentions to achieve an efficient asset portfolio may have resulted in additional distribution costs from Lagos and Benin to the Eastern hub further depressing previous margins.
TURNOVER AND NET INCOME

Naira Million Turnover Net Income
89,148 69,172
13,541 FY09
11,861 FY08
Source: Vetiva Research & NSE
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In the period under review, the Companys cash and bank balances recorded a significant decline of 61.5% from N15.1 billion to N5.1 billion as at FY09, while trade Debtors doubled from N3.2 billion to N6.3 billion reflecting a less stringent debt collection policy and an increase in the debtors collection period. However, the increase in debtors outstanding could not offset the significant increase in short term borrowings, inspiring the massive erosion of the firms working capital position. We acknowledge the ongoing deployment of gas plants at both the Benin and Lagos plants and the attendant potential reduction in power costs. We expect the Companys performance to improve in future years on the back of ongoing expansions, which we opine would impact turnover growth. We also lend our optimism to the bottom heavy and growing demographics. We remain optimistic in the performance of the Company going forward, infrastructural challenges notwithstanding. The aforementioned challenges notwithstanding, we expect Guinness to continue to post steady Top and Bottom line growth and sustain current margins on the back of its strong brand portfolio and aggressive marketing drive, as well as increased operational efficiency.
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Ratio Analysis
1. Liquidity Guinness has maintained an enviable liquidity position growing its liquidity position year on year and increasingly showing its ability to meet short term obligations when they occur. Relative to its liquidity position in 2006, the companys Current Ratio decreased slightly from 1.46x to 1.42x. The Quick and Cash ratios also decreased marginally from 1.30 times and 0.67 times to 1.10x times and 0.50 times respectively. Highly commendable is the trend in the Quick Ratio as it has remained above the theoretical safe benchmark of 1.00x. 2. Solvency Guinness has reduced its Debt to Equity ratio from 12 % in 2003 to Nil in 2007. Thus, the Company has no long term liability in its books. However, in terms of its short term liabilities, the Company has reduced them significantly (measure d as a percentage of total liabilities and equity), from 30.2% in 2006 to 23.0% in 2007. This is further substantiated by the Times Interest Cover which also recorded a leap from 7.8x in 2006 to 39.0x in 2008. Given the Companys reliance on equity and short term financing rather than long term debt, and in due consideration of its interest cover, we consider the company highly solvent and conservative in terms of its financing strategy. 3. Profitability Analysis A diagnosis of Guinness profitability shows an appreciable performance in cost control. Despite the onset of an unfavourable economic and operating environment in 2008, GP margin improved slightly from 48.1% in 2006 to 48.5% in 2008. Operating Ratio also improved from 27.85% in 2006 to 29.2% in 2008. PBT and PAT margins grew rapidly from 21.3% and 13.9% respectively in 2006 to 24.8% and 17.1% in 2008 on the back of effective cost management. However, on a comparative analysis of the past five years, Guinness performance has beat that of NB to second place 4. Asset Utilisation and Activity The Asset Utilisation and Activity ratios show commendable and efficient utilization of its assets. The company recorded effective working capital management as well as growing profit margins which led to the growth in ROE from 24.3% in 2006 to 25.5% in 2008. However, a more effective working capital management and greater margin improvement could serve as key drivers of ROE. On the other hand, we further decomposed Guinnesss 5-year average Return On Assets (ROA) of 17.1% to reveal an increasing fixed asset turnover and declining current asset turnover. This implies that more potential exists for efficient asset utilisation so as to precipitate increased ROA.
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Our assumptions as regards expectations for Guinnesss operations and performance are stated below. These assumptions provide guidance for our forecast from 2010 2012. Assumptions The Company has maintained a Gross Profit Margin slightly exceeding 50% over the past two historical years, and whilst we have identified the rising costs of prime raw materials such as barely, and likely increases in power costs, we readily admit efforts of the Company at improving margins. The recent deployment of gas powered generating plants at the Benin and Lagos brewing plants should lend to decreased production costs. It is our expectation that in spite of raw material costs on the increase, the Company would maintain Gross Margins in the range of 50%. We also estimate slightly stable EBITDA margins of about 28-30% going forward. Our financial forecast assumes a 5 year Turnover CAGR of 17% from N69.2 billion in 2008 to N127.5 billion in 2012; we estimate a 12% CAGR for growth in Before Tax Earnings, from N14.8 billion to N29.6 billion and a 15% CAGR in After Tax Earnings, inspiring a leap from N11.9 billion in 2008 to N20.7 billion in 2012. It is our opinion that Guinness is currently running at 85% of capacity (approximately 5 million hectolitres installed capacity) and we anticipate a further increase, on account of the ongoing capacity expansion at the Lagos and Benin breweries. It is our expectation that Guinness will continue to grow its capacity, especially in the light of threats from new players. We also lend some of our credence to the recent defensiveness of the Sector and the strength of Guinness brands. We hold this responsible for our current growth assumptions until 2012. In arriving at a fair value for Guinness Plc, we estimated Free Cash Flow (FCF) and PAT for the period between 2010 and 2013. We project FCF to grow from N16.59 bn in 2010 to N29.27 bn in 2013. In our DCF valuation, we assumed a terminal growth rate of 3.5%. Our valuation employs a Weighted Average Cost of Capital, WACC of 16.0%, which is estimated using a beta value of 0.9 based on the 5year historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE-ALSI), coupon rate of 11.33% on the 10-year Federal Government (FGN) Bond in the month of August 2009 as our risk free rate. We assumed a market risk premium of 5%. Our Discounted Cash Flow model values Guinness at a fair value range of N135.59-N149.39 per share while the Price to Earnings multiple generates a N154.04 per share. A weighted average of the two valuation model indicates an average fair value of N148.50 for Guinness. Our forecast DPS for the forecast period 2010 to 2012 are N8.14, N9.52 , N10.53 and N12.20 respectively. We therefore place a NEUTRAL recommendation on Guinness at its current price of N144.50.
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INCOME STATEMENT (N'Mill)

Income Turnover Cost of Sales Gross Profit Distribution& Adminsitrative C harges Advertising& Promotion Expenses C ore Operating Profit Other Income EBITDA Depreciation & Amortisation EBIT Interest (Paid) &Similar C harges Interest Receiv ed Profit Before Taxation and Exceptional Income Exceptional Income Profit Before Taxation Taxation PAT Dividend
2006
53,652 (27,845) 25,807 (6,834) (4,072) 14,901 14,901 (2,677) 12,224 (1,551) 764 11,437 11,437 (3,997) 7,440 (4,720)
2007
62,265 (34,144) 28,121 (5,781) (5,349) 16,991 16,991 (2,764) 14,227 (1,540) 2,197 14,884 14,884 (4,193) 10,691 (6,637)
2008
69,173 (35,611) 33,562 (7,230) (6,164) 20,168 20,168 (3,126) 17,042 (437) 1,730 18,336 (1,243) 17,093 (5,232) 11,861 (8,856)
2009 F
90,591 (47,107) 43,484 (11,224) (7,247) 25,013 25,013 (4,064) 20,949 (1,540) 1,500 20,909 20,909 (6,273) 14,637 (10,977)
2010 F
104,180 (54,173) 50,006 (13,502) (8,334) 28,170 28,170 (4,876) 23,294 (1,617) 2,198 23,875 23,875 (7,163) 16,713 (12,535)
2011 F
119,807 (62,299) 57,507 (14,952) (9,585) 32,971 32,971 (5,852) 27,119 (1,633) 2,462 27,948 27,948 (8,385) 19,564 (14,673)
BALANCE SHEET (N'Mill)

Assets Fixed assets Investments Long Term Debtors and Prepay ments C urrent Assets Stocks Debtors & Prepayments Deposits for Imports Investments in C ommercial Papers C ash and Bank balances Total Assets Liabilities C reditors &Accruals Taxation Bank Overdrafts C urrent Portion of Term Loan Total Current Liabilities Long Term Liabilities Deferred Tax Liability Term Loan Provision for liabilities &charges Total Long Term Liabilities Net Assets Capital and Reserves Share C apital Share Premium Bonus Issue Reserves Revaluation Reserves Revenue Reserve Shareholders' Equity Total Liabilities& Equity
2,006
29,532 182 29,714 12,933 3,231 51 13,921 30,136 59,850
2,007
30,125 268 30,393 12,721 6,662 26 22,007 41,416 71,809
2,008
38,045 211 38,256 12,867 8,316 108 12,867 36,400 74,656
2009 F
42,610 201 42,811 14,495 8,324 110 14,495 40,303 83,114
2010 F
47,723 191 47,914 16,669 8,337 110 16,669 45,965 93,878
2011 F
53,450 450 53,900 16,773 8,354 371 16,773 49,774 103,674
18,090 2,580 20,670 18,232 38,902 20,948
15,745 5,021 5,000 21,568 6,647 3,500 3,455 13,602 29,581
17,156 3,981 3,705 798 25,640 7,886 4,266 12,153 34,818
20,587 7,000 5,558 33,145 3,722 4,480 8,202 39,577
21,410 9,533 5,280 36,223 6,758 4,704 11,462 49,167
22,481 11,123 5,016 38,620 8,758 4,939 13,697 55,036
590 1,546 147 3,790 14,874 20,948 59,850
737 1,546 147 1,546 25,605 29,581 71,809
737 1,546 147 1,546 30,842 34,818 74,656
737 1,546 147 1,546 35,600 39,577 83,114
737 1,546 147 1,546 45,190 49,167 93,878
737 1,546 147 1,546 51,060 55,036 103,674
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SUMMARY
We expect a highly active Brewery Sector going forward especially on the back of the growing presence of new entrants SABMiller and Castel. We also expect ongoing expansion programmes by NB and Guinness to yield strong volumes and increased profitability. Despite the economic challenges, we look to commendable quarterly result declarations from NB as well as Guinness. It is our expectation that this, as well as impressive dividend declarations from these two will further spur increased demand for Brewery stocks. Having identified the latent challenges militating against the real sector, such as tight liquidity, further heightened by current reforms ongoing in the Banking Sector and expectations of a stricter risk management structure within the Sector, we opine that expected funding for some of these new entrants might be respectively affected. However, we look to see the effects if any, of the incursion of foreign brewers such as SAB Miller on the present configuration of the Brewery Sector. We expect the Big 2 to continue to increase their market share on the back of product diversification and proven expertise in the face of strengthening competition. We also anticipate that the brewery majors would be able to sustain existing profit margins, on the back of established operating leverage. We also look to the release into the market of the smaller sized bottles of Turbo King (a stout brand produced by Consolidated Breweries, currently the countrys third largest brewer). The recent launch of the brands bigger stout bottle was reported as largely successful. In summary, having identified the present forces impacting on the Brewery Sector, it is our expectation, that the current picture of the industry, with respect to market share, profit margins and customer brand loyalty would change somewhat . In terms of stock market activity as regards equities within the Sector, we expect that the flight to safety will prevail until much of the uncertainty currently pervading the Financial Sector fades. We believe that investors would continue to seek value in the Breweries Sector and other FMCG stocks on the back of sustained demand and growth. Thus, we are strongly optimistic in the Brewers and their ability to weather the storm. Demand is set to grow as population is also on the increase and penetration levels remain low. We foresee that the incursion of foreign brewers may in the medium to longer term, bring about changes in the current structure of the Sector.
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INVESTMENT RECOMMENDATIONS
Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell.
Buy/Overweight +20% expected absolute price performance Accumulate +10% to +20% expected absolute price performance Neutral/Hold +/-10% range expected absolute price performance Reduce -10% to -20% expected absolute price performance Sell/Underweight -20% expected absolute price performance Definition of Ratings Buy/Overweight recommendation refers to stocks that are highly undervalued but with strong fundamentals and where potential return in excess of or equal to 20% is expected to be realized between the current price and analysts target price. Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential return of between 10% and 20% is expected to be realized between the current price and analysts target price. Neutral/Hold recommendation refers to stocks that are correctly valued with little upside or downside where potential return of between +/- 10% is expected to be realized between current price and analysts target price. Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where potential return of between -10% and -20% is expected to be realized between current price and analysts target price. Sell/Underweight recommendation refers to stocks that are highly overvalued but with weak fundamentals and where potential return in excess of or equal to -20% is expected to be realized between current price and analysts target price.,
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Disclosures Section
Analyst Certification
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Brewers On The Rise

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Brewers On The Rise

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Brewers on the Rise

Soc iete des brassieries du Maroc Morocc o

African Brewers: Investment Highlights

Source:Bloomberg, CIA factbook, Vetiva forecasts and estimates

AFRICAN BREWERS: CONSUMPTION PER CAPITA

Kenya 12.7 Zimbabwe South Africa Botswana Namibia Average 44.1

18.3 91.0 119.2 119.7

PER CAPITA INCOME VS. PER CAPITA CONSUMPTION

Per Capita Income Per Capita Consumption

Per Capita Income (US$)

Source:CIA Factbook, Bloomberg, Imara Research, Vetiva Estimates

30.7% 29.5% 27.3%

15.0% 12.7% 11.1% 7.6% 5.1% 5.9%

Natbrew SABMiller Sechaba

Source: Company Financials, Imara Research 6

VALUATION PER HL VS VOLUME GROWTH

Sales Growth 2008 (%)

Market Cap/hl (US$)

500 400 300 200 100 -

Source: Bloomberg, Imara Research, Vetiva Estimates

THE NIGERIAN BREWERY SECTOR IN VIEW

As at August 31, 2009 One year

Three years Nil Three months

FY'07 Q2'09 FY'08

One year Nil Three months

THE EVOLUTION OF THE BREWERY SECTOR

INVESTMENT HIGHLIGHTS Strong Turnover and Earnings Growth

Avg. 5 yr Turnover CAGR 18%

Consistent Dividend Payout

GUINNESS NIGERIA PLC

NIGERIAN BREWERIES PLC

4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00

Source: Company Financials

Source: Company Financials

AFRICAN BREWERS: CONSUMPTION PER CAPITA

12.4 12.7 18.3 91.0 119.2 119.7

BACKWARD INTEGRATION TAKES CENTRE STAGE

EXCHANGE RATE MOVEMENT

High Operational Costs:

Increasing Raw Material Input Costs

BARLEY PRICES ON THE RISE

UNVELING OF NEW PLAYERS

HURDLES TO PROFITABLE ROLL OUT BY NEW PLAYERS

LOCATION OF BREWERY PLANTS IN NIGERIA

International Beer and Beverage

Nigerian Breweries Ibadan

Jos Intl Breweries

Standard Breweries Benue Breweries

Nigerian Breweries, Ama Life Breweries Onitsha

Pabod Breweries, Port-Harcourt

Source: NSE, Company Reports

RESURRECTION OF UNLISTED PLAYERS

MEET THE FRINGE PLAYERS

PRESENT TRENDS AMONGST KEY PLAYERS

1. Investment in Raw Materials

4. Marketing and Distribution

5. Increased Sales Volumes

THE BREWERY PROCESS

Source: Vetiva Research

GUINNESS- GROWING VOLUMES; STRENGTHENING PROCESSES

MARKET UPDATE - BREWERS SHOW RESILIENCE