Nigerian Brewers suffer protracted selloff as industry fundamentals weaken significantly

The ever party-loving Nigerians may account for Africa’s biggest alcohol market but investors in the Nigerian market now see alcohol beverage companies as toxic to their portfolio. As the industry profit margins decline to record low levels, so also has the stock price of publicly listed brewers declined in response.

Data compiled by Lagos-based investment research firm, EUA Intelligence shows that industry profit margin declined from 13 percent in 2014 to as low as 4 percent in 2018 as the industry giants have battled rapidly rising expenditure and slowly expanding revenue for the last 5 years. A deeper look at return on equity which is an important gauge in analysing the financial performance of the company using shareholder’s funds shows that the industry’s return on equity has dipped from around 22 percent in 2014 to 14 percent during the recession in 2016 and has now worsened to 7% in 2018.

Worried investors have proceeded to rapidly dumb brewery shares as industry performance continues to worsen over the years. A look at the stock performance of the big four brewers as at market close on Friday showed that Nigerian Breweries had declined -28.35 percent year-to-date, international breweries returned -51.43 percent YTD, Guinness returned -36.11 percent YTD and Champion declined only about -8.15 percent YTD.

Investors who have been keeping an eye on the profitability of the four industry giants saw Nigerian Breweries profit decline from N42.5 billion in 2014 to N19.4 billion in 2018, Guinness declined from N7.8 billion to N6.7 billion, International Breweries declined from N2.1 billion in 2014 to a loss position of -N3.8 billion in 2018 while Champion Breweries declined from -N754 million in 2014 to -N244.8 million in 2018 to cap a dark five year period in the industry.

As profits dropped, stock prices declined even faster. A deeper look at the historical performance of the brewery industry tells a more bitter tale for investors and further explains the massive selloffs observed in the past year. Based on data compiled from EUA end-of-day market analysis, Champion which is the best performing stock in the brewery industry so far this year has declined roughly about -83.38 percent in the last 5 years. Share prices in Guinness returned -76.71 percent, Nigerian Breweries declined -68.48% and International Breweries returned -45.45 percent as these companies have now lost hundreds of billions in market capitalization in the past half-decade.

The terrible market performance cost Nigerian Breweries its place in the exclusive trillion Naira market cap club last year as the company has now lost almost half of its market capitalization in the last one year. NB returned -46.88 percent in the past year.

The prognosis does not seem great for the sector as weaker consumer spending triggered by a slow economic growth and double-digit inflation fails to brighten the market outlook for these brewers.

“No smart investor is looking at taking any serious positions in the brewery industry despite the steep declines because there are honestly no bargains there. Valuations remain very high for the Brewers which is caused by a sharp decline in the profitability of these companies.

Using equal weights, average price to earnings ratio in the brewery industry as at market close on Friday was 54.99 which is miles above the EUA 80 average PE of about 10.85 (EUA 80 is the largest 80 most capitalized stock on the Nigerian Stock Exchange).

This means brewery stocks are still 5 times more expensive than the average stock in the local bourse. Therefore, we forecast further declines in the brewery companies share prices until industry fundamentals begin to improve,” said a research analyst from EUA Intelligence.