Naira, election spending to impact brewers’ outlook

Any upward devaluation in currency could disrupt the medium-term plan of companies operating in Nigeria’s brewery industry, though there are anticipated upsides from power sector investments and political spending beyond 2015, BusinessDay has gathered.

“Devaluation of the local currency (Naira) is expected to inflate the input cost of local brewers, given that these companies import some 40 percent of their raw materials, mainly barley,” said Abiola Rasaq, lead analyst at UBA Capital, a Lagos-based investment firm, in an e-mail statement.

“Thus, on our estimate, a 10-percent devaluation of the local currency may weaken brewers’ production margins by c.150 bps, with attendant impact on their profitability,” said Rasaq.

A report by Exotic Research had earlier raised hopes that the current slump in consumer beer spending would likely be reversed on the back of an expected recovery.

Political spending and private sector investments in the power sector could accelerate after the general elections, leading to volume growths in 2015 and 2016, Exotic Research said.

“We estimate volume growth of 5 percent and 9 percent in 2015 and 2016 financial years (FY15/16f). Although local brewers are optimistic that spending could pick up ahead of the elections, due to electioneering spend, we are inclined to think otherwise because of severe leakages likely to persist into the elections,” stated the research team led by Esili Eigbe.

“However, beyond the elections, we believe an acceleration in government spending and private sector investment in the power sector will induce consumption spending.”

Atedo Peterside, chairman, technical committee, National Council on Privatisation (NCP), had in September 2013 stated that while a grand total of approximately $3.3 billion was expected to accrue to the Federal Government coffers from the Power Holding Company of Nigeria (PHCN)’s generation (Gencos) and distribution (Disco) transactions, 11 Discos were projecting capital expenditure in the region of N60 billion per annum for each of the next five years.

“For the Discos, some very significant investments will also be required to improve efficiencies and reduce Aggregate, Technical Commercial and Collection Losses. Based on the proposals submitted by the core investors, new meters will be installed over the course of the next five years,” he stated.

The projected rise in public and political spend following the upcoming 2015 elections has led the Central Bank of Nigeria (CBN) to keep its benchmark Monetary Policy Rate (MPR) at 12 percent in order to maintain benign inflation expectations and keep the exchange rate volatility in check.

Nigerian brewers have reported mixed results so far for 2013. The nine months through September 30, 2013 showed Guinness Nigeria revenue slid by 5 percent to N22.4 billion from 23.69 billion in 2012, while profits were down 30 percent.

In the same period, International Breweries plc revenues jumped by 30 percent to N13.55 billion from N10.45 billion in 3Q12, while profits climbed 15 percent.

Nigeria Breweries’ audited results for 2013 showed the company grew revenue by 6 percent to N268.81 billion from N252.67 in FY12, while profits were up by 11 percent.

Their combined revenues to date stood at N304.56 billion, which represents a 6-percent increase from N286.75 billion recorded in the corresponding year.

Speaking further, Rasaq said that beyond the direct impact on production cost, naira devaluation would further pressure consumers’ purchasing power, with probable effect on demand for beer, as consumers ration disposable income amongst competing necessities.

ODINAKA ANUDU &  BALA AUGIE