Analysts see limited upside for brewery stocks as earnings capitulate to economic woes

Analysts do not see an upwards movement in brewers’ stock price in the medium term as earnings will continue to capitulate to the harsh and unpredictable macroeconomic environment.

Analysts at Cordros Securities Limited cited weak economic outlook, pressured consumer wallets, high production levies, and intense competition for market share as impediments to the growth of companies operating in the industry. 

“Although,  the negative  effects  of  the  aforementioned  appear  to  have  all reached  respective  peak  impact,  we  do  not  expect  a rapid recovery in the near term,” said analysts at Cordros Securities.

“We see limited  upside  for  these stocks, with market prices barely in line with fair values. On expected 2019 numbers, we  believe  the  brewers  under  our  coverage  will  report  flat-to-negative  volume growth, with revenue growth below inflation, with higher operating costs leading to decline  in  earnings,” said analysts at Cordros Capital.

All three brewing stocks listed on the Nigerian Stock Exchange currently underperform the broad market.

While the All Share index is down by 5.16 percent Year-to-date, Guinness Nigeria has shed 35.28 percent since the start of the year where it opened at N72 per share. International Breweries on the other hand has plunged by 45.25 percent and closed trading at N16.7 per share on Tuesday while Nigerian Breweries has pared 31.58 percent of its share value down to N58 Nigeria per share.

Nigerians have refused to open their purse string and hit the bar as over 50 percent of a population of 200 million live on less than $1.90 a day, while inflation and high transportation fare are increasingly eroding the purchasing of power of consumers.

Nigeria’s economic growth slowed in the first quarter after the oil sector, the country’s biggest foreign-exchange earner, contracted.

Gross domestic product in Africa’s largest oil producer expanded by 2.01 percent in the three months through March from a year earlier, according to a recent report by the National Bureau of Statistics (NBS).That compares with 2.4 percent expansion in the fourth quarter.

The country’s inflation has jumped to 11.40 percent in May 2019 from 11.37 percent in April.

To further exacerbate the already anemic position of beer makers is the recent decision by Federal Government to hike excise duty on alcoholic and beverage drinks. In order to shore up government revenue and diversify the economy away from overreliance on crude oil revenue, President Muhammadu in January, implemented another phase of 17 percent increase in duties on alcoholic beverages.

“The tax increase is hitting revenue,” Michael Famoroti, economist and partner at Stears Business, said by phone from Lagos, the commercial capital. “You are unlikely to see healthy revenue growth in the industry as the phased implementation continues. Companies will not be able to pass on the full burden of the tax.

Brewers are grappling with rising costs and deteriorating margins.

For the third quarter ended September 2019, Guinness Nigeria’s revenue reduced by 3.78 percent to N33.60 billion as against N34.92 billion the previous year.

Net margin, a measure of profitability and efficiency fell to 4.97 percent in the period under review from 8.55 percent the previous year.

Nigerian Breweries’ revenue was flat at N83.0 billion while net margin fell to 9.64 percent in March 2019 from 12.30 percent the previous year.

Consumers remain highly sensitive to price movements following the broad-based cost escalation in the past few years amid little-to-no-income growth,” said Ifedayo Olowoporoku, a markets analyst at Lagos-based Vetiva Capital Management Ltd. “We expect higher pressure on discretionary, non-essential products such as beer.”

Analysts say they see respite from the rise in young, middle-class consumers, presenting companies the opportunity to sell more premium brands, particularly into the leisure segment of the sector.

“We believe this helps in easing the price mix pressure that producers have faced in recent years, especially as the ability to increase prices is still constrained. The premium segment has been resilient in recent years, gaining 2 percent in market share in 2018FY,” said analysts at Cordros Limited.

BALA AUGIE