Guinness Nigeria sales have almost doubled in the most recent financial year.

The brewing industry in Nigeria is one of the flagship consumer sectors, and has rightly become a priority holding for many investors in the Nigerian stock market. In this article, Ian Furnivall, head of research based at CSL Stockbrokers' London arm, writes about the research which he and his team have recently published.

For any investment analyst who looks at the two major brewers in Nigeria, Guinness Nigeria and Nigerian Breweries, two words immediately spring to mind: growth and opportunity.

Growth is evidenced by the fact that for Guinness Nigeria sales have almost doubled from N47 billion in 2005 to N89 billion in the most recent financial year to June 2009. For Nigerian Breweries, the growth rate is likely to prove even more impressive when the company reports its figures to December 2009. Beer production in the country grew from 6.8mhcl (million hectoliters) in 2003 to 15.4mhcl in 2008, an aggregate growth of 132% in five years.

The opportunity is equally evident. There is a strong correlation between average wealth and beer drinking. Germany has the highest per capita consumption of beer in the world, closely followed by Australia and the United Kingdom. In contrast, South Africa, which drinks the most beer in Africa relative to the size of its population, consumes just over half of the average quantity drunk in Germany.

At 11 litres per head, beer consumption in Nigeria lags well behind the developed world, even allowing for the religious beliefs held by some communities which forbid alcohol. As per capita income grows, shifts in the demographic structure and a recovery in the rate of economic growth will continue to drive growth in the medium term.

Competitive environment

The entrance of SABMiller into the Nigerian market space through the acquisition of two regional brewing companies, Pabod Breweries and Standard Breweries, has given rise to speculation as to the future dominance of the two incumbent majors.

SABMiller has sought to gain share in the lower segments through the production of cheaper brews made from locally sourced raw materials such as cassava, as opposed to the premium product offerings of its two major rivals. This is in addition to offering its established brands through the distribution networks acquired.

Pabod Breweries, which is based in the Niger Delta area of the country, has already commenced operations with an output of 30,000 hectolitres. SABMiller recently disclosed plans to increase the plant’s output to 250,000 hectolitres by 2010, at the same time stating its willingness to acquire more brewing companies.

Consequently, we expect to see more acquisitions as SABMiller tries to establish greater market presence in Nigeria, while the two more established incumbents may strive to maintain their dominant positions by similarly making acquisitions. We note that Nigerian Breweries has already ventured indirectly into the production of lower grade beers through Consolidated Breweries; we expect that Guinness Nigeria may start to examine the possibilities of producing lower grade beers in order to defend its market share.

Investing in brewers

For investors, the breweries sector in Africa represents an excellent play on the improvement in GDP per capita and the growing power of the consumer. The quoted companies trade at significant discounts both to their peers in other emerging markets and to the global majors, including both Diageo and Heineken. Even though operating hurdles are likely to exist for the foreseeable future in Africa, the economic and demographic development should ensure good demand-led growth for the medium term.

There is little evidence of any abatement of the growth in demand in Nigeria. Prices are likely to increase shortly, and we see little reason for any pressure on margins for the two main incumbents.

Capacity increases will need to continue, especially for Guinness Nigeria, but otherwise we see no reason for any significant downturn for either of the two majors.

African brewery shares are cheap. The average ratio of share price to estimated earnings for 2010, for the universe of five African listed breweries which CSL studied, was 10.8x. This compares with a ratio of 14.1x for the global majors in the sector, and 22.1x for the average of a peer group of brewers in other emerging markets.

One of the few clouds on the horizon is the risk of a declining domestic currency, which is important for those brewers which import raw materials. For Nigeria, at least, this risk seems to be abating as the naira strengthens, reflecting both the firmer oil price and the sound economic management of the Yar'Adua administration.

While CSL accepts that the competitive environment will become more testing, SAB Miller is unlikely to overturn the dominance of the major companies’ brands in Nigeria in the short or medium term. The intensification of the competitive threat may act as an additional spur to both of the major companies to make defensive acquisitions of smaller regional breweries.

Guinness Nigeria is in CSL’s view the better value investment at the moment, but Nigerian Breweries should also serve as an excellent investment for the longer term.

CSL Stockbrokers Limited (CSLS) is a wholly owned stockbroking subsidiary of First City Monument Bank and a member of FCMB Capital Market Subgroup. CSLS is one of the oldest stockbroking firms in Nigeria and was licensed in September 1977 by the Nigerian Stock Exchange to deal in securities quoted on the Exchange.

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