Nigerian Breweries Plc - Stock is expensive right now
- Last week, Management of Nigerian Breweries (NB) hosted a conference call to discuss its FY 2017 results as well as to provide its outlook for 2018. In this note, we update our views on NB following the FY 2017 results and revise our 2018 forecasts to ascertain if there is still any upside potential for the stock.
- After touching a seven-month low in 2016 (N4 billion), earnings recovered in 2017, rising 16.2% YoY to N33 billion underpinned by an improvement in the operating environment relative to the prior year. However, earnings remained below pre-2016 trend level due to sustained weak consumer income and increased industry competition.
- Sales growth momentum set to moderate: In 2018, strategies to drive volume induced revenue growth seems to be the focus of management even as we envisage limited price increases in the year. Management plans to achieve volume growth via leveraging on its strong distribution network as well as increasing availability of products amidst rising industry competition. While we acknowledge these initiatives, we do not expect to see a sharp increase in revenue given that the operating environment remains challenging. In addition, the country’s exit from recession is yet to translate to a sizeable improvement in consumer wallets which also guides to a slow rebound in sales volume. Against these backdrop, we forecast a modest increase in revenue (+3.5% YoY to N6 billion) in 2018.
- Nigerian Breweries trades at a forward P/E of 28.4x vs. 32.9x for Bloomberg Middle East and Africa. NB has declined 5.1% YTD relative to a positive return of 10.2% for the NGSE INDE We retain our SELL recommendation on the stock with a FVE of N121.30.
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ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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