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INTERNATIONAL BREWERIES PLC - A game of volumes

We begin coverage of International Breweries, valuing the stock at ₦7.07 per share using a Discounted Cash Flow valuation methodology, which results in a BUY recommendation, given the 31% upside potential from its current trading price of ₦5.40 per share.

 Volume expansion strategy to deliver considerable growth: One of our focal points, is the company’s significant available capacity. Already, through its investment at the Sagamu Brewery right after its merger in 2018, Revenue has grown by a CAGR of 40% between 2017 and now. Thus, we believe that due to the capacity expansion, the company stands at an advantage to drive growth using an intense volume push strategy. Furthermore, given that the brewer has successfully acquired the number one Lager position in the South-Western and South-Eastern parts of Nigeria, we believe that the projected volume trajectory is a very feasible one. With this, we expect the company’s Revenue to grow by a CAGR of 20% in the next five years. Additionally, we believe that the decision by a key-competitor to shift focus from its Lager segment, although not advantageous to the company alone, will further International Breweries’ volume strategy.

 Capacity expansion and lager play to expand growth: International Breweries’ play in the Lager, Stout and Malt segments has been largely successful, given that it has aggressively grown its market share across these segments from 6% in 2016 to 24% in 2020, attaining the position of the second largest brewer and pushing Guinness to third place. However, we foresee a pattern of continued growth in the segments. In the Lager segment, despite being among the top three players, Guinness has reiterated its decision to deprioritize its Lager segment in order to focus strategically on its Spirits segment and currently earns only about 2% of its Revenue from its Lager segment compared to 20% three years ago. This leaves an opportunity for both Nigerian Breweries and International Breweries to gain more shares. Given International Breweries’ aggressive play in the West and the East where Guinness mostly plays, we expect International Breweries to fully take advantage of this opportunity to grow its market share.

 Ngeria’s beer consuming market remains receptive: Although the level of consumption per capita for Nigeria is higher at 13.4 litres compared to its peers and average in Africa (6.3 litres), the growth in alcohol consumption has remained weak. However, we expect this to improve in the coming years, given the largely active night lifestyle especially around urban areas and the exponential growth in population.