Vetiva Research Brewery Sector Update 2010 - Brewing Growth - Malting Value

Nigerian Brewery Sector
Brewing growth; malting value
October 2010
Investment Summary
We update our view on Nigerian brewery sector with NEUTRAL ratings Analyst
on the 2 biggest players - Nigerian Breweries Plc and Guinness Nigeria Ahmed Razaq
a.razaq@vetiva.com
Plc with pooled market share of c.80%.
Volume drivers still at work. With a 15m hectolitres (mhl), (2009 est.)
according it the second largest in SSA, the Nigerian brewery market, in our
estimate, will grow to 23mhl by 2015 premised on the combined impact of beer NEUTRAL
per capita consumption (PCC) growth (13litres expected vs. 10litres currently),
population build-up (2.8% p.a.) and nominal per capita income growth (8.3%
Market Cap: N855bn (US$5.7bn)
p.a.). Consumption of brewed products is intrinsically linked to GDP growth
which is rising across SSA economies, with Nigeria expected to deliver above- % of NSE: 14.3%
average growth performance, based on IMF and World Bank forecasts.
Forward P/E: 17.1x
Eyed by the bigwigs… Nigerian brewery sector is increasingly attracting
EV/2010 EBITDA: 9.8x
the attention of global majors: SAB Miller, Carlsberg and Castel. These interests
re-affirm the growth opportunities embedded in the sector and we expect it to 2010 Div Yield: 5.2%
generate a positive development for the sector in terms of volume growth and
deeper market penetration. 52-week perf: 40.9%
…in view of robust investment thesis. The investment case for the Upside potential: 2.1%
Nigerian brewery sector is uncomplicated: the sector is largely dominated by 2

global players, Heineken and Diageo, through their subsidiaries (Nigerian
Breweries Plc and Guinness Nigeria Plc respectively); beer consumption is 52-week share price performance (rebased to Sep’09)
notably at low levels with PCC of 10litres, which is a 56% discount to 1.6
comparative benchmarks and 40% discount to levels attained in the 1980s; NB

1.4 GUINNESS
medium to long-term economic outlook is healthy at 5%-plus real GDP growth
NSE ASI
expectation over the next decade; supportive demographics characterised by 1.2
growing youthful population with avid thirst for fun and social culture that
encourages festivities. These fundamentals form the basis of our conviction for 1.0
a deserving long-term call on the sector.

0.8
Credible route to economic growth potential… Nigerian brewers are S-09 D-09 M-10 J-10 S-10
moderately shielded against Nigerian macroeconomic risks as sales recover

quite swiftly from unfavourable economic cycles, proven once again in the Source: NSE, Vetiva Research
2009/10 financial years. We believe the sector provides a solid route to

accumulate direct exposure to Nigeria’s medium-term growth potential, and
indeed SSA, as we think domestic beer consumption rate will increasingly set
the Nigerian market apart on the heels of expanding economy. We will play this
growth theme through NB and Guinness from a long-term perspective given
their operational scale, market dominance and impressive CAPEX. Vetiva Capital Management Limited
266B Kofo Abayomi Street
…but we are NEUTRAL on full valuation, in the near-term. From a Victoria Island, Lagos
valuation standpoint, the shares of quoted brewers offer a long-term attractive Tel: +234-1-46175213
proposition but, on a 12-month horizon we find the risk-reward profile limited, Fax: +234-1-4617524
as the shares have performed strongly (41% in 12 months) and trade at Email: research@vetiva.com
forward P/E multiple of 17.1x and EV/2010e EBITDA of 9.8x. We are on the
sidelines to make an inroad into the sector’s long-term growth prospect on
better valuation attraction. At this point, we think direct acquisition and
repositioning of fringe players is a potent source of alpha.
Please see the last page of this report for important disclosures and analyst certification
Nigeria I Breweries I Equities
Table of Contents
Investment Summary .................... 1
Nigeria in Global Context .................... 2
Overview of the Beverages Market .................... 4
Industry Structure .................... 5
Competitive Strategies .................... 10
Industry Outlook .................... 12
Investment Thesis .................... 18
Quoted Companies .................... 21 - 40
• Valuation and recommendation

• Guinness Nigeria Plc
• Nigerian Breweries Plc
• Others
Un-quoted Companies ................... 41
Disclosures ................... 44
Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 1
Nigeria in global context

The African market is still small relative to the global beer market. As at Africa accounts for c.5% of global
2008 (the latest figure available), Africa accounted for just 5% of global beer beer production. Nigeria accounts
production while Nigeria accounted for an abysmally low share of less than for <1%
1% (0.8% precisely).
The competitive landscape in the African brewery market is shaped by 4

global players: SABMiller, Heineken, Castel and Diageo with a pooled market
share of above 80% in the continent. Based on 2008 figure, Africa has a beer
market of 92 mhl with 32% of this demand coming from South Africa alone.
Nigeria has the second largest beer market with a production size of 15mhl
p.a. representing 15% of African market. To put this in perspective, the
Nigerian beer market has a size roughly equivalent to the size of the whole
of Southern Africa (ex-South Africa). South Africa is the largest beer
market in Africa (32%); Nigeria
occupies the 2nd position (15%)
The four global players are operational in the Nigerian market with Diageo
and Heineken as the most active players through their majority-controlled
subsidiaries: Guinness Nigeria Plc (Guinness) and Consolidated Breweries for
Diageo; and Nigerian Breweries Plc (NB) for Heineken. Castel also launched
its foray into the Nigerian market through the acquisition of a majority stake
in International Breweries Plc.
The table below gives the evolution of Africa’s beer market share on a global
scale.
Fig 1: Global beer market
Share of production by continent
2003 – 2008
Continents 2003 2004 2005 2006 2007 2008
Europe 34.9% 34.1% 34.1% 33.4% 33.1% 32.2%
Asia/Middle East 26.9% 28.5% 28.5% 30.0% 31.2% 31.7%
North America 22.2% 21.4% 20.9% 20.0% 19.4% 19.0%
South America 10.2% 10.2% 10.7% 10.6% 10.5% 11.0%
Africa 4.4% 4.4% 4.5% 4.6% 4.7% 5.0%
Australia/Oceania 1.4% 1.3% 1.3% 1.3% 1.2% 1.2%
TOTAL 100% 100% 100% 100% 100% 100%
Africa’s 2003 Share Africa’s 2008 Share
4.4% 5.0%
Source: Beverage Marketing Corporation, Vetiva Research estimate
Over the past 9 years, beer volume growth in Africa has outpaced global Nigeria’s volume growth has
level by an average of 1.5x, making the region an emerging beer market in outpaced global level due to
the world. While global volume growth has been at 2.96% CAGR since 2000 powerful base effects…
(rising from 1.40bn hl to 1.8b hl in 2008), Africa’s beer volume grew by
4.48% CAGR from 62mhl in 2000 to 92mhl in 2008. This growth
performance gave uplift to Africa’s stake of global beer production to 5% and
further asserts the immense room for future growth.
Despite this growth, the current level still appears quite imbalanced putting
into perspective the geographic metric that shows Sub Saharan Africa (SSA) Further growth opportunities
controlling 11.5% of world population. This disparity in the distribution of abound
global beer consumption level is much more pronounced in the context of the
Nigerian market. This is premised on the fact that about 99% of the
production volume in Nigeria is used to meet domestic demand. Hence, the
level of beer production gives some estimate as to the level of domestic beer
consumption.
Hence, we argue that the Nigerian case presents an appealing growth theme
given that Nigeria controls 2.2% of global population base but controls barely
0.8% of global beer production. Asides the per capita income level, as we
demonstrate in the subsequent sections below, population level is another
strong intrinsic driver of beer volume growth.
As depicted in the figure below, if we are to assume convergence and

normalize the current gross imbalance between population and beer
production volume by modeling an average beer volume share multiple of
1.69x population share (under the aggressive assumption that per capita
income differential is held constant), then the embedded growth potential in
the Nigerian brewery market is glaringly emphasized. This underscores our
long-term call on the sector. Hence, it is no more surprising seeing global
brewery giants scaling up their CAPEX programme to tap this enormous
growth story. (See the coming of the giants on Page 5).
Fig2. Beer volume statistics

Back-of-the-envelope estimate of growth potential
Key Headlines Nigeria China South Africa
Population share 2.2% 19.8% 0.7%
Beer volume share 0.8% 22.8% 1.6%
Beer volume share-to-population share 0.34x 1.15x 2.23x
Actual beer PCC (liter) p.a. 9.71 30.94 59.83
Implied estimates
Potential beer volume share 3.8% 33.4% 1.2%
Implied beer production level (mhl) 68.1 601.1 21.2
Current beer production (mhl) 15.1 401.0 28.0
Production (deficit)/Surplus (mhl) (53.0) (200.1) 6.8
Implied beer PCC (litter) p.a. 45.4 45.4 45.2
Implied Growth 367.3% 46.7% -24.4%
Source: Vetiva Research estimate
Beverages market Overview

Nigerian beverages market is heavily driven by beer and carbonated soft Beer and CSD control 87% of
drink (CSD), with both controlling about 87% of beverages consumption. beverage market in Nigeria…
While the products in the beverages space have some level of
complementarities in production, traditionally there is a clear line of focus
among the key players in Nigeria. The CSD market is dominated by Nigerian
Bottling Company Plc (NBC) [the bottler of Coca Cola brand] and 7UP Plc
(PepsiCo franchise bottler) in conjunction with a rising number of fringe
players.
In recent times, we have observed an emerging theme among the key

players with gradual convergence of the beer and CSD market segments.
Brewers are increasingly exploring the soft drink market by enlarging their
product portfolios, through their non-alcoholic product variants and capturing
an increasing share of consumers’ discretionary spending. A classic instance …brewers are closing the divide by
is the drive of NB toward product portfolio optimization by the introduction of venturing into non-alcoholic drinks
the Fayrouz brand to its product kit. Being a non-alcoholic brand, such
products have a strong potential to permeate a broader market (breaking
religion boundaries – a key factor in the Nigerian brewery market) and pose
good competition to the key CSD producers.
Spirits, the key strength of the Diageo Group (the parent Company of the
second largest Nigerian brewer - Guinness), is still a very shallow market in
Nigeria as it remains unappealing in aggregate consumption basket. However
its stout brand remains a market favorite, with Nigeria ranking as the second
largest market for the Guinness Stout brand world-wide.
In this report, we focus on the lion share of the Nigerian beverages market:
the beer segment; and analyze the key players in this market though
consolidating their non-beer production volume which we think will not
significantly change the substance of our opinion.
Fig 3:
Nigerian beverage market is dominated by beer and CSD (2009 est)
1% 1%
1%
Beer
10%
CSD
Juice
45%
Spirits
42% Wine
RTDs
Source: Heineken, Vetiva Research
Brewery industry structure

A brewery market of “The Big Two”: The Nigerian brewery market is NB and Guinness control c.80% of
currently a 15mhl market and typifies a classic illustration of a duopoly. Nigerian beer market
Though there are handful marginal players, the market is dominantly driven
by Nigerian Breweries Plc and Guinness Nigeria Plc with a combined market
share of c.80%. From a holistic view, this concentration level is much more
pronounced when we consider the underlying ownership of the 2 brewers: NB
Plc is majority-owned by Heineken, and Guinness Nigeria Plc is majority-
owned by the Diageo Group. The 3rd key player (market share of little less
than 10%) is Consolidated Breweries Limited (not listed), also majority-
owned by the Heineken N.V. Group. In summary, Nigeria is a beer market of
2 global players with the Heineken group holding the ace (controls c.70%
market share through its 2 subsidiaries).
While the operations of Consolidated Breweries Limited and Nigerian Heineken and Diageo remain the
Breweries Plc are consolidated in the financials of the Heineken Group, the 2 ultimate players with controlling
subsidiaries continue to operate as separate entities, strategically focusing on stakes in NB and Guinness
respectively
different segments of the beer market. The former is Heineken’s route to the
low-end Nigerian market while NB operates in the premium and mainstream
markets.
Fig 4:
Beer market share estimate
8.5% NB Plc
9.5%
Guinness
57.0% ConsBrw
25.0%
Others
Source: Companies, Vetiva Research estimates
The coming of the giants: Late to the party? It is incredible that

SABMiller does not have footprint in Nigeria, the second biggest economy
south of the Sahara, and yet remains the biggest brewer in Africa. SABMiller
occupies a coveted position among the top 4 global brewers and operates in 6
continents.
However, the tune appears set to take a different gear as the brewer has
Global majors are coming; SAB
identified Nigeria as the next growth frontier and made a strategic entry in
Miller, Carlsberg and Castel are
2008 via the acquisition of 57% effective interest in Pabod Breweries Limited, already in the game, though mildly
80% effective interest in Voltic Nigeria Limited (a water business) and
Standard Breweries Limited as launching pads. We have observed that
SABMiller is attempting a gradual inroad into the broader Nigerian beverages
market to foster its time-tested full beverage portfolio strategy. While
SABMiller is yet to boil up competitive pressure, we are beginning to feel its
presence softly with the recent introduction of one of its international
premium brands, Castle Milk Stout (CMS), through its subsidiary, Pabod
Breweries.
Castel, another global brewery giant with rich African experience, has also
landed quietly in the Nigerian market with the acquisition of majority stake in
International Breweries Plc. International Breweries Plc is one of the fringe
players quoted on the Nigerian Stock Exchange (NSE) with an installed
capacity of about 500,000 hl. Historical performance has been troubled with
11 years of operating losses. It is expected that the coming on board of
Castel and the full optimisation of an on-going CAPEX programme should set
the stage for a turnaround. The recent performance of the company signals
this turnaround potential as Q2’10 scorecard reflects significant volume
growth and return to profitability.
Fig 5: Key Global Players in Nigeria

Old Line-up Subsidiary
Diageo Guinness Plc
Nigerian Breweries plc,
Heineken
Consolidated Breweries
New Line-up
SAB Miller Pabod Breweries, Standard Breweries, Voltic
Castel International Breweries Plc
Carlsberg* International Breweries Plc
*International Breweries has partnership agreement with Carlsberg for the production and commercialization of its trademarks in
Nigeria. It is not a subsidiary of carlsberg.
Source: Vetiva Research
In a similar dimension, Carlsberg, the 4th largest brewer in the world, is also
making a leveraged entry into the Nigerian market. The company just sealed
a partnership agreement with International Breweries Plc for the production
and commercialisation of its notable trademarks; Kronenbourg and Wilfort.
While the new entrants are yet to rile up the sector, we think these multiple
Ceding market share from NB and
entries will have a significant long-term implication on the sector’s economics. Guinness could be challenging
In our view, ceding of significant market share to the new entrants will be though doable
gradual as the volume share and brand positions of Guinness and NB are
strong hurdles to cross. The locals are no strangers to the thick brew;
Guinness has been in Africa since the early 19th century and has been
brewed in Lagos for more than 50 years. NB has a very rich Nigerian
experience with an extensively solid distribution platform and has successfully
built a strong customer base.
Beer consumption at low ebb: The beer per capita consumption (PCC)
Beer PCC of 10litres is at a
in Nigeria, based on 2009 estimate, stands at 10litres p.a. While this appears
significant discount to key peers
quite low relative to African peers (14.6 litres) and global average (26.9
and global benchmarks
litres), it is crucial to stress that consumption growth over the past 10 years
has been robust at 10% CAGR from 5mhl in 1999 to 15mhl in 2009. The low
level of beer PCC is a function of many weaknesses amongst which are:
production constraint and infrastructural bottlenecks, both of which limit beer
availability and deeper penetration. While capacity expansion has constantly
been on the card for the existing players, current consumption level when
combined with expected growth in GDP per capita leaves ample headroom for
significant future investment in this sector if the growing beer demand must
be met.
Fig 6:
Low beer PCC: a fundamental pointer to long-term growth potential
45.0
40.0
35.0
Global average
30.0 26.88
25.0
20.0 Peer Average

14.6
15.0
10.0
10.0
5.0
Source: Heineken, SAB Miller, Diageo and Vetiva estimate
Cost structure benefiting from backward integration strategy: Cost structure not materially
On the average, Nigerian brewers (which we have proxied by NB and different across key African brewers
Guinness Plc) expend half of their revenues on direct input cost leaving them
with an average gross profit margin of 50%. In the context of African brewery
sector, this is very much in line with the performance of their African peers.
Fig 7: Cost of sales ratio of African brewers

Companies Countries COGS/Sales
Nigeria
Guinness Nigeria Plc Nigeria 50%
NB Plc Nigeria 53%
Average 51%
Selected African peers

East African Breweries Kenya 49%
SECHEBA Botswana 58%
SMB Morocco 50%
Average 52%
Source: Company financials, Vetiva Research
Following the ban on the importation of barley and barley malt in mid-1980s Nigerian brewers still import about
(which was later lifted in 1999 and currently attracts 5% import duty), 25%-35% of their input needs
industry majors have developed technical competence in their backward though local content strategy is
integration strategy by substituting locally-grown sorghum and corn grits for encouraging
imported inputs (e.g. barley). While the local content strategy is still a well-
articulated pursuit, brewers still import about 25%-35% of their input needs
predominantly through joint purchase agreements with their parent
companies. This range is still within band, for instance, given a minimum
target of 60% local content policy set by Nigerian Breweries Plc.
More recently, the local content strategy received further boost with the
commissioning in Lagos of the first can manufacturing plant in West Africa, Local sourcing of cans+ could be
GZ Industry Nigeria Limited which has Rexam Plc (a publicly traded company margin-supportive in the medium-
on the London Stock Exchange) as technical partner. Cans are gaining term…
significance as input component for brewers especially, as industry players
have over the years deliberately moved away from bottling their product
contents to the use of cans. Cans are a more efficient means of product
distribution for the brewers as it eliminates the logistics challenge of
retrieving empty bottles from consumers, as well as aids a deeper
penetration of consumer markets with brewed products. GZI has an installed
capacity of 600million cans p.a. and plans to double capacity to 1.2billion by
2011. While NB and Guinness have already placed a year’s demand on GZI’s
cans, we highlight that the efficiency gains from locally sourced cans will be
strongly reflective on margins over the medium-term as the proportion of …though brewers are still exposed
canned drinks expand from the current level of less than 10%. We also see to the volatility of global aluminum
efficiency gains creeping in from reduced lead time which currently stands at prices as GZI is 100% dependent
16-20 weeks for imported cans and the elimination of 20-25% damage rate on imported aluminum foils.
during shipment.
Nonetheless, the brewers are still indirectly exposed to the volatility of

international price of aluminium as GZI has 100% dependence on imported
aluminium coils.
We highlight that the local content initiative could prove more value accretive
to the wider economy, given that Nigeria, as the second largest sorghum
producer globally (after the United States), is self-sufficient in sorghum
production with an estimated 2009 production volume of 11.0million tons.
The potential of the agricultural sector (40% of GDP) is immense and huge
costs could be saved if the on-going sorghum initiative is pursued
sustainably.
Cost structure not materially
In a similar dimension, we highlight another twist to brewers’ continued different across key African brewers
investment in the local raw material sourcing capability. For instance, in 2008
Nigerian Breweries acquired its 30,000 ton capacity Aba Malting Plant, which
is the largest in Africa. Our key attraction to this strategy is the potential
long-term margin impact and the resultant effect on value creation for the
brewers. The strategy is more instructive given our long-term view that the
sector will evolve to be more competitive as new entrants become more
aggressive. This will engender margin pressure stemming from weakening
pricing power. Hence, we continue to see strategies to improve margins now
as extremely positive from valuation standpoint.
OPEX, made up of S & D and Administrative expenses, gulps about 25% of Brewers are intensifying on advert
turnover. In order to defend their market share, key players have grown their spend to ring-fence their market
marketing budgets, making the sector visibly advert-intensive. In shares against potential
2009FY, Guinness and NB respectively recorded 24% and 21% on this encroachments…
expense line (as a proportion of sales) with advertising expenditure
representing more than half of that make-up. In our view, this elevates the
entry barriers for new players as significant investment is warranted to cede
market share from existing players.
Fig 8:
Brewers OPEX to sales ratio has been declining
35%
32%
NB Guinness
30% 29%
26%
25% 24%
25% 21% 24% OPEX line has shown appreciable
24% 24%
20% 22% efficiency depicted by declining
OPEX-to-sales ratio
15%
10%
5%
0%
2006 2007 2008 2009 Average
Source: Companies’ financials, Vetiva estimate
Route-to-market: Challenges remain despite retail outlet

activation: Brewing plants are relatively concentrated in the Western and
Southern Nigeria where the consumer markets are freely accessible and less Retail outlet activation is
restricted by religion considerations. Supply chain distribution has been on increasingly gaining grounds
the back of key distributors. Key channels have traditionally been through
kiosks, provision stores and beer parlours in that order, based on Heineken’s
estimate. In recent times, we have observed aggressive innovation to
enhance beer availability to consumers and deepen penetration, since getting
the products to the final consumer is the name of the game. Brewers are now
activating retail outlets and providing warehouses to distributors who enjoy
preferential trade terms.
While these, in addition to in-bar promotions, provision of chillers and cool

boxes in strategic locations, are meant to improve throughput, we highlight
that the cost implication could be disturbing if not efficiently managed.
Competitive Strategies
Typical of a duopoly market, the competitive tools in the brewery industry are Both micro and major brewers are
wide-ranging. Industry majors have vied to defend their market share while exploring the full beverage portfolio
numerous ‘micro brewers’ and fringe players continuously craft competitive strategy
strategies to service their market niche. With the entrance of new global majors,
we expect the terrain to be challenging in the medium-term and even more so,
in the long-term. We highlight the following key strategies currently being
adopted by Nigerian brewers to service the beer population:
Full beverage portfolio: Brewers are looking more at additional growth

frontiers within the beverages market space. While existing local players are
gradually buying into this strategy to balance-out their product portfolio, new
players like SAB Miller have shown how this could be a winning strategy in
other African markets. Hence, we see the giant brewer’s acquisition of
majority stake in water producing Voltic Nigeria Limited as a clear statement
for the articulation of this strategy. Going forward, we expect that other
brewers will look more into this to add some quantum to growth by taking
advantage of their distribution platforms and production complementarities.
Global technical partners charge 3-
Leveraging global scale: By design, Nigerian industry majors are 4% of net sales as technical fee
subsidiaries of much larger entities who simultaneously serve as their technical annually
partners. Besides enjoying technical and managerial competence, they
leverage on the parents’ global supply chain to purchase their inputs at
relatively more competitive rates. In return, the companies pay royalty and
technical fee to the parent bodies estimated at 3%-4% of net sales.
Product innovations: While taste may remain materially the same, the re-
New international brands are being
packaged products of brewers have consistently impressed a new look appeal
introduced in additional to re-
in the minds of consumers. Brewers have successfully deployed this “old-wine-
packaging of existing brands
in-a-new-skin strategy” to stimulate fresh demand for their products by
leveraging on its psychological impact on consumers. Nonetheless, we have
seen pockets of newly introduced global trademarks into the Nigerian market
and market acceptance has been quite encouraging. Canned products are
becoming an increasingly potent means to enhance beer availability and
acceptability, helping to secure a larger share of consumer spends. While this
has helped in boosting volume growth, it also exposes the brewers to the
vagaries of aluminium markets.
However, we could see some cost efficiency gain from local sourcing of cans
given the recent completion of GZ Industries Limited can manufacturing plant
which is the first of its kind in West Africa. The plant has an installed capacity
of 600 million cans per year and plans to double capacity to 1.2billion in 2011.
According to industry sources, can importation requires an average lead
time of 16-20 weeks and damage rate during shipment is put at about 20%-
25%. Substantial efficiency gains could accrue from this end in the medium-
term if cans are completely sourced domestically.
Segmentation: Significant milestone has been achieved with regards to

Lager remains the key market
market segmentation along the line of low-price economic beer and premium segment with 62% share of beer
segments, though we are seeing some degree of convergence as the major consumption…NB is the dominant
brewers are stratifying their product portfolio to play in both markets. Products player in this space
in the economy segment are aimed at competing in the space predominantly
occupied by micro brewers serving the low income consumers. In recent
times, upward drifting by consumers is encouraging on this front though
significant portion of this market is served by makers of traditional liquor.
Even at the top end of the market, brewers are increasingly making their
products become affordable luxury.
Stout controls about 14% of beer
The market grid below gives a detailed picture of how the players operate in consumption… Guinness is the
dominant player in this space
different market segments.
Fig 9: Type
Lager (62%) Malt (24%) Stout (14%)
Heineken (1) Maltina (1) Guinness Extra Stout (2)
Premium Beck's (4) Amstel (1)
Malta Guinness (2)

Category
Star (1) Top Malt (2) Legend Extra Stout (1)
Mainstream Gulder (1) Maltex (3)
Harp (2)
"33" Export (3) Hi-Malt (3) Turbo king (3)
Economy Goldberg (5) Champ Malta (4) Williams Dark Ale (5)
Champion Lager (4) Malta Gold (5)
Note: 1 Nigerian Breweries Plc's products

2 Guinness Nigeria Plc
3 Consolidated Breweries Limited
4 Champion Breweries Plc
5 Sona Breweries Limited
Industry Outlook
In this section, we attempt to assess and provide an outlook for the Nigerian
brewery sector from a valuation perspective. In our 2009 brewery sector report
(Brewers on the Rise, published in September 2009), we detailed the
fundamental drivers of the sector, with a conclusion that the outlook for the
sector was positive. In this update, we test our assumptions against evolving
developments over the past year. Our long-term call on the sector remains
unchanged and is premised on our positive outlook for key growth drivers of the
sector. In this regards, we highlight the following:
Payout from demographic dividend: We approach this theme from the +150 million population base
angle of population size and structure. The catch to size of 150million people is provides huge potential demand
the share enormity of potential demand for brewery products and the catch
to structure lies in the sustainability of this demand. Nigeria has a very high
fertility rate of c.5 children per woman driving a population growth estimate of
2.8% p.a. based on IMF estimate. While growing population has engendered
significant challenges to the economic managers, we cannot take away the
inherent demand potential for consumer goods. This has been the key
attraction to the investment case in Nigeria.
With respect to structure, we have earlier demonstrated that the demographic

structure is bottom-heavy with the potential to generate steady pipeline of Bottom-heavy population structure
provides sustainable source of
consumers. With an average age of 19 years, Nigerians are quite youthful. A
demand
contributory factor to the low level of aged population is the disturbing level of
life expectancy rate of 47 years, one of the lowest in the world. Brewers are
twisting their product models by targeting this huge base of youthful
population.
But what impact will this have on beer volume growth?
Fig 10: Fig 11:

Nigerian population build-up: 2.8% growth Population structure: bottom heavy
Femal Male
200
179
180 174
169
165 65 years 3%
160
156
160 152
148
144
140
136
140 133
129
126
119 122 15-64 years 56%
120
100
80 0 - 14 years 42%
2010F
2011F
2012F
2013F
2014F
2015F
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(50.00) (40.00) (30.00) (20.00) (10.00) - 10.00 20.00 30.00 40.00 50.00
Source: IMF Source: CIA
If we work with the conservative assumption of holding other industry drivers

We estimate that population growth
constant, and estimate the expected volume based on the current level of per
alone should drive beer demand by
capita beer consumption of 10litres p.a., we submit that brewery industry will
2.7mhl through 2015
need to scale up production level by 2.7mhl to meet up with demand by 2015.
This represents about 18% potential volume growth as demonstrated in
Scenario A in the table below. The upside to this estimate lies in the potential
upside to the current level of beer per capita consumption.
Capacity addition is warranted;

Using the construction cost of NB’s Ama Greenfield brewery as a reference
required CAPEX is massive
point, on an inflation-adjusted basis, we estimate the investment requirement
to fill this gap at N57bn – N84bn (US$380mn – US$560mn) with a minimum
lead time of 12 months.
Fig 12: Estimation of potential volume gap based on 2015 population

2009 2015 Scenarios
A B C
Current beer PCC (Litres): A 10.3 10.0 13.0 17.0
Population (mn): B 151.9 178.7 178.7 178.7
Beer Volume (mhl) 15.4 18.5 23.1 30.0
Potential volume gap (mhl) 2.7 8.1 15.0
A: 2009 beer PCC estimate is based on Heineken's figure
B: Population figures are based on IMF estimates
Rising per capita GDP: Before we diagnose the potential beer volume
impact from this fundamental driver, we highlight that Nigeria per capita Nigeria GDP per capita has
income has shown significant growth over the past 10 years. Based on IMF delivered 13% CAGR in the past
figures, we estimate a 10 year CAGR of 13% with GDP per capita rising to decade. We expect 8.3% CAGR
over the next 5 years.
US$1,141 in 2009. This phenomenal growth has been fuelled by substantial
market-friendly macroeconomic reforms aimed at inducing a private-sector led
economic growth. However, growth slowed down significantly in 2009 on the
back of a global economic crunch. From this base, IMF estimated a per capita
income growth of 8.3% over the next 5 years with GDP per capita expected to
hit US$1,839 in 2015.
Fig 13:
Nigerian GDP per capita (current price)
2000 GDP per capita to hit US$1,839 in

1,839.18
2015
1600
1,141.91
1200
823.824
800
389.951
400
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F
Source: IMF
Having reviewed historical GDP per capita performance and forecast over the Beer products are both income and
next 5 years, we now focus our attention on the intrinsic link between income price elastic, though the former is
and beer volume growth. stronger
Beer products are both income and price elastic as reflected in the charts
below. This implies that rising income level and price reduction could boost
volume growth significantly. We however observed that income-effect on
volume growth is twice as strong as price-effect. This position is further
strengthened when we consider the mild negative impact of recent economic
slowdown on beer consumption growth and the fact that previous price We do not expect material price
increases have had little or no pressure on volume sales. More so, we do not reduction given steady demand and
see the likelihood of significant price reduction playing out due to strong modest inflation
demand and moderately strong domestic inflation.
As highlighted previously, we expect SAB Miller to play on pricing, given our

understanding of the company’s strategy to focus on cheap beers produced
from cheap domestic inputs. While such strategy could dislocate the current
market share distribution among the key players (though we do not think this
will happen any soon), it will ultimately help to swell the overall pie as beer
penetration will be deepened.
Using the hypothetical model below, we extrapolate that the expected GDP per Stylised model suggests a 25%
volume growth based on 8%
capita growth of 8% in Nigeria implies a potential beer volume growth of 25%
expected per capita GDP growth
p.a. We think this is quite bullish and is driven by the implicit assumption that
the beer consumption per capita in Nigeria will converge towards global
average of 27litres p.a. (from 10litres currently). While this argument sounds
plausible theoretically, we have some slight reservation with regards to how
quickly this can be achieved given the uniqueness of the Nigerian socio-
political/cultural make-up.
Fig 14: Fig 15:

Income-effect on beer volume growth: 1 to 3 Price-effect on beer volume growth: 1 to 1.7
30% 50%
Beer volume growth
Beer volume growth
25%
40%
20%
30%
15%
20%
10%
10%
5%
0% 0%
0.0% 2.0% 3.5% 5.0% 6.5% 8.0% 10.0% 0% 5% 10% 15% 20% 25% 30%
GDP growth Price reduction
Source: SAB Miller Source: SAB Miller
Premiumisation- A card best fit for tomorrow: In high income per

capita economies where the beer market is relatively saturated and volume
growth potential is limited, brewers are responding by adopting the
premiumisation strategy to open up new value sources. With regards to this
card in driving volume growth, we highlight that the Nigerian market, much like
its emerging and frontier market peers, is still very much unsaturated and could
still deliver superior volume growth with conventional beer products. However,
a much appealing catalyst could be the capturing of the large informal market
niches currently being served by homebrewed liquor makers. A gradual switch
from traditional liquor as income grows is a possible scenario and we regard
that as a typical form of ‘premiumisation’ that could play out in favour of the
major brewers.
Appealing bar culture: Though it is quite difficult estimating the outlet

density for the Nigerian brewery market space due to data challenges, what is
obvious is the proliferation of selling outlets which are highly concentrated in
the South-West, South-East and South-South regions of Nigeria. Most social
functions among the growing elite and middle class are marked by generous
beer consumption just as frequent daily and weekend fun-catching in bars
contribute meaningfully to the overall consumption rate. While there are strong
religious restrictions in Sharia-compliant states of Northern Nigeria, the pace of
consumption in the south remains unperturbed as bar outlets keep springing up
given their low cost of establishment and absence of any meaningful restriction.
2015 Scenarios: Where do we see volume by 2015?
In the previous section, we highlighted the different drivers of our

volume growth for the brewery sector, and analysed their potential
impacts on a standalone basis. In this section, we sum it all up by
presenting our consolidated outlook for the sector and where we see
beer volume over the next 5 years (2015).
o Our base case assumption is that beer consumption per capita in Nigeria We expect beer PCC consumption
will grow to 13litre p.a. in 2015. This level represents about 30% growth to deepen to 13liters by 2015,
rising 30% from current level
over the current level, just half of global average of 27 litres p.a. and 11%
below the average for African peers. It is worth mentioning that
consumption peaked at 17 litres in 1983, before the ban on imported barley
severely constrained domestic production.
o Our expected beer PCC is driven by 8.3% growth in per capita GDP through Beer consumption is intrinsically
linked to income and population
2015 (based on IMF forecasts) as we have established a strong positive
levels
correlation between GDP and beer consumption per capita. Increasing
urbanisation rate should provide additional catalyst.
o We expect population growth rate of 2.8% p.a. through this period (based
on IMF forecast) translating to a population base of 179million in 2015.
Premised on the above, we expect beer demand growth to continue in the high
single digits over our forecast period. Our estimate puts it at 9.1% CAGR
through 2015 (vs. 9.6% actual performance over the past 5 years). Hence, the We forecast 9.1% CAGR in volume
combined impact of income and population growth is expected to push beer through 2015 (vs. 9.6% historical
demand to 23.1 mhl in 2015, representing 54.3% growth over 2009 level. Even performance)
at this growth estimate, Nigerian beer market still represents 83% of the
current size of South Africa (28 mhl). These fundamentals underlie our
positive outlook for the sector, in terms of potential volume growth.
Fig 16:
Base-case estimate of 2015 beer demand: 9.1% CAGR
25 23.1
20 5.3
15.0 2.8
15
Our forecast suggests that Nigerian
beer demand will hit 23mhl by
9.5
5.5 2015.
10
2005A 5-Year Growth Curent Level Population Effect GDP Effect 2015F Total
Volume
Source: Vetiva estimate
Over the long-term, however, when we think it is more reasonable to assume

Nigeria has a potential of 40mhl
some level of convergence in beer consumption rate across key African beer market but we do not see that
markets, we assert that Nigeria has a potential beer market size of 40 mhl, materializing due to lag in income
implying 170% unrealised growth over the current level (excluding the level
population effect). However, we argue that Nigeria is not likely to attain
that level of beer PCC during this period due to lag in its income level.
That said, we highlight that current production capacity of local brewers cannot
meet up with this expected surge in demand. More importantly, brewers are
currently operating at close to full capacity utilisation rates due to steady
demand. Hence, supply must be boosted by significant CAPEX in capacity
expansion.
A back-of-the-envelope estimate, using the construction cost of Ama Brewery

(Greenfield), adjusted for inflation and Naira depreciation, suggests that
meeting up with the expected demand gap requires CAPEX of N154bn to Meeting up with expected demand
N227bn (US$1.02bn – US$1.51bn). While this investment is significant, we surge requires CAPEX estimate of
believe that the industry return on investment is exciting enough to justify between N154 and N227bn
capital injection. We continue to think that this capacity expansion will come
from both existing players and new entrants.
Investment Thesis
Growth: Potential is enormous. Based on our estimate, the Nigerian Beer consumption growth will be
beer market currently sits on an unrealised volume potential of 40mhl, driven by population build-up
(2.8% p.a.) and rising GDP per
representing 170% growth over the current level of 15mhl. While this potential
capita (8.3%)
may not be realised in the short-term, we highlight that GDP per capita growth
and population build-up are proven fundamentals that we are convinced will
drive beer demand to 23mhl in 2015, representing 54% growth over 2009. The
market has delivered growth rates above this level over the past 5 years. We
leave early realisation of this potential growth as upside to our estimate.
CAPEX requirement is equally high... Current capacity utilisation rates

of local players are quite tight in the region of 90% due to steady demand.
Meeting up with expected demand growth will require significant investment in CAPEX requirement is huge as
the range of N154bn – N227bn (US$1.02bn – US$1.51bn), on our estimate. current capacity utilization rate is
tight
Our expectation is that this investment will come from both existing players and
new entrants. For instance, the 2 major global players (Heineken and Diageo)
are increasingly looking at developing markets of Africa as a veritable source of
volume growth for their global portfolio. For the new players like SAB Miller,
getting to a meaningful scale of operation in Nigeria will require significant
CAPEX in capacity expansion.
...but potential return gives justification. Nigerian brewers have

proven their mettle in value creation ability as reflected in their superior return In our view, the return potential in
on equity (ROE), relative to many other sectors. More instructive is the fact the sector should drive this huge
that this return profile is less levered as the brewers are highly cash generative CAPEX injection
and parade low-debt capital structures. The differential in the rate of return on
equity between Nigerian Breweries and Guinness is explained by the degree of
asset utilisation as their margin performances are quite similar. NB has shown
better efficiency in the utilisation of its asset than Guinness, a key value driver
we associate with the economies that accompany operating scale.
Fig 17:
Return on Equity: Nigerian Breweries Plc Return on Equity: Guinness Nigeria Plc
50% 47%
80%
71%
68% 45%
70%
40% 36% 36%
60% 34%
35%
48%
50% 30%
40% 25%
30%
20%
30%
15%
20%
10%
10% 5%
0% 0%
2006 2007 2008 2009 2006 2007 2008 2009
Source: Companies financials, Vetiva
In terms of market returns, brewers have done pretty well outperforming BRIC
and Emerging markets basket by a wide margin over the past 10 years. NB and
Guinness market returns bear close semblance to their earnings growth
trajectory over the past decade. In the most recent 5 years, NB and Guinness
have delivered BRIC-like return profile buoyed largely by appealing growth
story in top and bottom lines. This, in our opinion, captures market’s validation
of the sector’s value propositions.
Fig 18:
10-Year CAGR in share price 5-Year CAGR in share price
40.0% 20.0% 18.8%

31.9%
30.2% 14.8%
30.0% 13.2%
9.9%
20.0% 10.0%
10.9% 10.7%
8.6%
10.0%
0.7%
0.0% 0.0%
Guiness Nigerian Nigeria (All BRIC Emerging Guiness Nigerian Nigeria (All BRIC Emerging
Nigeria Plc Breweries Share Index) Markets Nigeria Plc Breweries Share Index) Markets
Notes:
1. BRIC and Emerging Market returns are dollar-based, while NSE, NB and Guinness returns are based on domestic currency.
2. Returns are not inclusive of dividends
Source: MSCI Barra, NSE
New entrants: A positive sum game, in our view. The value and
growth creating opportunities in the brewery sector are proven propositions.
This is affirmed by the increasing attention the market commands from global
brewery giants in their search for growth poles. Existing players are scaling up
CAPEX programmes while new entrants (like SAB Miller, Castel) are acquiring
fringe players with the strategic intent of building capacity in the medium-term.
In our view, the entry of equally-big players will only help to add to the size of
the industry pie in the long-term though we highlight that the medium-term
economics of the brewery market may be pressured. The key pressure points
include pricing power and margins.
Valuation: Unattractive at current levels; we are on the sideline.

While our long-term view of brewers is positive, the fundamental upside
potentials to current market valuations of the key quoted players extensively
covered in this report (Nigerian Breweries Plc and Guinness Nigeria Plc) are
limited over a 12-month investment horizon as we see them fairly priced. The
strong fundamentals of the sector have been priced in. Current prices are well
within our DCF-based fair value ranges.
Fig 19: Valuation Metrics Growth attraction is priced-in as

NB Guinness Average current valuation presents marginal
alpha generation potential
Market Cap (N'bn) 589.88 272.86 431.37
Market Cap (US$'bn) 3.93 1.82 2.88
Forward P/E 16.40 14.34 15.37
EV/EBITDA 10.66 8.76 9.71
Market Value per mhl (N'bn) 58.99 68.22 63.60
DCF-based Fair Value 74.30 175.50
Current Price 78.50 185.13
Premium/(Discount) to fair valuation 5.66% 5.49% 5.57%
Rating Neutral Neutral
Notes:
1. NB has a December 31 financial year end, while Guinness has a June 30 financial year end. Forward estimates are
based on this convention.
Acquisition: A potent source of alpha. For investors having a control

perspective, acquisition of existing fringe players, listed or unlisted, could prove
Acquisition of fringe players is a
a potent source of accessing alpha returns in the Nigerian Brewery space, if the potent source of alpha, at current
technical know-how to operationally revamp these ‘latent values’ can be level, from control perspective
provided. While intensive due diligence is warranted especially for those
brewers that have regional presence and advantages, what is obvious is that
there are handful fringe players that need the competitive edge to withstand
industry dynamics and climb along the industry growth path. We have
highlighted earlier that technical partnership with global giants has been a key
success factor for thriving brewers in Nigeria.
In view of the high market valuations of the sector’s key players, we think
direct acquisition and repositioning of fringe players is an attractive call option
to gain profitable exposure to the enormous growth and value opportunities in
the brewery sector. SAB Miller is already treading this path using the
acquisition of fringe players as launching pads. In our view, this is a cheap
means of gaining access to the second largest beer market in Africa, as
at now.
Quoted Companies
Brewers Price (N) Shares Outst. Market Cap Market cap YtD share Analyst
(mn) (N'mn) (US$mn) share perf. rating
Nigerian Brew. Plc. 78.50 7,563 571,352 3,809 66.3% 42% Neutral
Guinness Nig Plc 185.13 1,475 273,053 1,820 31.7% 45% Neutral
Int'l Brew. Plc. 6.71 2,013 13,507 90.0 1.6% 196% Not rated
Champion Brew. Plc. 2.46 900 2,214 14.8 0.3% -22% Not rated
Jos Int. Brew. Plc. 3.36 562 1,888 12.6 0.2% -11% Not rated
Golden Guinea Brew. Plc. 0.68 251 171 1.1 0.0% 0% Not rated
Premier Brew. Plc 0.93 126 117 0.8 0.0% 0% Not rated
862,301 5,749 100.00%
Guinness Nigeria Plc

NEUTRAL
Investment Thesis
We expect Guinness to deliver the following
lowing CAGR metrics over the next Stock Data
5 years: Volume: 8%, turnover: 12%, %, earnings: 1
16%. These compare Market Price (N) 185.13
with historical 5-year CAGR of 18% and 23% in turnover and earnings
Shares Outs (bn) 1.47
respectively.
Market cap (N’bn) 273.05
We expect this growth to come as Guinness leverages its coveted Fair value range 170 - 182
position as the second largest Nigerian brewer (27% market share and Rating NEUTRAL
4.5 mhl installed capacity) to tap into the brewery industry growth
opportunities. The brewer has operatin
operating footings in the premium,
mainstream, and economic segments of the beer market given its Price Perf. Guinness NB NSE
product portfolio a self-sustaining growth balancing behaviour through 12-month (%) 37.2 44.7 4.7
economic cycles. 6-month (%) 32.1 11.6 -12.5
3-month (%) 11.5 26.5 -0.8
Guinness key strength lies in its c.80% dominance of the stout market
where the Guinness brand (which commands 75% price premium over
mainstream lager brands) holds the ace. We view this undisputed Financials 2009A 2010A 2011F
leadership as a viable source of growth as the stout segment drives Turnover (N'bn) 89.1 109.4 122.6
14% of the Nigerian beer market. Modest incursion into the lager
EBITDA (N'bn) 24.4 24.4 28.9
segment
egment with strong performance from Harp, coupled with tthe capacity
PAT (N'bn) 13.5 13.7 17.2
expansion of 1.5mhl expected to come on stream by June 2011
2011, should
EBITDA Marg (%) 27.4 22.3 23.7
provide further headroom for our volume growth expectation.
PBT Margin (%) 21.3 18.3 20.7
Guinness shares currently trade at 2011E P/E multiple of 15.8x (driven PAT Margin (%) 15.2 12.6 14.1
by 27% 2011E EPS growth) and EV/2011 EBITDA of 9.0, driven by ROaE (%) 47.0 41.1 46.8
EBITDA margin of 25%. These compare well with NB’s (2011 P/E 16.6x;
EV/EBITDA 9.2x). While we expect 2011 margin performance to be sub sub-
2008, the market share gain (in terms of v volume) over the past year Valuation 2009A 2010A 2011F
will support strong EPS growth. We expect Guinness market share to P/E (x) 13.4 20.4 15.8
remain attractive at 25%-plus
plus through 2015. We are Neutral at current PBV (x) 2.7 8.0 7.4
price as we see mild discount to fair value estimate
estimate.
EV/EBITDA (x) 10.7 10.7 9.0
Fig 20: 52-week Share price performance Div. Yield (%) 4.1 3.5 4.3
1.6 Shareholding structure (as @ 2009)
NB
1.4 GUINNESS Guinness
NSE ASI Overseas
Nigerians Limited
46.2% 46.0%
1.2
1.0 Atalntaf
Limited
7.8%
0.8
S-09 D-09 M-10 J-10 S-10
Source: NSE, Vetiva Research
Nigerian Brewery Sector Update: Brewing Growth;; Malting Value I October 2010 I 22
Performance Update: FY’10

The FY’2010 results of Guinness lends credence to the continued organic
growth momentum in volume as reflected in 23% YoY growth in turnover.
Turnover hit an all-time high of N109bn and earnings came in with a
defensive posture (PBT: N20bn, PAT N14bn). Key takeawys from this
performance are highlighted below:
Volume growth treads our expectation line: In the context of our

expectation, Guinness slightly underperformed our turnover forecast of
N111 billion by 2%. This robust performance (23% YoY growth), despite
a 6% decline in Guinness stout volume due to consumers shift to lower
priced beers, is indicative of strong future growth. We note that the
Guinness brand is more vulnerable to shocks in consumer spending
given its price premium of c.75% compared to mainstream lager brands.
Performance in the period under review was driven by modest market
share gain in the lager segment where Harp has been performing
strongly. Malta Guinness and Smirnoff brands are also contributing to
growth.
Bottom lines threw ample surprise elements: While the strong

growth in sales is yet to be fully reflected on earnings due to elevated
marketing expenses and high input costs, FY’10 margin performance
came in well ahead of our expectation with post-tax earnings climbing
marginally by 1.4% to N14bn as against our expectation of 14% decline.
10% DPS growth on higher payout: Guinness outperformed our

dividend expectation by wide margin. This was driven by 2 major factors
which we view in positive light: earlier-than-expected margin recovery
(we expected 11% vs. 13% actual), and higher payout ratio (we
expected 80% vs. 88% actual). DPS declared is N8.25.
Fig 20:
Turnover (in N’bn) PAT (in N’bn) and PBT margins
120 Post-tax earnings (LHS,N'bn) PBT Margin (RHS)

109
14 30%
100 25%
89 25%
13
80
69 20%
21%
60 18%
12 15%
40
10%
11
20 5%
- 10 0%
2008 2009 2010 2008 2009 2010
Source: Company, Vetiva Research
Company Overview
Guinness Nigeria Plc has about 50 years of operating experience in
Nigeria. The company was licensed to brew, bottle and market Guinness
products and was listed on the Nigerian Stock Excha
Exchange in November
1985 under the breweries sector.
ector. It is the second largest brewer in
Nigeria with a beer market et share (by volume) of about 27 27% and
capacity to produce 4.5 mhl per annum.
Guinness Nigeria Plc operates under the Diageo Group, a multinational

beer, wine and spirits company, trading in over 180 markets around the
world spanning 7 continents. Nigeria
eria has grown in relevance to be one of
Diageo’s most strategic markets for Guinness stout in the world. In
2009, Guinness Nigeria contributed 4.1% to the Group’s net sales.
The company has four (4) brewing plants located in 3 states: Ikeja and
Ogba Breweries
ries in Lagos state, Benin brewery (Edo state) and Aba
brewery
rewery (Abia state). Much in line with the regional configurati
configuration of
brewery plants in Nigeria, all Guinness’ breweries are located in regions
south of the River Niger (South West and South
South-South Nigeria) where
beer market is predominantly unregulated by religi
religion consideration.
The Company produces five major brands: Guinne Guinness stout, Gordon’s
Spark, Harp lager, Malta Guinness and Smirnoff Ice. These products
have been promoted under the platform of various thematic campaigns
with music and reality shows as key selling attractions
attractions.
Guinness Nigeria Plc is ultimately

ltimately owned by the Diageo Group and its
market value of N273bn (US$1.82bn),2bn), represents 4.1% of the market
cap of Nigerian equity market size.
Fig 21:
Geographic foot print of Guinness; generates 99% of sales in Nigeria
Key
Brewery
Malting plant
National boundaries
Major cities
Federal capital
Forecasts
We are optimistic about Guinness growth prospects given our positive
outlook for the brewery industry and our view that Guinness is well
positioned to transform underlying growth potential in beer consumption
into value for shareholders. We are more positive on profitability stance
given our expectation that margin will rebound strongly in FY’11 as huge
marketing spend takes a breather. We believe capacity expansion will
continue as this could be done profitably given the current demand-supply
dynamics in the industry.
For 2011FY, we forecast a turnover of N123bn, representing 13% YoY

growth. Our short-term expectation is anchored on growth resumption in
the stout segment of Guinness portfolio. We expect gradual trade-up by
consumers as purchasing power adds weight to play in favour of the
premium segment. While we still expect modest performance in lager
(Harp) and malt (Malta Guinness), we continue to think that competition
from NB could be stronger in these markets.
Our earnings outlook for 2011FY is very strong given our view that the
market share gain in the past year is yet to pass through to margins as
marketing spend outpaced turnover growth. We thus forecast a PBT
margin accretion of 200bps in 2010FY (PBT Margin: 20.6%). Our margin
expectation translates to post tax earnings of N17bn and EPS of N11.64
(EPS growth of 27%).
Over the next five years, we forecast a CAGR of 12% in turnover (vs.
18% in the last 5 years) to be driven by both price increase and volume
growth of 8%. Our turnover outlook is premised on Guinness’ flexibility
to play both the economy and mainstream segments of the beer market.
Fig 22:
Key income statement heads forecasts (in N’bn except stated)
200 27% 30%

26% 26%
25%
22% 25%
160
20%
120
15%
80
10%
40
5%
- 0%
2009 2010 2011F 2012F 2013F
Turnover EBITDA PAT EBITDA margin
We forecast a 16% CAGR in earnings over the next 5 years (vs. 23%
achieved previously). Our earnings outlook is premised on our view that
margin will rebound from the current trough: 2010 EBITDA margin of
22% vs. 28% historical average. We are looking for an average EBITDA
margin of 26%, which we believe is achievable given Guinness’ record of
operating efficiency.
We expect earnings to be more than double by 2015, representing a

doubling time of less than 5 years. Historical earnings growth has been
fuelled by powerful base effect and consistent capacity expansion.
Valuation and rating
In the valuation of Guinness Nigeria Plc, we adopt a DCF valuation

methodology (DDM) given the brewer’s stable dividend policy. We assume
an average dividend payout of 85% and discount our expected dividend
streams by an estimated cost of equity (COE) of 14%. Our COE is driven
by a nominal risk free rate of 10%, beta of 0.77 (relative to the NSE ASI)
and an equity risk premium of 5%, much in line with frontier market
benchmark.
Post our explicit forcast horizon (2020), we assumed a terminal growth

rate of 6% guided by the long-term prospect of Nigerian GDP and
Guinness’ relatively higher retention rate (relative to NB). Summing up all
the above, we have the following valuation output for Guinness Nigeria
Plc’s ordinary shares:
Fair value estimate is N175.50 per share. Sensitizing our model to

growth and COE assumptions gives a fair value range of N170– N180.
Our fair valuation implies justified P/E multiple of 15.1x (on 2011F EPS)
and EV/EBITDA multiple of 8.3x.
Current market price is at some premium to fair value; hence, we rate

the stock NEUTRAL but will be quite willing to play the big beer market
at attractive valuation.
Our DCF-based NEUTRAL rating is consistent with historical market

valuation of the brewer. Guinness has a 5-year historical average P/E
multiple of 18.6x (using the data from September 2005 to date).
Fig 23:
Historical P/E multiple: 5-Y average of 18.6x
45.00
5-Y Avg. P/E + 1 SDEV 5-Y Avg. P/E = 18.6x Current P/E = 19.9x
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00 5-Y Avg. P/E - 1 SDEV
Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
The stock is currently priced at a P/E multiple of 19.9x, representing

some 5% premium over what is obtainable based on historical market
perception. We do not think there is any fundamental justification for a
change in this long-term valuation multiple.
However, over a 12-month investment horizon, we think the market

will reward Guinness 2011 EPS growth of 25% which places it forward
P/E multiple at 15.8x (vs. long-term average of 18.6x). This
further adds some fundamental support to our long-term call on
this name.
Financial Performance
Over the past years, Guinness Nigeria Plc has taken advantage of
favourable dynamics in the Nigerian beer market to deliver robust volume
and earnings growth. We x-ray this performance along key performance
indicators in this section as this provides a solid backgrond to our outlook
of the company as we have highlighed above.
Market position 2006 2007 2008 2009 2010 2011F 2012F

Nigerian Beer market size (mhl) 11.00 12.50 14.50 15.00 16.42 17.83 19.25
Beer market volume growth 22.2% 13.6% 16.0% 3.4% 9.4% 8.6% 7.9%
Population (mn) 140.00 143.85 147.81 151.87 156.05 160.34 164.75
Beer PCC (litres) 7.86 8.69 9.81 9.88 10.52 11.12 11.68
Guinness market share 25.0% 24.0% 25.0% 26.0% 28.0% 27.8% 27.6%
Guinness volume 2.75 3.00 3.63 3.90 4.60 4.96 5.31
Price/mhl 19,510 20,755 19,082 22,859 23,544 24,721 25,933
Growth 2006 2007 2008 2009 2010 2011 2012

Volume 22% 9% 21% 8% 18% 8% 7%
Price/mhl -7% 6% -8% 20% 3% 5% 5%
Turnover 14% 16% 11% 29% 23% 12% 12%
Core Operating profit 5% 16% 19% 23% -2% 22% 18%
EBITDA 8% 14% 18% 22% 0% 19% 17%
PBT 15% 29% 24% 10% 0% 25% 18%
PAT 53% 43% 12% 14% 1% 25% 18%
Profitability 2006 2007 2008 2009 2010 2011 2012

Return on Equity 38% 40% 35% 40% 42% 49% 53%
Return on Assets 14% 16% 16% 18% 18% 20% 20%
Margins 2006 2007 2008 2009 2010 2011 2012

Gross margin 48% 45% 49% 48% 44% 46% 46%
EBITDA margin 28% 27% 29% 27% 22% 24% 25%
EBIT margin 23% 23% 25% 24% 19% 20% 21%
PBT margin 21% 24% 27% 23% 19% 21% 22%
Net Profit Margin 14% 17% 17% 15% 13% 14% 15%
Per share data 2006 2007 2008 2009 2010 2011 2012
EPS 6.31 7.19 8.04 9.18 9.31 11.68 13.79
DPS 4.00 4.50 6.00 7.50 8.25 9.93 11.72
NAPS 17.63 21.45 24.99 21.37 23.19 24.94 27.01
Sales/Share 45.47 42.22 46.90 60.44 74.15 83.10 93.42
Appendix:
Income Statement (N’mn) 2006 2007 2008 2009 2010 2011F 2012F
Turnover 53,652 62,265 69,173 89,148 109,367 122,561 137,781
Cost of Sales (27,845) (34,144) (35,611) (46,510) (61,672) (66,551) (74,402)
Gross Profit 25,807 28,121 33,562 42,639 47,695 56,010 63,379
D & A Expenses (9,511) (8,545) (10,515) (14,000) (18,796) (20,835) (22,321)
A & P Expenses (4,072) (5,349) (6,164) (7,796) (8,568) (10,418) (11,849)
EBITDA 14,901 16,991 19,993 24,408 24,385 28,897 33,863
Depreciation 2,677 2,764 3,110 3,565 4,053 4,139 4,653
Operating profit 12,224 14,227 16,883 20,843 20,331 24,757 29,210
Other income - 159 227 780 - -
EBIT 12,224 14,227 17,042 21,069 21,111 24,757 29,210
Interest Paid (1,551) (1,540) (437) (2,026) (1,052) (946) (1,331)
Interest Received 764 2,197 1,730 1,212 254 1,525 2,024
Profit from operations 11,437 14,800 18,336 20,255 20,314 25,336 29,902
PBT & EI 11,437 14,800 18,336 20,255 20,314 25,336 29,902
Exceptional Income (1,243) (1,263) (325) - -
PBT 11,437 14,800 17,093 18,992 19,989 25,336 29,902
Taxation (3,997) (4,193) (5,232) (5,451) (6,252) (8,107) (9,569)
PAT 7,440 10,607 11,861 13,541 13,736 17,228 20,333
Balance Sheet 2006 2007 2008 2009 2010 2011F 2012F

Fixed Assets 29,532 30,125 36,733 35,898 38,245 45,992 51,703
Intangible Assets - - 1,311 1,807 1,382 1,021 659
Long term Debtors 182 268 534 399 443 532 598
Stocks 12,933 12,721 12,867 16,848 16,153 19,425 21,837
Debtors & Prepayments 3,231 6,662 6,529 9,105 9,094 9,994 10,705
Deposits for imports 51 26 108 3,991 376 452 508
Cash and bank balances 13,921 22,007 15,108 5,821 12,705 16,863 19,975
Total Assets 59,850 71,809 73,191 73,869 78,397 94,278 105,986
Creditors & Accruals 20,670 21,568 20,148 24,244 30,648 36,385 40,374
Bank Overdrafts - - 3,705 6,897 - 4,506 6,655
Deferred Tax Liability 6,969 6,647 7,886 8,094 8,356 10,049 11,297
Term loan 8,500 8,500 - - 1,299 - -
Provision for gratuity 2,764 3,455 4,589 3,108 3,895 4,684 5,265
Total Liabilities 38,902 40,171 36,328 42,344 44,198 55,624 63,591
Share capital 590 737 737 737 737 737 737
Share premium 1,546 1,546 1,546 1,546 1,546 1,546 1,546
Revaluation Reserves 3,790 3,751 3,738 3,303 3,296 3,296 3,296
Revenue Reserve 14,874 25,605 30,842 25,938 28,620 31,204 34,254
Shareholders' Equity 20,800 31,639 36,863 31,525 34,199 36,783 39,833
Nigerian Breweries Plc

NEUTRAL
Investment Thesis
We expect NB to deliver the following CAGR metrics over the next 5
Stock Data
years: Volume: 7.1%, turnover: 14.5%, earnings: 15.7 15.7%. These
Market Price (N) 78.50
compare with historical 5-year CAGR of 17.4% and 40.6
40.6% in turnover
Shares Outs 7.56
and earnings respectively.
Market cap 571.35
We expect this growth to be delivered on the back of NB’s market Fair value range 68.82 – 79.77
leadership (60% market share and capacity to produce 10mhl p.a) Rating NEUTRAL
which we argue is sustainable till 2015. NB’s dominance is more
pronounced in the mainstream lager segment where Star and
Guilder brands dictate market pace though we have recently seen some Price Perf. Guinness NB NSE
level of aggression from Harp (Guinness’ main lager brand) brand). The
12-month (%) 37.2 44.7 4.7
potential of this market, and logically for NB, remains strong when we
6-month (%) 32.1 11.6 -12.5
consider the fact that lager commands 62% of beer market volume.
3-month (%) 11.5 26.5 -0.8
A strong value proposition for NB iss its presence along the spectrum of
beer value chain which, in our view, will provide the catalyst for future
operational efficiency. NB recently acquires a 30k tones p.a. malting Financials 2009A 2010F 2011F
plant in furtherance of its local content strategy to mitigate earnings Turnover (N'bn) 164.2 180.7 209.6
exposure
osure to FX risk. The key constraint to volume growth is the EBITDA (N'bn) 48.5 54.2 62.9
inflexibility of NB, unlike Guinness, to partake in the lower-end of the
PAT (N'bn) 27.9 31.8 37.5
beer market which is being played by Consolidated Breweries (a sister
EBITDA Marg (%) 29.5 30.0 30.0
company majority-owned by Heineken).
PBT Margin (%) 25.2 25.9 26.3
NB shares currently trade at 2010E E P/E multiple of 1

18.0x (driven by PAT Margin (%) 17.0 17.6 17.9
13% 2010E EPS growth) and EV/2010 EBITDA of 10.7x, driven by ROaE (%) 70.8 67.2 76.4
EBITDA margin of 30%. %. These compare with Guinness’ (2011 P/E
15.8x; EV/EBITDA 9.0x). Unlike Guinness, we expect 2010 margin
performance to be at par with 2008 but expect slower growth than Valuation 2009A 2010F 2011F
Guinness. We remain Neutral at current price as we see mild discount P/E (x) 15.4 18.0 16.6
to fair value estimate of N175/share. PBV (x) 9.3 13.4 11.3
EV/EBITDA (x) 10.5 10.7 9.2
Fig 24: 52-week Share price performance Div. Yield (%) 6.5 5.6 6.0
1.6 Shareholding structure (as @ 2009)
NB
1.4 GUINNESS
NSE ASI
Others
1.2 Heineken
45.9%
N.V.
Group
54.1%
1.0
0.8
S-09 D-09 M-10 J-10 S-10
Source: NSE, Vetiva Research
Performance Update: H1’10

Nigerian Breweries saw improving performance in her half year 2010
scorecard with a half year turnover of N88bn and profit after tax of N16bn.
Key takeawys from this performance are highlighted below:
Turnover grew by 7% YoY: During the half year ended June 2010, NB
reported a turnover level of N88.44bn, representing 7.0% growth over
H1’09. The growth in turnover is a remarkable slowdown when
benchmarked against the average of 20% delivered in the most recent 4
years. The slowdown was more pronounced in Q1’10 as turnover level
was rather flattish relative to corresponding period in 2009. In the first
quarter of 2010, brewer faced a very challenging macroeconomic
environment: tight credit cycle negatively affected key product
distributors, and rising job losses among the middle class hampered
aggregate consumer spending. However, we have noticed resumption in
volume growth in Q2 with a 20% sequential growth in turnover.
Cost headwinds hit earnings though margin is rebounding:

Despite growth resumption at top line, NB reported a weaker earnings of
N15.88bn in H1’10, representing a decline of 5.8% relative to H1’09.
Earnings have been hampered by the combined impact of rising
production cost and momentous advert spend in Q1. Despite this YoY
decline, we noticed significant improvement in earnings generation in Q2
with a sequential growth of 47.9%. The impressive earnings
performance in Q2 was buoyed by margin rebound in H1 which trended
up in line with historical average of 18% as against 16% recorded in Q1.
Though we observed that H1’10 margin was lower than H1’09 by 204
basis points.
Fig 25:
Turnover (in N’bn) PAT (in N’bn) and Profit margin
PAT (LHS) PAT Margin (RHS)

90.00 18.00 21.0%
88.44
88.00 20.4%
20.0%
16.86
86.00
19.0%
84.00 15.88
16.00
82.69
18.0% 18.0%
82.00
17.0%
80.00
78.00 14.00 16.0%

Q2'09 Q2'10 Q2'09 Q2'10
Company Overview
Nigerian Breweries Plc, the largest brewer in Nigeria with production
capacity
apacity of 10mhl, commenced operation in Nigeria in 1949. The
company has about 60 years of operating experience in Nigeria and
represents
resents the largest quoted company in Nigeria by market value (as at
report date). In the beer market, NB Plc has a grip of about 60%.
Nigerian Breweries is a subsidiary of Heineken N.V. and is quite strategic

to the group’s operations in Africa. Heineken is one of the leading
brewers globally in terms of volume sales. Heineken is operationally
present in 11 African countries, brews and s sells more than 200
international premium brands through its global network of breweries
and distributors. In 2009, Nigerian Breweries Plc sales represent about
5.8% of Heineken’s global sales.
NB has the broadest footprint of brewery plants in Nigeria wit with 5

breweries and 1 malting plant strategically located across the country.
The breweries are located in Lagos, Aba, Kaduna, Ibadan and Enugu. NB
Plc has a distinctive geographical advantage with the location
locations of its
plants as it has leveraged on this to serve
erve broader market space.
The Company has evolved a very rich product portfolio through

continuous products innovation, re-branding
branding and re
re-launching. Principal
brands in its products bouquet include Star, Gulder, Maltina, Legend,
Amstel Malta, Fayrouz, and Heineken.
Heineken N.V. Group holds 54.1% of the issued share capital of NB Plc
with the balance being held by Nigerian and foreign institutions and
indviduals.
Fig 26:
Geographic foot print of NB; generates 99% of sales in Nigeria
Key
Brewery
Malting plant
National boundaries
Major cities
Federal capital
Forecasts
Summarily, our outlook for Nigerian Breweries is broadly positive in terms
of volume growth and profitability. Our outlook is premised on our view
that NB’s market leadship is strong and the brewery sector provides ample
room for volume growth. We think capacity expansion is on the card as
demand surges and this could be done profitably given the current
demand-supply dynamics in the industry.
For 2010FY, we forecast a turnover of N181.8bn, representing 10% YoY

growth. Our short-term expectation is anchored on continuous volume
growth in key brands during H2’10 as credit becomes relatively more
available for key distributors and consumer discretionary spends get on
the uptrend. We have also anchored our expectation on seasonality as
H2 traditionally contributes about 57% to FY performance.
Our earnings outlook for 2010FY is a bit stronger at 13.9% YoY growth
premised on our view that margin will remain steady at 18% (vs. 18.0%
recorded in H1’10). NB’s net margin over the past 3 years has remained
in the 17%-mark and we do not see significant deviation in FY’10.
Hence, we forecast 2010FY earnings after tax of N31.8bn translating to
an EPS of N4.21.
Over the next five years, we forecast a CAGR of 13.4% in turnover (vs.
17.1% in the last 5 years) to be driven by both price increase and ramp
up in volume. Our modest outlook on this front is premised on the
expectation that despite the market dominance by NB, increasing
competitive pressure could slightly dilute it price-setting power. Hence,
we think volume growth is the key variable to watch.
Fig 27:
Turnover (in N’bn)
300 32%
30% 30% 30%
29% 30%
250 30%
200 28%
150 26%
100 24%
50 22%
- 20%
2008A 2009A 2010F 2011F 2012F
Turnover EBITDA
PAT EBITDA margin
Our earnings outlook is premised on our margin assumption for NB:

Average EBITDA margin of 29.6%. On this we forecast a CAGR of 14.8%
in earnings after tax (vs. 40% recorded in the last 5 years). We expect
earnings growth to outpace turnover growth slightly as we think the
huge margin growth delivered over the last 5 years might not be
replicated. This remains one of the upside risks to our earnings estimate
if operating efficiency gains from local content throw upside surprises.
We expect earnings to double by 2015, representing a doubling time of 5
years longer that NB did historically. Historical earnings growth has been
fuelled by powerful base effect and consistent capacity expansion.
Valuation and rating
In line with our valuation approach for Guinness, we adopt a DCF valuation
methodology (DDM) in estimating the fair value of Nigerian Breweries Plc’s
shares premised on an obvious reason: visibility of the brewer’s dividend
policy. We have assumed an average dividend payout of 95% (vs. 85% for
Guinness) and discount our expected dividend streams by an estimated
cost of equity (COE) of 14.4%. Our COE is driven by a nominal risk free
rate of 10%, beta of 0.87 (relative to the NSE ASI) and an equity risk
premium of 5%, much in line with frontier market benchmark.
Post our explicit forcast horizon (2019), we assumed a terminal growth

rate of 5% guided by the long-term prospect of Nigerian GDP and NB’s
relatively lower retention rate (relative to Guinness). Summing up all the
above, we have the following valuation output for Nigeria Breweries Plc’s
ordinary shares:
Fair value estimate is N73.43 per share. Sensitizing our model to

growth and COE asumptions gives a fair value range of N68.82 – N
79.77.
Our fair valuation implies justified P/E multiple of 17.1x (on 2010F EPS)
and EV/EBITDA multiple of 9.4x.
Current market price is at marginal premium to fair value; hence, we

rate the stock NEUTRAL but will be quite willing to play the big beer
market at attractive valuation.
Our DCF-based NEUTRAL rating is consitent with historical market

valuation of Nigerian Breweries shares. NB’s shares have historically
been priced at a P/E multiple of 20x (5-year average P/E multiple of
using the data from September 2005 to date).
Fig 28:
Historical P/E multiple: 5-Y average of 20.4x
50.00
5-Y Avg. P/E + 1 SDEV 5-Y Avg. P/E = 20.4x Current P/E = 21.9x
40.00
30.00
20.00
10.00
5-Y Avg. P/E - 1 SDEV
The stock is currently priced at a P/E multiple of 21.9x, representing

some 7% premium over what is obtainable based on historical market
perception. We do not think there is any fundamental justification for a
change in this long-term valuation multiple. We however note that, NB
has enjoyed some 10% valuation premium over Guinness; which we
think is justified given NB’s better operating efficiency credentials.
Over a 12-month investment horizon, we think the market will reward

NB with a normal return given its 2010 and 2011 P/E multiple of 19.4x
and 16.4x (vs. long-term average of 20.4x).
Financial Performance
Over the past years, Nigerian Breweries Plc has taken strong advantage of
favourable dynamics in the Nigerian beer market to deliver robust growth
and value on the back of commendable operating efficiency. We x-ray this
performance along select KPIs in this section as this provides a
background to our outlook of the company as we have highlighed above.
Market position 2007 2008 2009 2010F 2011F 2012F

Nigerian Beer market size (mhl) 12.50 14.50 15.00 16.42 17.83 19.25
Beer market volume growth 13.6% 16.0% 3.4% 9.4% 8.6% 7.9%
Population (mn) 144 148 152 156 160 165
Beer PCC (litres) 8.7 9.8 9.9 10.5 11.1 11.7
NB's market share 56% 57% 60% 58% 58% 58%
NB volume 7.0 8.3 9.0 9.5 10.3 11.1
Price/mhl 15,964 17,600 18,245 18,884 20,240 21,673
Growth 2007 2008 2009 2010F 2011F 2012F

Volume 15.7% 18.1% 8.9% 5.8% 8.3% 7.6%
Price/mhl 12% 10% 4% 4% 7% 7%
Turnover 29% 30% 13% 9% 16% 15%
Core Operating profit 61% 35% 13% 13% 17% 16%
EBITDA 45% 31% 14% 11% 16% 15%
PBT 70% 35% 10% 12% 18% 16%
PAT 74% 36% 9% 13% 18% 16%
Profitability 2007 2008 2009 2010F 2011F 2012F

Return on Equity 48% 68% 71% 67% 76% 85%
Return on Assets 23% 26% 26% 28% 29% 30%
Margins 2007 2008 2009 2010F 2011F 2012F

Gross margin 53% 49% 46% 48% 48% 49%
EBITDA margin 29% 29% 30% 30% 30% 30%
EBIT/Sales 24% 25% 25% 26% 26% 27%
Pretax Income/Sales 25% 26% 25% 26% 26% 27%
Net Profit Margin 17% 18% 17% 18% 18% 18%
Appendix:
Income Statement (in N’mn) 2007 2008 2009 2010F 2011F 2012F
Turnover 111,748 145,462 164,207 182,905 212,233 244,478
Cost of Sales (52,564) (74,562) (88,734) (95,111) (109,724) (125,662)
Gross Profit 59,184 70,900 75,472 87,795 102,508 118,816
D&A (32,077) (34,314) (33,955) (40,239) (46,691) (54,030)
Core operating profit 27,108 36,586 41,517 47,555 55,817 64,787
Other income 249 192 145 159 191 220
EBITDA 32,587 42,543 48,457 54,788 63,616 73,375
Depreciation 5,230 5,765 6,795 7,073 7,608 8,368
EBIT 27,357 36,778 41,662 47,715 56,009 65,007
Net Interest 519 741 (263) (353) (141) 15
PBT & EI 27,876 37,519 41,400 47,362 55,867 65,022
Exceptional Items - - - - - -
PBT 27,876 37,519 41,400 47,362 55,867 65,022
Taxation (8,933) (11,818) (13,490) (15,156) (17,878) (20,807)
PAT 18,943 25,701 27,910 32,206 37,990 44,215
Balance Sheet 2007 2008 2009 2010F 2011F 2012F

Fixed Assets 50,195 63,558 69,003 72,453 79,698 87,668
Long term Debtors 272 80 206 226 249 274
Investment 150 150 150 150 150 150
Stocks 16,157 20,741 22,065 25,607 30,137 34,716
Debtors & Prepayments 7,586 3,850 3,589 4,307 5,169 6,203
Cash and bank balances 15,796 15,613 11,812 14,632 21,223 24,448
FX purchased for imports 393 421 163 549 637 733
Total Assets 90,548 104,413 106,988 117,924 137,263 154,192
Creditors & Accruals 17,946 25,863 24,290 32,923 38,202 44,006
Taxation 7,298 9,246 13,462 14,398 16,984 19,767
Dividend 4,170 19,667 4,567 6,119 7,218 8,401
Deferred taxation 11,360 14,110 14,322 17,616 21,316 25,153
Gratuity 6,591 3,298 3,777 3,966 4,164 4,372
Total Liabilities 47,365 72,183 60,418 75,022 87,884 101,698
Share capital 3,781 3,781 3,781 3,781 3,781 3,781
Share premium 4,568 4,568 4,568 4,568 4,568 4,568
Capital Reserves 7,325 7,240 7,095 7,095 7,095 7,095
General Reserve 27,509 16,639 31,125 32,736 34,635 36,846
Shareholders' Equity 43,183 32,228 46,570 48,180 50,080 52,291
Other quoted players

In this section, we give a brief insight into the world of 5 other quoted
players on the Nigerian Stock Exchange. As a group, they have a
combined market cap of N19bn (US$124mn), representing less than 3% of
the sector’s market capitalisation and are thinly traded.
International Breweries Plc:
IB Plc is the 3rd largest quoted brewer in Nigeria with a market cap of
N14bn (US$93mn). The share price has gained 207% YTD on the heels
of company-wide restructuring, capacity expansion and successful
turnaround in volume growth and profitability.
The Company was incorporated in December 1971 primarily to carry

out the business of brewing beer and non-alcoholic malt drinks. Its
brewery is sited in Ilesa, Osun State. Some of the company’s products
include Trophy Lager Beer and Beta Malt.
Following accelerated CAPEX programme in the past 2 years (about

N3billion) geared towards facility upgrade and capacity expansion,
International Breweries has set the stage for a robust performance.
Volume and turnover in 2009 increased 59% and 74% yoyo
respectively, with the company increasing installed capacity to 500k hl
p.a.
In April 2010, the Company launched Kronenbourg, Wilfort and Castel

beer, an offshoot of a new partnership with Calsberg and plans to
reintroduce its malt drink (Beta Malt).
In H1’10, the South-West based brewer recorded its highest profit in 11

years of losses. PAT climbed to N983 million from loss position of
N66million in H1’09, just as turnover jumped 166.14% to N1.88 billion.
Champion Breweries Plc
Champion Breweries Plc is the fourth largest quoted brewer (based on

market capitalisation) with N2.3bn (US$16mn) market value. The stock
has lost 18% of its value YTD.
Located in Uyo, Akwa Ibom State, it was incorporated in July, 1974 for
the purpose of brewing and bottling lager and Champ Malta drinks and
listed on the NSE in September 1983. The company has a running
partnership with InBev, a global player in the alcoholic drinks market,
in the domestic production of Beck’s in Nigeria. The Brewery has an
installed capacity is 500,000 hl of beer p.a.
The latest performance numbers of the company (FY December 2009)

revealed operational challenges with turnover declining by 18% to
settle at N1.2bn. A stronger loss position was recorded as loss before
tax climbed to N1bn (vs. loss of N851mn in 2008).
Jos International Breweries Plc
JIB Plc has a market value of N1.9bn (US$13mn) and the stock has lost
11% YTD.
Jos International Breweries Plc (JIB) came into existence in 1975

following a tripartite investment agreement signed between the
Government of Plateau State of Nigeria, the Danish firm of A/S
Cerekem International Limited and the Industrialization Fund for
Development Countries IFU. JIB is involved in the brewing of lager beer
in the brand names of ‘Rock’ and ‘Class’ as well as the production and
sale of malted drink in the brand name of ‘Malt Royale’.
The latest performance scorecards of JIB (2008 FY) revealed a turnover

of N1.01bn and a loss of N0.60bn.
Golden Guinea Breweries
Golden Guinea Breweries plc has a market capitalisation of N171mn

(US$1.1mn).
Golden Guinea Breweries Plc was incorporated in September 1962 and

subsequently listed in 1979. Located in Aba, the Company is engaged in
the brewing, bottling and marketing of Golden Guinea lager beer and
Eagle Stout, as well as the production and marketing of Bergedorf
premium lager beer and Bergedorf Malta under a franchise from Holsten
Brauerei AG of Hamburg.
The company has no relevant performance update in the public domain.
Premier Breweries Plc
Premier brewery has a market value of N117mn.
The Company was incorporated in 1976 and subsequently listed on the

floor of the NSE in 1988. It is located in Onitsha, Anambra State and
was incorporated for the purpose of brewing alcoholic products.
Financial performance numbers for the past 3 years revealed that

production must have been suspended as the company recorded zero-
turnover and mounting loss positions.
Un-quoted players
While we have a handful of fringe quoted players recording operating
losses, it is exciting to point out that the big unquoted players are faring
quite well with relatively good market shares in the upper single digits.
Consolidated Breweries Limited
Consolidated Breweries was incorporated in 1980 and is credited as the

third largest brewer in Nigeria after NB and Guinness, in terms of
volume share. Consolidated Breweries operates two breweries located
in Ijebu Ode, Ogun State and Awo Omamma, Imo State. The Company
has remained unshaken by the market majors, shaping a niche for itself
in the low price segment of the beer market.
Consolidated Breweries is majority-owned by Heineken with a

controlling interest of 50.4%. The Company is involved in the brewing
of its main lager brand. “33” Export, the Hi-Malt brand, a non-alcoholic
drink, and “Turbo King” which is its main route into the stout market.
Consolidated Breweries’ market share has been in the 7-9% range.
In a bid to further improve its current products mix, the Board recently
acquired 95.05% equity holding in Dumex Industries Limited/Maltex at
a cost of US$11.3 million following the divestment of CFAO Nigeria Plc.
The acquisition of DIL/Maltex will enable the company leverage on the
brand resilience of Maltex which is a mainstream malt drink.
Consolidated Breweries originally produces Hi-Malt, which serves the
low-income end of the malt segment.
This acquisition and the introduction of new products (Turbo King) are
already contributing to turnover as the company recorded 18% YoY
growth in turnover (FY’09: N20.7bn) though PAT dipped by 10.5% YoY
to N2.7bn, due to unfavourable increase in energy cost, finance charges
and higher effective tax rate.
The company paid final dividend of N3.52 per share for 2009FY, making
the total dividend paid N1.39 billion. This represents a payout of 52%.
Sona Breweries Limited
Sona Breweries is a member Company of the Sona Group which is in

the business of manufacturing beer, beverages, plastic and glass ware.
The Group practices a strategy of acquiring distressed companies and
turning them around by investing modern technology and efficient
management. In line with this strategy, the Group has stakes in
several other fringe brewers in Nigeria such as International Beer and
Beverage Industries (Nigeria) Limited (IBBI), Champion Breweries
Limited, Uyo, and Benue Breweries, and Life Breweries and Company
Limited.
Together, the above mentioned breweries are responsible for the

brewing of several alcoholic and non alcoholic products in the Nigerian
breweries market, some of which are Kronenbourg Beer, Tigre Bock,
Champion Lager Beer, and Champ Malta. Renowned brands from the
stables of the parent Company include Maltonic (a malted drink), Sun
Top (a line of packaged juices marketed under a franchise
arrangement), Wilfort Dark Ale, a 7.6% alcoholic product which enjoys
a monopoly position in the small ale segment of the lager market.
However, in the recent past, we have watched the Company emerge

from its previously inactive state, launching two new brands into the
Nigerian drinks market. The products are Williams, another dark ale,
quite like the previous Wilfort Dark Ale and Malta Gold, in the malt
drinks market.
Investment Recommendations
Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell.
Buy/Overweight ≥ +25% expected absolute price performance

Accumulate +10% to +25% expected absolute price performance
Neutral/Hold +/-10% range expected absolute price performance
Reduce -10% to -20% expected absolute price performance
Sell/Underweight ≤ -20% expected absolute price performance
Definition of Ratings
Buy/Overweight recommendation refers to stocks that are highly undervalued but with strong fundamentals and where
potential return in excess of or equal to 25% is expected to be realized between the current price and analysts’ target
price.
Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential
return of between 10% and 25% is expected to be realized between the current price and analysts’ target price.
Neutral/Hold recommendation refers to stocks that are correctly valued with little upside or downside where potential
return of between +/- 10% is expected to be realized between current price and analysts’ target price.
Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where
potential return of between -10% and -20% is expected to be realized between current price and analysts’ target price.
Sell/Underweight recommendation refers to stocks that are highly overvalued but with weak fundamentals and where
potential return in excess of or equal to -20% is expected to be realized between current price and analysts’ target price.
Disclosures: Analyst Certification

The research analysts who prepared this report certify as follows:
That all of the views expressed in this report articulate the research analyst(s) independent views/opinions
regarding the companies, securities, industries or markets discussed in this report.
That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to
the specific recommendations, estimates or opinions expressed in this report.
Other Disclosures
Vetiva Capital Management Limited or any of its affiliates (collectively “Vetiva”) may have financial or beneficial interest in
securities or related investments discussed in this report, potentially giving rise to a conflict of interest which could affect
the objectivity of this report. Material interests which Vetiva may have in companies or securities discussed in this report
are herein disclosed:
Vetiva may own shares of the company/subject covered in this research report.
Vetiva does or may seek to do business with the company/subject of this research report
Vetiva may be or may seek to be a market maker for the company which is the subject of this research report
Vetiva or any of its officers may be or may seek to be a director in the company which is the subject of this research
report
Vetiva may be likely recipient of financial or other material benefits from the company/subject of this research report.
CONTACTS
Vetiva Research Email
Oluwakemi Owonubi Head, Research o.owonubi@vetiva.com
Adesoji Solanke Analyst, Banking a.solanke@vetiva.com
Adedayo Idowu Analyst, Insurance a.idowu@vetiva.com
Razaq Ahmed Analyst, FMCG (Breweries & Conglomerates) a.razaq@vetiva.com
Adedoyin Adelakun Analyst, FMCG (Food & Beverages, Health Care) a.adelakun@vetiva.com
Uduakobong Equere Analyst, Oil & Gas, Energy u.equere@vetiva.com
Tosin Oluwakiyesi Analyst, Construction & Building Materials (Cement) t.oluwakiyesi@vetiva.com
Vetiva Wealth Management
Damilola Ajayi Head, Wealth Management d.ajayi@vetiva.com
sales@vetiva sales@vetiva.com
For further details, kindly contact
Vetiva Capital Management Limited

Plot 266B Kofo Abayomi Street
Victoria Island
Lagos, Nigeria
Tel: +234-1-4617521-3
Fax: +234-1-4617524
Email: research@vetiva.com, info@vetiva.com
Disclaimer
This research report is based on public information which the research analyst(s) consider credible and reliable. Facts and
views presented in this material have not been reviewed by, and may not reflect information known to, professionals in
other business areas of Vetiva, including the investment banking team, as Vetiva has established information barriers
between its Research team and certain business groups. Whilst reasonable care has been taken in preparing this
document, no responsibility or liability is accepted either by Vetiva, its officers or any of its employees for any error of fact
or opinion expressed herein. No reliance should be placed on the accuracy, fairness or completeness of the information
contained in this report as it has not been verified by the research analyst(s) involved or the companies whose securities
have been referred to except as otherwise disclosed. Neither Vetiva nor any of its officers or employees including the
research analyst (s) warrant or represent the accuracy or completeness of information set out in this report. Any ratings,
forecasts, estimates and opinions set forth in this report constitute the analyst(s) position as at the date of this report and
may not necessarily be so after the report date as they are subject to change without notice. It is also instructive to note
that a company’s past performance is not necessarily indicative of its future performance as estimates are based on
assumptions that may or may not be realized.
The value, price or income from investments mentioned in this report may fall as well as rise due to economic conditions,
industry cycles, market indices, operational or financial conditions of companies or other factors. Thus, Vetiva and its
officers and employees shall not accept liability for any loss arising from the use of this report or its contents in making
investment decisions or recommendations.
This report provides general information only. It is not intended to provide personal investment advice and does not take
into account the specific investment objectives, financial situation and the particular needs of any specific person.
Investments discussed in this report may not be suitable for all investors and the reader(s) should independently
determine their suitability and evaluate the investment risks associated with such investments. All investors are solely
responsible for their investment decisions. Any decision to purchase or subscribe for securities in any offering must be
based solely on existing public information on such security or the information in the prospectus or other offering
document issued in connection with such offering, and not on this report. Vetiva, through business units other than Vetiva
Research, may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and
reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the
different time frames, assumptions, views and analytical methods of the persons who prepared them, and Vetiva is under
no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of
this report.
To the extent this report discusses any legal proceeding or issue, it has not been prepared as nor is it intended to express
any legal conclusion, opinion or advice. Information relating to the tax status of companies whose securities are discussed
in this report is not intended to provide tax advice or to be used by anyone to provide tax advice. By accepting this
research report, you agree to be bound by the foregoing limitations.
Vetiva Capital Management Limited is registered with the Securities & Exchange Commission to conduct Financial Advisory,
Fund/Portfolio Management, and Trusteeship business in Nigeria. This document is for information purposes only and for
private circulation. No portion of this document may be reprinted, sold or redistributed without the written consent of
Vetiva Capital Management Limited. Vetiva research report is disseminated and available primarily electronically, and, in
some cases, in printed form.
Additional information on recommended securities/instruments is available on request. © 2010 Vetiva Capital

Management Limited. All rights reserved

Vetiva Research Brewery Sector Update 2010 - Brewing Growth - Malting Value

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Vetiva Research Brewery Sector Update 2010 - Brewing Growth - Malting Value

Uploaded by

Copyright:

Available Formats

Nigerian Brewery Sector

Brewing growth; malting value

Nigerian brewery sector is uncomplicated: the sector is largely dominated by 2

comparative benchmarks and 40% discount to levels attained in the 1980s; NB

a deserving long-term call on the sector.

moderately shielded against Nigerian macroeconomic risks as sales recover

2009/10 financial years. We believe the sector provides a solid route to

Investment Summary .................... 1

Nigeria in Global Context .................... 2

Overview of the Beverages Market .................... 4

Industry Structure .................... 5

Competitive Strategies .................... 10

Industry Outlook .................... 12

Investment Thesis .................... 18

Quoted Companies .................... 21 - 40

• Valuation and recommendation

Un-quoted Companies ................... 41

Nigeria in global context

The competitive landscape in the African brewery market is shaped by 4

TOTAL 100% 100% 100% 100% 100% 100%

Africa’s 2003 Share Africa’s 2008 Share

Source: Beverage Marketing Corporation, Vetiva Research estimate

As depicted in the figure below, if we are to assume convergence and

Fig2. Beer volume statistics

Source: Vetiva Research estimate

Beverages market Overview

In recent times, we have observed an emerging theme among the key

Source: Heineken, Vetiva Research

Brewery industry structure

Source: Companies, Vetiva Research estimates

The coming of the giants: Late to the party? It is incredible that

Fig 5: Key Global Players in Nigeria

Source: Vetiva Research

20.0 Peer Average

Source: Heineken, SAB Miller, Diageo and Vetiva estimate

Fig 7: Cost of sales ratio of African brewers

Selected African peers

Nonetheless, the brewers are still indirectly exposed to the volatility of

Route-to-market: Challenges remain despite retail outlet

While these, in addition to in-bar promotions, provision of chillers and cool

Full beverage portfolio: Brewers are looking more at additional growth

Segmentation: Significant milestone has been achieved with regards to

Lager (62%) Malt (24%) Stout (14%)

Heineken (1) Maltina (1) Guinness Extra Stout (2)

Premium Beck's (4) Amstel (1)

Malta Guinness (2)

Star (1) Top Malt (2) Legend Extra Stout (1)

Mainstream Gulder (1) Maltex (3)

"33" Export (3) Hi-Malt (3) Turbo king (3)

Champion Lager (4) Malta Gold (5)

Note: 1 Nigerian Breweries Plc's products

With respect to structure, we have earlier demonstrated that the demographic

But what impact will this have on beer volume growth?

Fig 10: Fig 11:

Source: IMF Source: CIA

If we work with the conservative assumption of holding other industry drivers

Capacity addition is warranted;

Fig 12: Estimation of potential volume gap based on 2015 population

2000 GDP per capita to hit US$1,839 in

demand and moderately strong domestic inflation.

As highlighted previously, we expect SAB Miller to play on pricing, given our

Fig 14: Fig 15: