Beer makers’ return on capital leaves room for improved efficiency
Many successful fund managers say a company’s return on capital is the most important indicator of its quality.
This is because it measures the extent to which management firm has deployed shareholder’s resources in generating higher profit.
Consider three companies, Nigerian Breweries (NB), International Breweries and Guinness Nigeria, which operate in the same industry sector.
The table below shows the Return On Capital Employed (ROCE) of these brewers as stated in their third quarter 2017 financial statement.
Instead of just looking at the revenue generated by each company, the capital employed by the three companies should be compared.
Although Nigerian Breweries had more sales in the period under review and more assets, in terms of value, International Breweries’ and Guinness’ ROCE of 118.05 percent and 352.23 percent is higher than Nigerian Breweries 0.95 percent ROCE.
This means that International Breweries and Guinness Colgate-Palmolive have done a better job of deploying its capital than Nigerian Breweries. A higher ROCE indicates a more efficient use of capital.
ROCE should be higher than the company’s capital cost; otherwise, it indicates that the company is not employing its capital effectively and is not generating shareholder value.
There is intense competition in the beer industry as these three firms are intensifying strategies with a view to increasing their share of the market.
AB InBev is aiming for the consolidated business to be the 5th largest listed company on the exchange, sources say.
AB InBev acquired SABMiller last year which owns International Breweries Plc, Intafact Beverages Limited, and Pabod Breweries Limited.
Already, the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) has given approval to the merger following a regulatory filing by the board of one of the listed companies – International Breweries Plc.
Currently, AB InBev indirectly owns 75 percent of Intafact, 82.8 percent of Pabod and 72.2 percent of International Breweries. International Breweries Plc is currently listed on The Nigerian Stock Exchange and this may be preferred vehicle for bringing the consolidated entity to the exchange, sources said.
BusinessDay analysis shows that the top 5 listed firms on the NSE today by market capitalisation are Dangote Cement valued at N3.91 trillion, Guaranty Trust Bank N1.26 trillion, Nigerian Breweries (NB) N1.10 trillion, Nestle Nigeria N991 billion, and Zenith bank N757 billion.
Guinness Nigeria has a market capitalisation of N219 billion, while International Breweries (standalone) is currently valued at N170.64 billion.
BusinessDay calculations show that investors are paying up for International Breweries perhaps seeing the firm as a growth stock and better positioned to grow volumes (off a low base) given its value-focused portfolio.
International Breweries currently sports a trailing twelve months (ttm) price to sales ratio of 4.6x on sales of N36.62 billion, compared to 3.1x for NB and 1.6x for Guinness, according to BusinessDay data.
Johnson Chukwu, managing director and chief executive officer of Cowry Assets Management Limited says it is possible the shares of International Breweries will be issued in exchange for the shares of shareholders of the two unlisted firm under the control of the parent company.
“The additional shares of International Breweries will now be listed on the NSE. It means investors in those other companies will have their shares listed and owners will have increased liquidity. The total market capitalization on the exchange will also go up,” Chukwu said.
International Breweries shares have jumped 161 percent in the past year, Guinness Nigeria shares are up 19.79 percent while NB is up a mere 0.98 percent.
Nigeria is the second largest beer market in Africa and consumes some 16 million hectolitres of beer a year, about half as much as in South Africa, the continent’s biggest beer market.
The country’s per capita beer consumption is about 10 litres a year, compared to a global average of 35-40 litres, according to Morgan Stanley.
An expanding Nigerian middle class and the youthful population is helping drive beer demand, according to Euromonitor, which estimates the market was worth about N837 billion or $2.7 billion as at the end of 2016.
SAB Miller made inroads into the Nigerian market in 2009 when it acquired Port Harcourt-based Pabod Breweries, makers of Grand lager beer, and Ilesa-based International Breweries, makers of Trophy lager.
In 2012, SABMiller established a $100 million brewery in Onitsha, which makes the Hero lager brand.
AB InBev, the world’s largest brewer, acquired SABMiller, South Africa’s largest brewer, last year.
AB Inbev, plans to open Nigeria’s second largest brewery, a $400m mega plant located in Shagamu, Ogun State, soon.
More troubling for the other brewers (NB and Guinness), is AB Inbev’s possible gravitation towards price cuts as it sees ensuing margin improvements across its operations post-merger, according to analysts at CSL Research Limited.
“We particularly believe the ability of the AB Inbev’s newly-combined entity to absorb inflationary pressures will become stronger relative to rivals,” CSL Research analysts said.
“Post-merger of AB Inbev Nigerian operations, however, any price increases implemented by NB and/or Guinness could potentially cost them not just sales volume losses (caused by falling demand), but also market share losses to SAB Miller.”
AB Inbev’s well-diversified portfolio makes it easy for the brewer to consolidate its position in the market post-merger, BusinessDay market analysis show.
For instance, Trophy Larger Beer, produced by SAB Miller, is a premium brand in the South West while Hero, produced by Intafact, is increasingly making inroads in the South East.
International Breweries half year results for the September 2017 period, showed sales up 29.8 percent to N17.4 billion.
Olajumoke Okeowo team of research analysts at FBNQuest have been more positive on International Breweries Plc “because of the favorable segment (value segment) it operates in and its merger with Pabod and Intafact.”
Other brewers in the market are not just cooling off though as Nigerian Breweries (NB) the biggest beer-maker is said to be planning a new plant in Benin, while Guinness Nigeria Plc, the other major player is also looking to deepen competition in the sector following its strategy to build a total beverage portfolio, and the recent completion of its £12 million mainstream spirits plant in Benin.
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