Nigerian Breweries Plc 2020 Final Corporate Rating Review Report 2019 Corporate Rating Review Report Nigerian Breweries Plc Rating Assigned: This is a company that possesses very strong financial condition and very strong Aa- capacity to meet local currency obligations as and when they fall due. Outlook: Stable RATING RATIONALE Issue Date: 19 August 2020 • Agusto & Co. hereby affirms the “Aa-“ rating assigned to Nigerian Breweries Plc Expiry Date: 30 June 2021 (“Nigerian Breweries”, “NB Plc” or “the Company”). The assigned rating reflects Previous Rating: Aa- our opinion on the Company’s very strong financial condition evidenced by good cash flow, low leverage, adequate working capital, satisfactory profitability, stable and experienced management team as well as strong support from the parent Industry: Brewery company – Heineken N.V Group. However, growing competition in the Nigerian Brewery Industry, unfavourable regulatory stance, weak consumer purchasing power and uncertainty of the economic impact of COVID-19 pandemic remains a Outline Page Rationale 1 challenge for key operators in the Brewery Industry in the short to medium term. Company Profile 4 Financial Condition 7 • Nigerian Breweries Plc is a subsidiary of Heineken N.V of Netherlands Ownership, Mgt & Staff 12 Outlook 14 (“Heineken” or “the Group”) – one of the world’s leading manufacturers of beers Financial Summary 15 and ciders. Heineken operates in over 190 countries and has a rich portfolio of Rating Definition 19 over 300 global brands across alcoholic and non-alcoholic beverage categories with consolidated beer volume sales of 241.4 million hectolitres in the financial year ended 31 December 2019. Heineken N.V Group has credit ratings from two Analysts: international rating agencies - Moody’s (“Baa1”) and S&P (“BBB+”). Ikechukwu Iheagwam [email protected] • Despite the challenging macroeconomic environment and increasing competition Isaac Babatunde in the Industry, NB Plc’s profitability metrics in the financial year ended 31 [email protected] December 2019 (FYE 2019) remained satisfactory with an operating profit margin of 10.6%, return on assets of 8.3% and return on equity of 14%. Subsequent to Agusto & Co. Limited UBA House (5th Floor) FYE 2019, NB has continued to maintain market leadership and sustained 57, Marina operational efficiencies in the first quarter of 2020, thus resulting in a marginal Lagos improvement in performance. Nigeria • In FYE 2019, the Company reported an operating cash flow (OCF) of ₦45 billion, www.agusto.com which was sufficient to cover returns to providers of finance and adequate to fund other short-term obligations including the current portion of long-term loans due during the year under review. NB’s OCF to sales ratio of 14% in 2019 and three- year (2017 – 2019) average of 16% are in line with our expectations and better than peers in the Brewery Industry in Nigeria. • Nigerian Breweries has continued to maintain a low leverage position, mainly supported by its strong cash-generating capacity, good track and credit history as well as its optimal funding mix of equity (44%), spontaneous financing (42%) and interest-bearing liabilities (14%). As a result, the Company’s interest coverage The copyright of this document is reserved by Agusto & Co. Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Agusto & Co. Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited. Nigerian Breweries Plc ratio of 5.4 times and interest expense to sales ratio of 2.6% for FYE 2019 remained within our expectations and compare better than its peers. • Akin to the Industry norm which reflects the capital-intensive nature, NB Plc has consistently posted short term financing surpluses and long-term financing needs. Nevertheless, the Company’s short-term financing surpluses have been adequate year on year to cover the long-term financing needs, thus resulting in overall working capital surpluses over the last five years. • Going forward, Nigerian Breweries’ strategic growth plan is hinged principally on five building blocks, which it considers essential for sustained growth amidst the macroeconomic headwinds, increasing competition and uncertainties posed by the COVID-19 pandemic. Thus, Agusto & Co. expects NB to continue to maintain its market and cost leadership by volume growth across business segments, improve operational efficiencies, optimize working assets level, sustain favourable trade terms with suppliers and customers and leverage the support of the parent company. Also, cash flow is expected to remain strong occasioned by an optimal operating cash cycle, while leverage is poised to remain within acceptable limits, strongly supported by the Company’s good credit history and access to low-cost funds. Notwithstanding, NB’s profitability will be pressured in the short term due to the attendant impact of the COVID-19 pandemic. However, should the pandemic moderate in the near term, we expect a marked improvement in the overall performance in the medium term as the Company’s business fundamentals remain strong and sustainable. • Overall, we believe that Nigeria’s growing population, favourable demographics, low beer consumption per capita as well as Nigeria Breweries’ strategic initiatives on market leadership, cost efficiencies, the route to market strategies and diversified product offerings portends opportunities for growth in the medium term, despite the uncertainty of the impact of Covid-19 on the general outlook on the economy. • Based on the aforementioned and strong parental support from Heineken N.V Group demonstrated over the years through technical and management support, product innovation and human capital development, Agusto & Co. attaches a stable outlook to Nigerian Breweries Plc. 2 2020 Corporate Rating Review Report Nigerian Breweries Plc Figure 1: SWOT Analysis Strengths • Part of a strong global player - Heineken N.V Group of Netherlands • Dominant market position - accounting for about 60% of Industry market share • Diversified product offering • Strong financial condition • Qualified, stable and experienced management team Weakness • Declining margins Opportunities • Low beer consumption per capita of 11.8 litres in Nigeria, relative to other markets in the World • Favourable demography supporting consumption of alcoholic and non-alcoholic drinks • Large market with a population growth of 3% pa. Threats • Heightened competition across all segments in the Brewery Industry • Poor infrastructure and attendant high cost on operations • Security challenges prevalent in some parts of the Country • Tough regulatory environment • Attendant impact of COVID-19 on consumption patterns • Low consumer spending power 3 2020 Corporate Rating Review Report Nigerian Breweries Plc PROFILE OF NIGERIAN BREWERIES PLC Overview & Background Nigerian Breweries Plc (“Nigerian Breweries”, “NB Plc”, “NB” or “the Company”), a subsidiary of the Heineken N.V. Group1, is the largest brewing company in Nigeria in terms of asset size and market share. NB Plc was incorporated in 1946 as a limited liability company and produced the first bottle of its flagship brand, Star lager beer, at the Lagos Brewery in June 1949. The Company later became a public limited liability company and was listed on the Nigerian Stock Exchange (NSE) in 1973. In 2011, the Company acquired majority equity interests in two companies - Sona Systems Associates Business Management Limited (“Sona Systems”) with two breweries in Ota, Ogun State and Kudenda, Kaduna State, and Life Breweries Company Limited (“Life Breweries”) with a brewery in Onitsha. In 2014, Nigerian Breweries Plc merged with Consolidated Breweries Plc and as part of the merger acquired a majority equity interest (89.3%) in Benue Bottling Company Limited (BBCL). BBCL is an entity with no business activities that hold land, buildings, and some idle production assets, which have been fully impaired. In 2019, the Company incorporated 234 Stores Limited as a wholly-owned subsidiary to explore opportunities to deepen its route-to-market strategy. Nigerian Breweries has grown both organically and inorganically to become the leading brewing company in Nigeria, controlling about 60% of the lager market in the country as at end of December 2019. As at 30 May 2020, NB was one of the most capitalised stock on the NSE with a market capitalisation of circa ₦483.8 billion. Other major players in the Nigerian Brewery Industry are Guinness Nigeria Plc (a subsidiary of Diageo Group) and International Breweries Plc (part of the ABInBev Group). Figure 2: Key Milestones in Nigeria Breweries Plc's History 2015 - 2019 1946-1949 • Focused on • UAC and Heineken innovation to signed contract for 2000 - 2007 strengthen current incorporation of business and expand Nigerian Breweries • Nigerian Breweries opportunities into new Limited as a limited became a subsidiary of categories liability company Heineken • Incorporated 234 • First bottle