Business Hilights

Tracking Nigeria's Headline Business News Online

Access NBreweries 2

Five factors that will make or mar brewing sub-sector in 2020

Ad 2
Ad 3

Fresh outlook for the Nigerian Consumer Goods Sector, with a key focus on the Brewers by Cordros Securities has identified four factors that will shape the Nigerian brewing industry from next year.

In a new report made available to our correspondent in Lagos, the group said “For 2020, we adopt a less cautious stance on the Nigerian Brewery sector. Compared to 2019, when we were wholly negative, we now see some value for 2020: bearish sentiment has led to depressed valuations at a time when we see a catalyst to earnings from beer price increases. “Nigerian Breweries (TP: NGN63.30) is our preferred play as we feel the company will continue to deliver solid leadership, especially in the premium space. Thus, we rate the stock a ‘BUY’.

The outlook said the sector is not out of the woods yet as fundamentals remain challenged: (1) relatively weak economic growth outlook, (2) pressured consumer wallets, (3) higher production levies, and (4) intense competition for market share. We have a negative outlook on Guinness Nigeria (TP: NGN24.81) as we are not entirely convinced about management’s strategy to deliver above target earnings growth; the near terms risks to margins and earnings are high. Thus, we rate the stock a ‘SELL’.

Aside the four factors listed above, market survey by Business Hilights Intelligent Unit (BHIU), pointed out that “The new VAT regime from 5% to 7.5% will further force brewing firms to cut outputs to avoid unsold as disposable incomes of many Nigerians will be affected by the still fragile economy, thus creating strong  discouragements for drinking.  

Still yet, higher beer prices to serve as new impetus on the heels of the VAT hike may backlash the industry.

Business Hilights recalls that NB, in November 2019, had increased crate prices to distributors on Heineken and Legend – both Premium brands –, each by 1.8% (NGN50.00), and on 33 Export, a mainstream brand by 5.6% (NGN100.00).

GUINNESS also followed suit, increasing the price of Guinness Foreign Extra (Premium) by 1.5% (NGN50.00). This is a welcome development, as this is needed in order to compensate for rising excise costs and weaker volumes. We note that the price increases are focused mainly at the premium segment, which grew double-digit last year, and according to NB’s parent company, Heineken NV, has been growing double-digit over the previous 3 quarters. Consumers in this segment are not as price-sensitive, relative to the mainstream and value customers, and as such a significant drop off in volumes is not expected.

Within next year, the prevailing macro pressures in the sub sector are likely to continue, although growth is expected to pick up next year.

According to Cordros Securities, “We believe that 2020 will remain tough for Nigeria from a macroeconomic standpoint, and even more so for consumers. Upward adjustments on electricity tariffs next year, Increase in VAT, and the land border closures, provide scope for renewed inflationary pressures – we forecast average inflation of 12.77% in 2020 – thus, offsetting the impact of the new minimum wage, which we do not expect to be fully implemented across all regions of the federation.

“This should keep consumer discretionary spend under pressure. Additionally, higher energy costs are likely to weigh on COGS, and with brewers still unable to fully transfer the cost burden to consumers, we expect some contractionary margin pressures,” the group averred.

Business Hilights is an online news channel conceptualized and structured to report and track on a daily basis; latest developments in critical business sectors to serve as a one stop news gateway for governments, foreign and indigenous investors.