There has been talk recently of probably how overvalued most Nigerian stocks currently are. It may seem ominous considering that there are quite many undervalued stocks out there particularly in the financial sector. But you really can’t blame them when you consider how some so called “Blue Chip” stocks continue to attract seemingly high valuations. A typical example is Nigerian Breweries, one of the oldest and most consistent company quoted on the floor of the Nigerian stock exchange.
Nigerian Breweries posted a profit after tax of N43billion for its full year ended December 2013. The company has grown at a compounded annual growth rate (CAGR) of 11% and revenues have also grown at 10% CAGR. This year, profit after tax also grew 15% year on year for the first half of 2014. These are good numbers but does it justify a valuation of N176 (N187 last week)? That’s were I beg to disagree for the following reasons.
Price Earnings Ratio – Nigerian Breweries currently has a price earnings ratio of 31x. Now we do know Blue chip stocks have such high valuations in this market but is 31x justified based on its fundamentals? The earnings growth of the company doesn’t justify that high valuation in my opinion. At that P.E the PEG ratio is 3x and way beyond the reach of any value investor. Growth investor? The stock has returned 6% this year so it doesn’t quite posses the capita appreciation ability growth investors seek. At 31x P.E ratio, there is little room for an upside here.
Forecasted Price Earnings Ratio – According to Bloomberg stock quotes NB has a forecasted P.E ratio of 27x suggesting there is little room for a growth investor to glean an upside. Nothing in here suggest a stock that can return double digits one year from now. You also have to realise that Nigerian Breweries is in a very competitive market with smaller (backed by bigger owners) and more nibble brewers popping up. They still own a huge share of the market but that market will shrink in the coming years as Nigerians seek for cheaper beverages and beers. It’s hard to see the company grow above our GDP rate in a couple of years.
Dividend Hunters – This is where it even gets harder. NB paid dividend of N4.5 for 2013 which at the current price is a dividend yield of about 2.5%. For a stock with a single digit capital appreciation growth, that is a hard sell for any dividend hunter. By the time you buy and sell the stock your 2.5% is pretty much wiped out by tax, fees and charges.
Valuation – Nigerian breweries has risen by 33% on a CAGR basis for the last 5 years. It has returned 333% from the N43 it was five years ago. So really, maybe the current stunted growth in capital appreciation is a blip. But that is not for me to determine, I can only just base my valuation on my modest metrics. By my estimates, if Nigerian Breweries grows its Earnings per share at a CAGR of 11% for the next five years and discounted to todays price (using 10% DCF) it is only just worth about N100. Now the last time Nigerian Breweries traded at that price was in April 2012 and even at that price P.E ratio was about 20x by my estimates. Therefore, it is a stock that will always attract high premiums (but not at this price). I could buy at N120 just to accept that premium but even that is a brave move and purely short term.
Finally, Nigerian Breweries is a defensive stock and one you want to have in your portfolio if you are a pension fund or a mutual fund. A correction isn’t farfetched in the near to medium term making this a risky investment for a small time investor. As such a retail investor with between N100,000 to N1million may want to look elsewhere. The dividend yield isn’t worth it at this price and capital appreciation isn’t assured considering the high P.E ratio. You might buy it and make 10% net or lose 10% net. This price isn’t worth the risk to me. I would look elsewhere for a bargain.
