After conducting distribution and channel checks in Nigeria recently, we came away with a more cautious view on volume and pricing growth. With the worsening macro and expected tighter rate environment, we raise our WACC assumptions and compare Guinness Nigeria (GN) with Nigerian Breweries (NB) on their cash positions. As a result, NB is still our preferred play in Nigeria, but we downgrade our rating to HOLD (from Buy) and lower our TP to NGN138/share (from NGN162). We maintain our SELL rating on GN, but lower our TP to NGN99/share (from NGN103).
Worsening macro
Investors are familiar with Nigeria’s current problems, but with inflation edging upwards and another devaluation on the cards, we believe the operating environment will become even tougher in 2015. Yvonne Mhango, our SSA economist, forecasts core inflation of 13% with real wage growth moving further into negative territory. Beyond core inflation eating into consumers’ disposable income, the Nigeria Labour Congress (NLC) is now contemplating reducing the minimum wage as it believes the level is unsustainable with current oil prices.
3Ds: Devaluation, distribution and debt
This year, the lack of pricing power at the brewers will likely hit operating cash-flow, which we think will face pressure on the back of the devaluation. Furthermore, with subdued demand, the credit facilities that the brewers provide to their distributors could lead to a longer cash-conversion cycle. NB’s negative cash-conversion cycle places it in a stronger position than GN. NB also has minimal debt vs GN whose borrowing has increased 3x in 1H FY15 vs FY14.
GN to cut dividends
We analyse the funding requirements in FY15 for both GN and NB and conclude that GN will have to cut its dividend pay-out ratio or come to the market to raise equity as it faces a funding gap of ~NGN14.3bn, whilst NB has excess cash and will be able to maintain its pay-out ratio, in our view.
Downgrading TPs, but still prefer NB
We downgrade NB to HOLD (from Buy) with a lower TP of NGN138/share (previously NGN162), and maintain our SELL rating on GN and lower our TP to NGN99/share (previously NGN103), on the back of higher WACC assumptions. We believe 2015 will be one of the toughest years for the consumer in Nigeria and only those companies with strong balance sheets and cash positions will be able to weather the storm. As a result, NB remains our preferred brewer in Nigeria.
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