Is Nigerian Breweries overvalued? That has been the question on my mind since their 2017 Full year results was released on Thursday.
The company reported a profit after tax of N33 billion up from N28.4 billion a year earlier. here are quick highights of its result.
- Revenue of N344.5 billion representing a growth of 10% from N313.7 billion a year earlier.
- They also reported an EPS growth of 15% to 413 kobo compared to 358 kobo a year earlier.
- The Board of Directors also declared a final dividend per share of N3.13, which inclusive of an interim dividend of N1.00/share, brings total dividend for the year to N4.13 (FY16: N3.58).
- This of course implies dividend growth of 15% YoY and a dividend pay-out ratio of 100% and dividend yield of 3%.
- The company is basically paying out all its profits as dividends.
So why do we think it is overvalued? The chart below will provide some explantion
Nigerian Breweries has over the last 5 years traded at a price earnings ratio of between 24x and 32x. This suggest the market expects the stock to grow its earnings every year. Unfortunately, this has not been the case.
As the chart above depicts, Nigerian Breweries has recorded a decline in its earnings per share over the last 5 years, going from N5.7 per share to as low as N3.58 per share in 2016. It’s share price rose again to N4.13 in 2017 but still lower than the N5.7 reported in 2013. Nigeria Breweries’s earnings has recorded a compounded annual growth rate of -7.7% annually since 2013 for the last 5 years.
The stock is also trading at a price to book ratio of 5.8x, meaning that its market value is nearly 6 times its Net Assets. Important to consider that Goodwill makes up about 49% of the company’s net assets, according to comments from its Auditors, Deloitte. At that multiple, it is difficult to understand why it is worth as much as N1 trillion when its Net Assets is just N382 billion.
This means that the 32x earnings multiple assigned to the stock by investors is not tenable as the stock has not grown its earnings in the last 5 years. But we understand why the stock is overvalued.
Just like Guinness, Unilever, Nestle and other foreign majority owned stocks, investors assign a valuation to a stock on the basis of the multiples assigned to their peers in Sub-Saharan African countries. If Nigerian Breweries sister company in South Africa or Kenya is trading at 25x earnings, then it is expected that the Nigerian entity should be trading that high too. Does this make sense? No, except you are a foreign investor with a majority stake in the entity.
What should a retail investor do?
As a retail investor, you are best served if you own this stock strictly for capital gains. Dividend yield on the stock is a meagre 3% and nothing to write home about. However, investors in this stock can only hope that the share price will provide an upside for capital appreciation.
Unfortunately, the latest result does not provide any major confidence that the company will be growing earnings any time soon. They said this much in the earnings guidance issued in the press release that accompanied the result. According to the company, consumer confidence is still down following the harsh macro-economic conditions.
The results also clearly shows the company was able to grow revenues not because Nigerians are drinking more beers (volumes dropped) but by increasing price. Demand for beer is also expected to plummet this year, following plans by the government increase taxes on alcoholic drinks.
Nigerian Breweries share price closed at N131.4 at the close of business on Friday losing 40 kobo. It is up 19% in the last one year.