Namibia Breweries Ltd. Solidly defending the home turf 28 October 2016 A succinct presentation of Namibia Breweries Company: Namibia Breweries results for FY16 is: 1) Owing to volume migration to South Africa, NSX Ticker: NBS revenue contracted by 0.3% to N$2,425.885m Sector: Beverages 2) Royalty income edged up 12.1% to N$88,615 Current Price: 2760 cents 3) Operating profit increased by 6.7% to N$540.674m Target Price: 2940 cents 4) PAT increased by 43.8% to N$508.113m Dividend Yield [%] 2,96 5) Finance costs increased to N$39.412m from N$8.847m mainly due to funding raised to Expected Total Return [%]: 9,48 acquire a 25% shareholding in Heineken South Africa 6) EPS increased to 180.3cps from 125.4cps. 7) HEPS fell by 0.7% to 185.7cps 8) The total dividend for the year stood at 77.0cps, thereby registering a growth of 8.5%. NB: All the monetary values are in units of 1000 DEVELOPMENTS IN THE GLOBAL BEER MARKET Beer production has witnessed a swift growth over the past few years and being the oldest consumed beverage in the world, the demand has led to a variety of offerings coming to the market. The various types of beers on offer such as light beers, premium beers, malt liquors, imported beers, popular beers, non-alcoholic beers, super-premium beers, ice beers, and malt liquors. The global beer market is segmented on the basis of: Light Beers Premium Beers Imported Beers Popular Beers SABMiller is reported to have agreed "in principle" to a 44-a-share offer by AB InBev. The Mega-Brewer, which is estimated to be worth about 70bn, will produce about 30% of the world's beer. SABMiller s global annual sales are about $26bn, while AB InBev s global revenues exceed $47bn. AB InBev's brands are largely concentrated in the Americas and Europe; SABMiller has about 40 brands in Africa. It is reported that AB InBev s appetite for SABMiller is predominantly on account of the growth of SAB Miller African brands. Table1: Ranking of The Top Ten Global Brewers By Volume Sales in 2014 Ranking Brewer Market Share[%] Ranking Brewer Market Share[%] Source: Plato Logic, NEB 1 Anheuser- Busch InBev 20.8 6 Tsingtao Brwery Co Ltd 4.7 2 SAB Miller 9.7 7 Molson Coors Brewing Co 3.2 3 Heineken NV 9.1 8 Beinjing Yanjing 2.8 4 Carlsberg A/S 6.1 9 Kirin Holdings Co Ltd 2.3 5 China Resources Enterprise Ltd 6.0 10 Asahi Group Holdings Ltd 1.2 SINE AQUA NON EST VITA = THERE IS NO LIFE WITHOUT WATER The persistent drought over the last two years has led to a situation whereby the Central Areas of Namibia are facing severe hydrological droughts (drought in rivers, lakes and groundwater). Being the largest industrial water consumer in Windhoek, which lies in the CAN, the water-shortage situation has prompted to migrate some 320,000 hectolitres of beer volume production to the Sedibeng Brewery. The second reason why some volumes have been migrated to the Sedibeng Brewer is ensure the long term feasibility and to optimize the JV s cost structure.
Owing to the lack of what could be termed a meaningful solution to the water shortage problem in the CAN and given the current water usage of 4.4 litres per litre of beer, Nambrew has been prompted to sink its own boreholes and so far sunk five of those. The company has permission from the municipality to exploit the resources in two of these boreholes and hopes to get permission for the remaining three. The climate change aspect sees the Congo air-mass so much closer to our air-space more consistently during the course of the season. The same southward shift sees the sub-tropical High Pressure belt core to move from its text-book latitude as illustrated at 30S to the frequently observed track sub-tropical High Pressure belt closer to 40S. The subsequent anticyclonic flow, which is approximately 8000 feet thick, is drawn into the sub-continent and it is normally moved towards the regular heat-low pressure core, to be found over the continental western interior. This synoptic weather pattern combination is a very positive foundation from which rainy weather develops, primarily in our context. Such an input will see rainy weather matching both the broader distribution ranges, scattered and widespread, to match more frequent intensity falls in the Productive and Substantial rainfall measures. The potential for a wet season is measured based on results well above the qualifying 130%, which is above the normal benchmark. This output of the wet season is the outlook expected at this stage for the extensive summer-autumn area of Namibia opined our weatherman John Olszewski. RATIONALE FOR THE BARLEY PROJECT In the traditional sense, beer is a generic term which refers to a fermented alcoholic beverage brewed from malt and flavoured with hops. Thus, malting barley has come to be perceived as one of the principal activities in the manufacturing of beer. The amount of malted barley that Namibia Breweries currently imports from Europe is estimated at 30,000 tonnes annually. Although, the long term objective, 10-year target plan, is to plant barley on land with an extent of 12,000 hectares, the Namibia Breweries barley project is still on a small scale and presently does not justify setting a malting plant. However, the objective is, once the numbers back up the intentions, to set up a malting plant that ideally should meet Namibia Breweries needs of approximately 40,000 tonnes of malted barley. In all likelihood to avoid over-commitment, we will not be surprised if a partnership can also be forged on this project. Malting is the controlled germination of cereals, followed by a termination of this natural process by the application of heat. Further heat is then applied to kiln the grain and produce the required flavour and colour. A basic rule is that, for malt to be made, the barley must be capable of germination, so maltsters source barley with a minimum germination of 98%. To be used in the brewing industry, barley must meet the following main criteria: High germination capacity Purity (in the variety) Graded grain Low protein content There are five stages in the process of converting barley into malt: Barley grading and cleaning Steeping (24 hours) Germination (96 hours) Kilning (24 hours) Malt cleaning and grading The colour of beer (white, blond or pilsner amber, brown or lager), depends on the roasting of the malt. The more the malt is roasted, the darker the colour of the beer. The processing cycle is completed in approximately 9 days. Approximately 120 to 130kg of screened barley are necessary to obtain 100kg of malt (depending on grain quality and purity). The average ratio or rule of the thumb used is 1.267 kg of screened barley to 1 kg of malt. Until the project reaches the requisite economies of scale, the locally grown barley is being blended with imported malted barley to produce the new offering, King. The offering has an alcohol content of 5.5% and its volume could go as high as 100,000 hectolitres.
OPERATIONAL OVERVIEW AND COMPARISON TO OUR PROJECTIONS In Table 2 and Table 3 overleaf, we show the geographic - and the customer contributions to revenue. Namibia Despite what looks like economic hard times, Namibia still remains the growth engine for beer products sales and the beer volume sales grew by 8,3%. Beer volume sales in Namibia account for 67,6% of all volumes sold by Nambrew (which is made up of beer, Fruittree, Aquasplash, RTDs, Vigo and McKane) The Namibian market is said to be growing at 4%-6% annually. Namibia Breweries believes its share of the beer market in Namibia is 85,0% Table 2: Geographic Percentage Revenue Contributions Geographic Allocation 2015 2016 Namibia 57,5 72,4 South Africa 37,5 21,9 Rest of the world 5,0 5,7 Table 3: Customer Percentage Contributions to Revenue Customer 2015 2016 DHN Drinks and Heineken SA 37,5 21,8 Sefalana Cash & Carry Namibia 9,1 11,4 Remaining Customers 53,4 66,8 OPERATIONAL OVERVIEW South Africa South Africa will all the more remain a crucial market for Namibia Breweries because of the vested interests that Namibia Breweries has in the country on the back of the 25% shareholding it has in Heineken South Africa. Built in 2009, the Sedibeng Brewery has a capacity of 4.5m hectolitres and is the standard-bearer for the South African operation. In FY16, Nambrews exported about 450,000 hectolitres to South Africa and that, in our opinion, represents a reduction of 42% in the volumes that normally are exported to this market. In addition to that, should the water problems in Namibia persist, the acquisition would have come at a most opportune moment, for it can be used for larger volume migrations. The partners objective is to capture further market share in South Africa by consolidating their efforts and leveraging their products. This is a tall order, but not unachievable. We also surmise that, come 2018, the South African operation will breakeven, after which Namibia Breweries will start harvesting handsome dividends from it. Table 4: Segmental Contribution to Revenue N$1000 FY14 FY15 FY16 Beer 2 105,731 2 266,443 2 240,987 % Change 3,0 7,6-1,1 Other 211,201 167,734 184,898 % Change -37,6-20,6 10,2 Table 5: Operating Expenses Breakdown N$1000 FY14 FY15 FY16 Raw Material & Consumables 927 394 860 587 730 524 Employment Cost 231 702 268 714 289 544 Admin. & Marketing Expenses 367 681 448 969 516 165 Railage & Transport 174 065 177 930 155 880 Repairs & Maintenance 52 994 50 572 67 735 Depr. Amort & Impairments 111 765 120 891 125 363 Export Market Ex-South Africa It is our considered opinion that these markets will always be peripheral and the mixed news emerging from these markets do vindicate this opinion. The current news that emerges from these markets is: Beer volumes decreased by 5% in the combined market Volume sales are reported to have doubled in Tanzania In Botswana volumes sales are said to have been flat Mozambique saw volume declines and high alcohol levies are being sighted as the reason. By 1H15, the news was that the Mozambican market had a glut of cheap imports from Europe. In FY16, the sales revenue declines from N$26,089m to N$1,741m can predominantly be ascribed to this market. The Zambian market situation is deemed to be challenging on account of currency devaluation In other markets (the UK, Germany and Australia), the strategy seems to be to leverage communities of individuals who have Table 6: Volume Contribution per category Category % Contribution Category % Contribution Namibia beer 67,6 Aquasplash 1,0 South Africa beer 20,7 RTDs 0,7 Export ex-south Africa 4,9 Vigo 0,6 Fruittree 4,0 McKane 0,5 Table 6: Percentage Volume Share Location % Volume Share Location % Volume Share Namibia 72,60 Swaziland 0,28 South Africa 22,24 Lesotho 0,10 Tanzania 2,03 Saint Helena 0,06 Botswana 1,07 Kenya 0,03 Zambia 0,83 Mauritius 0,02 Zimbabwe 0,38 Australia 0,02 Mozambique 0,29 China 0,01 visited Namibia as tourists and have thereby developed a taste for the Namibia Breweries brands or variously Namibians who have immigrated to these countries. The volumes sales in this combined market are reported to have remained flat in FY16.
OUTLOOK IN OUR OPINION The Positives The potential to leverage and maximise on the synergies with Heineken South Africa. To optimally use the locally grown barley by exploring other products until the economies of scale are achieved to set up a malting plant To further strengthen the secondary product distribution channel (supermarkets, liquor stores, shebeens, pubs and other hospitality outlets) of the logistic chain so as to own the direct customer relationship The Downside to the story The impending water scarcity in the central area of Namibia (CAN) should have a huge impact on the operating expenses of any water intensive business. Until last year, FY15, Namibia Breweries used 4.8 litres of water to brew 1 litre of beer and according to the latest company reports, that ratio has gone down to 4.4:1. As we stated in FY15, although the water scarcity will also affect the competition, we are jittery about the potential social-epidemics which can be caused by concerns over water utilization for issues that affect the public at large. Now, Nambrew has to deal with the combined might of the Mega Brewer, SAB Miller-AB InBev, which is quite a challenge. INCOME STATEMENT Our revenue projections are made based on the regional revenue contributions as well as divisional contributions. In the latter case, we use Nambrew s market share and the per capita beer consumptions in Namibia and South Africa. In our projections, we have ruled out an outright price war, and assume a quasicollusion whereby Nambrew and SAB Miller-AB InBev will price their offerings by mimicking the first mover s action. Strategically, we expect the two companies to try and match each other s offerings. The water shortage problem in Namibia could not have come at a worst time. Thus, although volume migration looks to be the only strategy for business sustainability it does have the potential to erode the profitability margins. Table 5: Income Statement N$000 FY15A FY16A % Ch NEB FY17[Projections] Revenue 2 434 177 2 425 885 5,4 2 556 973 Sales of Goods 2 432 806 2 432 491 5,1 2 556 973 Royalty Income 79 067 88 615 3,2 91 412 Discount Allowed -77 696-95 221-4,0-91 412 Rent Received - 2 344 0 Operating Profit 506 514 540 674 1,9 551 038 Operating Margins (%) 21 22-3,3 22 Profit Before Taxation 395 074 508 113 18,4 601 474 Net Profit 258 982 372 470 16,4 433 474 Net Profit Margins(%) 11 15 10,4 17 Shares in Issue 206 529 206 529 206 529 EPS(cps) 125,4 180,3-28,3 129,2 HEPS(cps) 187,1 185,7-30,2 129,6 DPS(cps) 71,0 77,0 6,2 81,8 NAVPS 505,5 609,0 18,2 719,7 ROE 26,2 32,4-10,8 28,9 VALUATIONS Last year, FY15, based on the activities that Namibia Breweries is carrying out in an effort to grow the business, we realised that there was a need to include a few more metrics. Hence, we added the EV/EBITDA and EV/Sales metrics to the arsenal that we use to value Namibia Breweries. These methodologies we use are: PE(x); Multi-stage DDM; EV/EBITDA and EV/Sales. Assigning variable weights to those, we arrived at a Blended Value of 2936cps, which we simply round off to 2940cps, the share price should vary in the range of 2852cps to 3028cps. RATIONALE FOR ADDING THE TWO EV BASED METHODOLOGIES Both metrics take into account the value and amount of debt a company has, which needs to be paid back at some point in time. A word on each one of them: EV/EBITDA This measure is not affected by changes in the capital structure, therefore when the capital structure of a company changes, it is more suitable than the P/E ratio. From its very definition one can see that this approach removes the effect of non-cash expenses such as depreciation and amortization, which is another positive aspect of this ratio. EV/Sales This metric compares the value of a company, inclusive of debt and liabilities, to the actual cash earnings exclusive of the non-cash expenses and gives the investors an idea as to how much it costs to buy the company s sales. It can also be used as gauge of how many dollars of EV are generated by one dollar of annual sales. Why we have specifically called up this measure is because of the near revolutionary developments in the global and regional Beverages Industry. Surely, the future will not be what it used to be.
CONCLUDING REMARKS & RECOMMENDATION Management has demonstrated business acumen and good understanding of the challenges. The acquisition of the 25% shareholding in Heineken South Africa, growing barley locally with the objective of eventually setting up a malting plant and the emphasis placed on owning the direct customer relationship are crucial strategic initiatives. What is somewhat worrying to us is the fact that the bulk of the group revenue is contributed by Namibia. As a country, Namibia has some binding constraints and unfortunately some of those are immutable and hence can handicap growth beyond a certain threshold for a beverage business. Our projected dividend gives a DY of 2.96%, while the Blended Fair Value leads to a potential share price gain of 6.52%, implying a total return of 9.48%. On the basis of the fact that GC21 has a yield of 9.22%, one would be tempted to call NBL a HOLD. However, the good quality Namibian stocks tend to trade at a premium, therefore one cannot not rule out the possibility of the share price reaching 3028cps. This publication has been issued by Namibia Equity Brokers (Pty) Limited. It is confidential and issued for the information of clients only. This document may not be reproduced in whole or in part without the direct written permission of Namibia Equity Brokers. The information contained herein has been obtained from reliable sources and persons, but accuracy, completeness or any other aspects pertaining to this document can not be guaranteed. All opinions expressed and recommendations made are subject to change without notice. No information contained herein, opinion expressed or recommendation made constitutes a representation by Namibia Equity Brokers. This document is by no means a solicitation for the purchase of securities mentioned herein; Namibia Equity Brokers will accept no responsibility whatsoever arising here from or in consequence hereof. Securities or financial instruments mentioned herein may not be suitable for all investors. Securities of emerging and mid-size growth companies typically involve a higher degree of risk and more volatility than the securities of more established companies. The recipient of this report must make its own independent decisions regarding any securities or financial instruments. Past performance is not indicative of future results, and investors may receive less than their initial investment. The inventories of Namibia Equity Brokers (Pty) Limited and its employees may from time to time include securities mentioned herein.