Namibia Breweries FY14 Results Review

FY14 Results

Namibia Breweries (NBS) released results for the year ended 30 June 2014. The full year results reflect disappointing operational performance with operating profit down 9.7% y/y. Basic EPS rose 181.9% y/y to 99.5c, coming of a low base after the N$188m impairment to its investment in DHN Drinks (Pty) Ltd last year that resulted in a decrease in earnings per share in FY13. HEPS, however, is down 10.5% from 177.8c to 159.1c. The board declared a final dividend of 34cps, taking the total dividend for the year to 68cps,up 9.7% on last year, with last day to trade cum 21 November 2014.

Sales and Volumes

Although NBSmanaged to increase local sales volumes, revenue fell by 2.8% y/y to N$2,316.9bn,with the contraction stemming from the migration of production volumes to South Africa.Total sales of goods, however, are down 3.0% y/y while royalty income rose 2.9%.Locally,sales volumes growth was seen across the board, led by Tafel Lager. Ready to drink (RTD)and soft drink sales recorded double digit growth compared to last year, confirming the market’s positive uptake of the Vigo soft drink.

SAB MILLER

Despite the strong macro environment, we are concerned about the possible impact the SAB Okahandja Brewery might have on NBS. SABMiller Namibia started production at its 260 000 hectolitre brewery in Okahandja during September this year. The introduction of the returnable format by Castle Brewing will change the competitive landscape of the Namibian brewing industry. SAB targets a medium term market share of 30% in Namibia.

DHN Drinks JV

The equity loss from the JV increased to N$120.0m in FY14, with the increase attributed to a fiercely competitive environment in South Africa and higher cost of goods sold per unit due to unfavourable production levels and mix. Although the DHN Drinks JV still shows a loss, taking into account royalties and production margins that NBL earn through selling to DHN Drinks directly from their Namibian brewery, NBL continue to make positive returns from the ongoing operations in South Africa. The volatility in the line item emphasises its unpredictable nature and uncertainty going forward.

Valuation

We value NBS using the dividend discount model, with the required rate of return of 11.5%, based on a risk free rate of 8.22% (GC24), equity risk premium of 4.09% and a beta of 0.8, and a long-term sustainable growth rate of 7.5%. Based on these assumptions and our forecasted dividends for NBS, we value the company at an intrinsic value of N$15.70 per share.

Using a justified PE multiple of 12.8x, however, we forecast a target price for NBS of N$16.40 per share. This implies anexpected total return of 3.9% over the next twelve months, largely supported by dividend payments. We are concerned as to the effect SAB will have on the company’s market share going forward as well as the losses being carried as a result of the JV, however we do not expect the stock to trade significantly lower than current levels over the next 12 months given the illiquidity of the stock and the possibility that once sold shares may be difficult to rebuy in future, therefore we keep our recommendation on a HOLD.

We remain, however, concerned about the NBS business going forward, as we expect the increased competition in the local market to drive margin compression and sales-volume reductions for the business. Additionally, the losses experienced within the JV, and the migrating of local production to the Sedibeng Brewery are concerning, in that royalties from production at Sedibeng are significantly lower than lost revenues due to this migration, and this volume migration appears inadequate to notably reduce the JV loss, or make the JV profitable.

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Namibia Breweries FY14 Initial Impression

FY14 Results

Namibia Breweries (NBS) released results for the year ended 30 June 2014. The full year results reflect disappointing operational performance with operating profit down 9.7% y/y. Basic EPS rose 181.9% y/y to 99.5c, coming of a low base after the N$188m impairment to its investment in DHN Drinks (Pty) Ltd last year that resulted in a decrease in earnings per share in FY13. HEPS, however, is down 10.5% from 177.8c to 159.1c. The board declared a final dividend of 34cps, taking the total dividend for the year to 68cps,up 9.7% on last year, with last day to trade cum 21 November 2014.

Sales

Although NBSmanaged to increase local sales volumes, revenue fell by 2.8% y/y to N$2,316.9bn,with the contraction stemming from the migration of production volumes to South Africa.Total sales of goods, however, is down 3.0% y/y while royalty income rose 2.9%.Locally,sales volumes growth was seen across the board, led by Tafel Lager. Ready to drink (RTD)and soft drink sales recorded double digit growth compared to last year, confirming the market’s positive uptake of the Vigo soft drink.

In South Africa,total volumes produced by NBS and sold to theDHN Drinks joint venture (JV) decreased, with total beer and RTD volumes down 24% and 87% respectively, which according to management is according to plan. This resulted in the value of sales decreasing 29.2%%. Total beer volumes exported to Tanzania and Mozambique increased compared to the previousyear, thus showing good growth in volumes albeit from a low base. However, RTD volumes sold to export markets were down 36.0% compared to last year.

Export sales declined as a percentage of total sales of goods, falling to 45.9% from 61.3% a year ago. This means that local sales now outweigh exports.

JV losses and Operating Margin

The equity loss from the JV increased by 10.4% or N$11.3m, to N$120.3m, contributing negatively to the bottom line. NBS operating profit decreased 9.7% as a 2.8% decline in revenue was coupled with weaker operating margins. The operating margin decreased 1.5pps to 20.5%. In our view a fierce operating environment in SA has most likely resulted in lower margins and increased losses from the JV.

Cash Position

Cash flow from operating activities decreased significantly from N$481.3m to N$265.9m, down 44.8% from the prior financial year, to a total of N$55.9m, less than the dividends payable of N$70m. We are also concerned that available cash decreased significantly despite the fact that working capital was cash flow positive.

Valuation

We currently have a HOLD recommendation on NBS and looking forward we remain concerned about the increased competition in the local market after the construction of the SAB Brewery in Okahandja. However, we will update our forecasts and target price followingdiscussions with management and further analysis.

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