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Company Research

Namibia Breweries FY14 Results Review

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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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Oryx FY14 Results Review

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Oryx Properties Limited (Oryx) released its results for the financial year ended 30 June 2014, reporting 6.1% distribution growth to 148cpu from 139.5cpu reported in FY13, 3.5% higher than our estimate of 143cpu. Over the same period, EPU rose by 99% to 331.75c on the back of a significant increase in fair value of investment property and a bargain purchase gain of N$26.7m due to the revaluation of the Gustav Voigts Centre after its purchase. HEPU rose by 8.9% to 162.16c from 148.89c in FY13 – above our estimate of 143c.

The company displayed another period of good operational performance, with net rental income increasing by 23.7% y/y to N$162.9m – in line with our estimate of N$163.6m, supported once again by above average occupancy levels (reported at 99.1%) and new rental streams from Maerua Mall, as well as the Gustav Voigts Centre being included for the first time. Oryx reported a profit of N$106.9m (up over 600% y/y), despite a sharp increase in rental expense and finance costs. The additional profit being attributable to the fair value gains, bargain purchase gain and growth in revenue. Headline earnings grew by 22% to N$100m. Much of this increase was due to revenues attributable to projects funded through the rights issue and thus per unit growth was lower at 8.9% as stated above.

Vacancies (as a % of lettable area) increased from 0.4% in FY13 to 0.9% in FY14. This is more in line with our benchmark rate of 1.5% and we expect to see a further slight deterioration in the occupancy rate over the next year due to competition in the form of the Grove and other malls as well as a normalisation in the retail occupancy levels.

As at year end 2014, Oryx’s properties were valued at N$1.977bn. Retail made up the largest percentage of the valuation at 64%, Industrial contributed 29% and Offices 7%. In November 2013 Oryx acquired a 100% interest in Tuinweg Property Investments (Pty) Ltd, the owner of the Gustav Voigts Centre. Thus the centre has contributed to the increase in rental income from this time. The Maerua expansion and upgrade was completed during the course of the financial year (with the exception of internal works at Checkers) and has also contributed greatly to the increase in rental income. 2015 will be the first year that these two additions will contribute 12 months of rental income which will lead to higher revenues.

The distribution reported translates in a 12 month distribution yield amounting to 8.2%, a decline from 8.9% for the same period last year. The decline can be seen as a function of a high share price and the rights issue leading to more units in the base calculation. The last day to trade for the second half yearly distribution of 80.75cps was on 5 September 2014, and the payment date was on 26 September 2014.

Based on our FY15 forecasted distribution of 149.9cps, the current unit price is above our warranted price of N$16.30, based on a justified yield of 9.2%. Nevertheless, we do not believe that the company’s unit price will decline to this level due to supply-demand limitations within the local equity space, and thus have a target price at the current level of N$18.20. Thus, the total return expected is described by the distribution per unit only. We keep our HOLD recommendation for 2015 as we feel that the strong management team has the ability to continue to add value to the share price in the long term, despite the current period of consolidation following major investment and unit-price growth over recent years. Stronger growth is forecasted for 2016 and 2017.

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Bidvest Namibia FY14 Results Review

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FY14 Results

BVN released its results for the year ended 30 June 2014. The firm posted reasonable results in light of the difficulties the fishing division finds itself in. EPS fell 10.6% to 129.6cps and HEPS decreased 10.4% to 129.5cps.

Costs almost sunk the ship

While BVN managed to grow revenues by 10.4% y/y to N$3.7bn, mainly attributed to the commercial businesses, cost of sales grew at 13.8% and operating costs by 36.9% to N$385.3m from the N$281.4m reported for FY13. The main reason for the witnessed cost increase was a sizable increase inquota rentals fees, following a reduction in direct quota allocation to BVN from the Ministry. Trading profit shrunk by 16.7% y/y to total N$501.3m. As usual, the fishing division supplied the largest chunk of trading profit, coming in at N$407.1m or 81%. This figure is 23.0% lower than the N$528.5m seen in FY13, despite the division’s individual revenue increasing by 4.6% y/y, reflecting depressed margins.

Price pressure

Price regulations in the Democratic Republic of Congo, coupled with artificially reduced demand from Nigeria following import restrictions, resulted in an oversupply in the company’s traditional markets, leading to a 18.6% decline in average realised selling price in US$ for horse mackerel. The weaker Namibian Dollar offset the lower US Dollar price effect on revenue, but also had a significant impact on costs. The weaker N$ is expected to remain the silver lining for this division, amidst cloudy conditions that prevail.

Uncertain outlook for Bidfish

The outlook for the fishing division remains challenging according to company management with uncertainties surrounding quota allocations. Additionally, we foresee the market price for horse-mackerel remaining depressed over the next year, as supply continues to outstrip satiable demand. The urgent application by Namsov against the Ministry of Fisheries and Marine Resources as well as the Government over reductions in fishing quotas will be heard in the High Court on 9 October 2014, and the outcome of this courts decision will have a significant impact on the performance of the fishing division, especially in the first half of the 2015 financial year.

Valuation and Recommendation

The stock is currently trading on a FY16 yield of 4.68% based on full year dividends of 61cps at an assumed 54% payout ratio. This compares negatively to its average yield of 4.8% since listing, but remains a good yield in general.

The positive economic environment bodes well for the revenue growth in the commercial businesses, however weaker selling prices of horse-mackerel and lower quota allocations add strain torevenue growth in the fishing division, while the cost of securing additional quota will negatively affect the company’s bottom line, thus revenue and trading profit margins are expected to contract further through FY15 and decrease earnings visibility.

We have adjusted our earnings forecast and target price following a detailed analysis of the full year results. We forecast FY16 earnings of N$1.10 per share and calculate a warranted price of N$12.30 per share based on a justified PE ratio of 11.2 times. We are concerned about the possibility of a dividend cut given the outlook of the company, however we do not expect the stock to trade lower from current levels given the illiquidity of the stock and the possibility that once sold units may be difficult to rebuy in future, thereforewe change our BUYrecommendation to a HOLD recommendation.Based on our target price of N$13.00, the 12m total return is expected to be 4.3%.

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