Chioma Francisca Nwabuaju

Financial Statement & stock exchange report on Nigerian Brewery PLC Table of content: Introduction Director’s comment analysis Auditors comment analysis Ratio Analysis/timeline series Introduction: The objective of this report is to analyze the financial statement from stock exchange market of this company (Nigerian brewery) while proposing it’s financial cash flow, market stock analysis, ratio/timeline series of the stock exchange market using the impending market flow through proper evaluation of its net worth, gross income, net cash flow, inventories, investment and 4 years annual financial reconciliation. As detailed already, Nigerian Brewery PLC has a Share Exchange Ratio that were determined on the basis of the relative values. Nigerian Breweries, operates as a public limited liability company quoted on The NSE, was incorporated in November 1946, under the name, “Nigerian Brewery Limited”. The name was changed in January 1957 to Nigerian Breweries Limited and thereafter to Nigerian Breweries Plc in 1990. Nigerian Breweries is a subsidiary of Heineken and has benefited from Heineken’s technological, logistics, marketing and managerial expertise. It is a company with an enviable track record of consistent and sustainable growth and has contributed significantly to the development of Nigeria and the economy. Nigerian Breweries is engaged in the brewing, marketing and selling of both alcoholic and non-alcoholic beverage drinks. Its brands are Heineken lager, Guilder lager, Star lager, Maltina malt drink, Amstel Malta, malt drink, Fayrouz soft drink and Climax herbal energy drink. Others are Goldberg lager, Legend Extra Stout, Life Continental lager, Malta Gold malt drink and Star Lite lager. Nigerian Breweries operates from nine operational breweries/plants nationwide – Lagos, Aba, Aba Malting Plant, Pudenda (Kaduna), Kakuri (Kaduna), Ibadan, Ama, Ota and Onitsha. The brewery at Ama, Enugu is the biggest brewery in Nigeria. Nigerian Breweries has over the years created, and continues to create, sustainable economic opportunities for various other businesses by making sustainable investments in its value chain. Nigerian Breweries was the first brewer to use sorghum in its production processes in Nigeria and today has the largest sorghum malting plant in Africa (Aba Malting Plant). The company has created over 500,000 jobs (directly and indirectly) in the agricultural sector, manufacturing sector (makers of bottles, crown corks, labels, plastic crates, cans) and other service providers (such as transporters, distributors, event managers, advertising and marketing communication agencies) amongst others. Nigerian Breweries‟ authorized and paid up share capital as at 31 December 2013 were N4.00 billion and N3.78 billion respectively, while the Shareholders‟ funds as at 31 December 2013 stood at N112.36 billion. Total Assets as at 31 December 2013 were in excess of N252 billion. Nigerian Breweries is the second largest listed company on The NSE, with a market capitalization of about N1.13 trillion as at 8 May 2014 and over 115,000 shareholders Director’s comment analysis: The directorial comment discussed the value of the key stakeholders, the scheme merge hierarchical company policy and their engagement with FCMB capital market limited as well as the soliciting of their financial adviser their corporative decision of making production, marketing and distribution of alcoholic and non-alcoholic beverages. His comment leverage the broader product offering premium mainstream value segments with high economic of scale product, made accessible to the market. The core overview of stock market according to the chairman presents Nigerian Breweries as an engaged brewing, marketing and selling of both alcoholic and non-alcoholic beverage drinks in Nigeria with one of the largest companies listed on The NSE. His comment discussed the shareholder value creation making the prompt stock market change: Consolidating Breweries shareholders as becoming the richest and it’s venture most profitable entity. In the financial market, they designed Synergies created as a result of the merger will create additional value for shareholders. Shareholders unwilling to be part of the enlarged company will have the option to receive cash for their shares and make alternative investments as they deem fit. According the director, the value of each ordinary share of Nigerian Breweries and Consolidated Breweries, as recommended by the Financial Advisers and approved by the respective Boards of Directors of Nigerian Breweries and Consolidated Breweries are N150 and N120 respectively Nigerian Breweries‟ authorised and paid up share capital as at 31 December 2013 were N4.00 billion and N3.78 billion respectively, while the Shareholders‟ funds as at 31 December 2013 stood at N112.36 billion. Total Assets as at 31 December 2013 were in excess of N252 billion. Nigerian Breweries is the second largest listed company on The NSE, with a market capitalization of about N1.13 trillion as at 8 May 2014 and over 115,000 shareholders. As at 31 December 2013, Consolidated Breweries had revenue of N33.92 billion, an authorised share capital of N350.00 million, made up of 700 million ordinary shares of N0.50 each and an issued share capital of N248.04 million. The shareholders‟ funds as at 31 December, 2013 stood at N13.94 billion. Auditors comment analysis: The stock exchange auditor presenting market leverage of Nigerian Brewery developed main facts and assumptions used in evaluating their financial market stability, ratio valuation and global stock stands. This analysis demonstrates the Merger of Nigerian Breweries and Consolidated Breweries as expected to bring about economies of scale, cost savings and improved operational and administrative efficiencies. Whereby the synergies are expected to result in increased returns to shareholders. The auditor basic assumptions states; The valuation reference in 2014, being the date prior to the announcement of the Transaction; The issued and fully paid share capital of Nigerian Breweries as at the valuation reference date, was N3,781,352,216 comprised of 7,562,704,432 ordinary shares of 50 kobo each; The issued and fully paid share capital of Consolidated Breweries as at the valuation reference date, was N248,035,808.50 comprised of 496,071,617 ordinary shares of 50 kobo each; and The closing price per share of Nigerian Breweries on The NSE as at the valuation reference date was N149.00. It’s valuation methodology includes share exchange ratio for the detailed financial list below; Discounted Cash Flow; Historical Market Prices; Over the Counter (“OTC”) Trading Prices; Comparable Companies Trading Multiples; Enterprise Value (“EV”) to Total Revenue; Enterprise Value (“EV”) to EBITDA; and Enterprise Value (“EV”) to EBIT. Nigerian Breweries Discounted Cash Flow approach shows, the weighted average cost of capital of the company to arrive at a present value of free cash flows and terminal value in which the DCF valuation analysis, the auditor made certain assumptions in line with global best practices, regarding the appropriate discount rates and terminal growth multiples to obtain a fair value range. Their Historical Market Prices presents prices of securities traded on exchanges provide market defined benchmarks of fair value. Nigerian Breweries is listed on The NSE and its share price provides probably the best indication of its value. 60 day volume weighted average closing prices to 8 May 2014 of Nigerian Breweries shares on The NSE was N149.18. Nigerian brewery has an OTC Trading Prices consolidating to N78.00 per share as announced by NASD OTC platform, prior to the announcement of the Proposed Merger. Finally, it’s stock exchange market valuation ratio value estimates of N150 per share and 120 N120 per share for Nigerian Breweries and Consolidated Breweries respectively, resulting in a share exchange ratio of Four (4) Nigerian Breweries shares for every Five (5) Consolidated Breweries shares. While the global share capital according to the scheme of merge presented by the auditor states below; Ratio Analysis/timeline series: The Share Exchange Ratio was determined on the basis of the relative values of Nigerian Breweries and Consolidated Breweries on the date prior to the transaction announcement based on various valuation methodologies agreed to for the purpose of the Scheme. Consequently, the Financial Advisers arrived at a fair consideration as follows: The Scheme Shareholders will receive Four (4) ordinary shares in Nigerian Breweries for every Five (5) ordinary shares held in Consolidated Breweries as at the Terminal Date or a Cash Consideration of N120 per Scheme Share. The value of each ordinary share of Nigerian Breweries and Consolidated Breweries, as recommended by the Financial Advisers and approved by the respective Boards of Directors of Nigerian Breweries and Consolidated Breweries are N150 and N120 respectively. The resulting valuation will have the following effects on the shareholders of both companies: (i) Capital Value upon the Scheme coming into effect, a Scheme Shareholder will receive Four (4) ordinary shares in Nigerian Breweries, for every Five (5) ordinary shares held in Consolidated Breweries. (ii) Taxation In accordance with section 32 of the CGT Act, no capital gains tax is payable on capital gains arising from the acquisition of the shares of a company taken over or merged with another company as a result of which the merged company loses its identity. Thus, no capital gains tax is payable on any capital gains made on a merger in which consideration was shares. Shareholders who are in any doubt about their taxation position, or who are subject to taxation in a jurisdiction outside Nigeria, are strongly advised to consult their professional advisers without delay as to the consequences of the Scheme in view of their circumstances. Nigerian Breweries quoted on The NSE, with approximately 54.10% interest with Heineken Brouwerijen B.V. (37.74%) and Distilled Trading International B.V. (16.36%). The following changes have taken place in Nigerian Breweries‟ authorised and issued share capital since 1976: Statistically, In 2000, Nigerian Breweries raised N7 billion loan capital to finance the offshore element of the company‟s major investment programme by way of a rights offer. The loan was unsecured and converted to shares between 2000 and 2003, at the option of each stockholder, at a conversion price that was dependent on the stock market price of the company‟s share at the time of conversion. Financial statement market position as demonstrated below; Nigerian Breweries Income statement illustrated below: Timeline stock exchange market analysis: In order to analyze the timeline ratio of the company, it’s essential to go through past liquidity flow of the company product and how it’s propelling in the present market. The table below shows some product from Nigerian below and it’s liquidity market flow; Main financial timeline series shows that; Nigerian Breweries Plc (NB) released audited financial results for the full year ended 31st December 2014, wherein revenues were flat (-0.8% YoY) from 2013 at N266.3 billion, while PBT and PAT both declined 1.3% YoY to N61.5 billion and N42.5 billion respectively. Notably, the FY 14 numbers do not reflect the Q4 14 acquisition of Consolidated Breweries Ltd (CB). NB declared a final dividend of N3.50 per share which implies a dividend yield of 2.7% using its last trading price. Together with interim dividend of N1.25 declared in Q3 14, total payout ratio for FY 14 comes to 84% (FY 13: 79%). Declining premium segment volumes weigh on top-line Revenues contracted for the second consecutive quarter (-8.5% YoY) to N71.6 billion in contrast to our expectations for a 2% YoY expansion to N79 billion. Amid generally stable pricing, the cutback in revenues reflects sizable volume moderation and contrasts with peers Guinness Nigeria Plc (+12.8% YoY) and International Breweries Plc (+6.6% YoY) which reported volume driven growth. In its FY 14 earnings call, NB’s parent, Heineken notes that H2 14 volumes in Nigeria were driven by value beers (Goldberg and Life), implying that top-line contraction reflects slower replacement of hemorrhaging premium segment volumes (Guilder and Star) by NB’s value offerings. Below states it’s market timeline illustration; Graphical representation and noted ratio analysis of NBL PLC: Fair Value 144.21 Current Price 145.00 Outlook Neutral Industry View Positive Market Cap $7.88B Price-Earnings [P E] 2013 Trailing 29.82X 2014 26.67X 2015F 25.28X ROE 24.23% ROA 12.20% Outstanding Shares 7.56Billion N.B YTD -1.72% ASI YTD -12.38% Nigerian Brewery ratio analysis between - show a forecast of their FY 2015 revenue estimate for Nigerian breweries is N277.03bn representing a 4% increase relative to FY 2013, while our net income estimate for FY 2015 is N43.37bn which is a 2% increase from FY 2013. This yields an EPS of N5.73 and a forward P/E of 24.43x. The Company traditionally posts its strongest quarterly performance in the fourth quarter, however this was not the case in 2014 as the company saw its highest performance in Q2 where it reported a revenue of N72.51bn; 4.7% increase from the period in the prior year and a net income of N13.81bn; 22.86% increase from the period in the prior year. On a quarter on quarter analysis, revenue was up by 5.1% to N72.52billion in Q2 2014 from N68.97billion in Q1 2014, but declined by 26.6% to N53.24billion in Q3 2014 and finally grew by 34.5% to N71.63bn in Q4 2014. Net income on the other hand rose by 37.3% to N13.81billion in Q2 2014 from N10.06billion in Q1 2014, but crashed by 57% to N5.95billion in Q3 2014 and rebounded by 112.9% to N12.69bn in Q4 2014. The shares of NB is slightly overvalued with focus on our FY 2015 estimates. The stock is currently trading at a 3.95% premium to our fair value estimate of N144.21 and a P.E of 26.67x. Below Excel tabulation of their ratio analysis: Conclusion note: NB’s credit line during the quarter (N24.7 billion) vs. N9 billion in Q4 13. The higher finance charges amplified the impact of the elevated OPEX levels on bottom-line with Q4 14 PBT and PAT declining 20.4%  The pullback in revenues after a strong first half suggests NB was unable to hold on to market share gains following Guinness’s price hikes of Q4 13. Outlook should be buoyed by the expanded product portfolio following the CB deal which provides NB with four value beers (33, Turbo King, Williams and More Lager) bringing segment offering to six. Though this is positive for volume growth, the resulting lower revenue per hectoliter should underpin softer sales growth. Whilst benign domestic commodity price outlook and limited exposure to currency pressures portends scope for gross margin expansion, these gains are likely to be offset by margin dilution on two fronts: via NB’s acquisition of CB and as NB’s own value brands increasingly contribute to top-line and share of premium beer shrinks. Finally, NB’s parent’s guidance to higher S&D expenses suggests that as with local peers, rising OPEX should sustain earnings pressure over 2015.  Adjusting our models to incorporate the foregoing and raising our discount rate to track the rise in yields on government debt drives a moderation in FVE (which does not incorporate CB) to N114.29 which is at an 11% discount to last trading price. NB trades at current PE of 22.9x vs. 22.7x and 38.7x for Guinness and International Breweries respectively with last trading price at an 11% discount to our FVE which implies a SELL recommendation. While their Contingent liabilities in respect of guarantees given for staff loans amounted to N3.94 billion (2010: N2.14 billion, 2009: N1.68 billion). This guarantee is backed by employees' gratuity. Bank guarantee given to the Company in respect of Nigerian Customs Service duty and Nigerian Export Promotion Council duty amounted to N3.36 billion (2010: N2.90 billion, 2009: N2.91 billion)