Why are some listed African breweries shares being sold off amid the pandemic while others are holding up well? In this editorial, we take a look at an industry - namely beer - that is representative of Africa’s consumer goods sector as a whole. The results may surprise you.
Capital News Africa: From the Trading Floor – Week 4-2022
If you would like to know how the Covid-19 pandemic is affecting the consumer goods sector, looking at the fortunes of listed breweries is a good idea. This is particularly true of those in Africa. Like those elsewhere, its breweries have been hit hard by temporary closures of bars, restaurants and hotels. Another factor weighing on them is the fact that Africa continues to lag behind in getting people vaccinated against the virus.
But have all listed African breweries suffered equally from the pandemic? To answer this, we look at the performance of two key beer stocks since 2 March 2020, when the first Covid-19 infections in Africa were confirmed.
Shares in International Breweries, (ISIN: NGINTBREW005), traded in Lagos, have lost 30% of their value since 2 March 2020. A key reason: In its 2021 financial year, the Nigerian brewery reported a loss of NGN 16.8 billion (EUR 35.7 million). It has certainly helped International Breweries that it has a strong majority shareholder, namely the well-known Dutch brewery Heineken (market capitalisation: EUR 23.5 billion). Heineken owns 56.1% of the Nigerian company. Yet this fact has not protected International Breweries’ shareholders from big losses.
A price-to-earnings (P/E) ratio for International Breweries cannot be calculated currently. That ratio, calculated by dividing the company’s share price by the earnings per share, is a key measurement in determining whether a stock is expensive or cheap relative to other stocks.
Meanwhile, shares in Nigerian Breweries (ISIN: NGNB00000005), International Breweries’ close rival, have held up well in the pandemic. Since 2 March 2020, the share price is up 15% to NGN 48.00 (EUR 0.1020). The P/E ratio for Nigerian Breweries is relatively high currently at 21.4.
But that is understandable considering that the company’s earnings are expected to rise 31% to NGN 23.8 billion (EUR 50.5 million) in its 2022 financial year. Nigerian Breweries’ majority shareholder is SAB Miller, which acquired the controlling stake in 2012 from French beverage group Castel. SAB Miller has since become part of the international brewery company Anheuser-Busch Inbev (ISIN: BE0974293251).
For European breweries, size is usually seen as an important factor in determining commercial success. But that’s not necessarily the case in Nigeria, where International Breweries is, with a market cap of NGN 388 billion (EUR 824 million), worth almost three times as Nigerian Breweries (market cap: NGN 134 billion). As is evidenced by its loss for 2021 and the decline in its share price, International Breweries’ size didn’t help its fortunes during the pandemic.
The success of Nigerian Breweries vis à vis International Breweries is also noteworthy when you consider that the latter has well-known brands like Star, Ace and Gulder. International Breweries also has the licenses to international brands like Heineken, Castel, 33 Export and even offers the popular herbal energy drink Climax.
Nigerian Breweries, by contrast, only has the local brands Castle Lager, Hero and Eagle, 19 beer and soft drink brands in total. But Nigerian’s local brands were apparently more attractive to the locals during the pandemic.
East African Breweries Limited (EABL) (ISIN: KE0000000216) is a supplier of premium beers in Kenya and east Africa, including the Tusker and White Cap brands. EABL is 50% owned by UK alcoholic beverage company Diageo and, through a license agreement, also brews Guinness and Pilsner. EABL is, furthermore, a distributor of Johnnie Walker whiskey and Smirnoff vodka in the region.
Since the start of the pandemic in Africa on 2 March 2020, the EABL share has lost 20%. In our view, the main reason for the stock’s slump is the absence of tourists who drink the more premium brands offered by EABL. And like in Nigeria, it seems that the locals in Kenya preferred the cheaper local brews.
It seems that, in the current economic climate, African brewers who distribute premium but locally-brewed beers are seen as attractive alternatives to cheaper, home brews. International brews are not really selling well currently - a fact that we attribute to the drop in tourism. It would therefore be wise for producers to invest more in promoting their local brews to the local population.
We see the news from Africa’s beer sector as positive, as it reflects that, despite the Covid-19 pandemic, Africa’s middle class is becoming more brand conscious. And the more that happens, the more the middle class will tend to buy premium brands that are manufactured locally instead of international ones.