United Capital affirms ‘hold’ rating for Nigeria’s INTBREW on merger, positive revenue outlook

Equity investment analysts at United Capital, Monday affirmed a ‘hold’ rating for International Breweries Plc.’s (INTBREW) stocks with a target price of N35 on projections of its recent merger and a positive earnings forecast.

Hold is an analyst’s recommendation to neither buy nor sell a security. A company with a hold recommendation generally is expected to perform with the market or at the same pace as comparable companies.

According to Yinka Ademuwagun and Wale Olusi, the recommendation implies a 10.4 percent upside from its current price.

“INTBREW merged with INTAFACT and PABOD Ltd. Although the stand-alone INTBREW has historically underperformed the other two beer giants in Nigeria (NB and GUINNESS) due to its smaller size, we are of the view that the newly merged company is better positioned to give the other two beer giants a run for their money,” the analysts said.

International Breweries is also expected to benefit from a bigger operating capacity and the global management efficiency of its new parent company, AB-InBev.

On the core drivers of growth, United Capital forecasts improved operational capacity of the company which is set to translate into increased production volumes and Sales; the possibility of a post-merger revenue-synergy should translate into bottom-line growth and positive overall economic outlook which bodes well for the sector.

Accordingly, a forecast of FY18-FY22E revenue CAGR +15.0 percent, PAT +10.3 percent was made.

On the risk to the investment case, “the risks to our overall outlook for the brewer include Integration risk; Political risk associated with the upcoming 2019 election and; Increased competition.”

The analysts added that, “Our target price N35 is derived using the Discounted Cash Flow (DCF) methodology. We use a Weighted Average Cost of Capital (WACC) of 14.8 percent. Thus, we computed the Enterprise Value, then deducted net market debt to get the Equity Value.”

Results for the half-year ended June 2018 show that revenue increased from N17 billion in 2017 to N53 billion in 2018, with a current share price at N32. The stock’s year to date returns has grown over 43 percent.