7UP now has the largest share in the carbonated soft drinks market (CSD) in Nigeria, outpacing Coke, according to Renaissance Capital report. “Its key brands are 7UP, Pepsi, Mountain Dew, Teem, Mirinda and Aquafina. 7UP posted revenue growth of 21.5% for 2014, compared with an average -3% for the rest of the consumer sector. 7UP’s RoE and RoIC are ~42% and ~25%, respectively, for 2014 and rising. We also expect a substantial reduction in debt, allowing for improved cash flow. “We initiate coverage of 7UP Bottling Nigeria (7UP) with a BUY rating and NGN262/share TP (77% upside potential). In a challenging earnings environment for corporate Nigeria, we find that 7UP has bucked the trend with its focus on the fast-growing non-alcoholic beverage sector and is undervalued vs its peers, trading at 12.7x P/E 2015, on our estimates.” According to the recently released report, it is clear that in the past couple of years the Nigerian consumer has faced severe headwinds, which have been reflected in the average -3% earnings decline for the consumer sector. “However, in this report, we show that certain segments of the consumer sector have experienced continued strong growth. Non-discretionary spending – on food, non-alcoholic beverages and housing – comprised 68.6% of total consumer expenditure in 2013, according to McKinsey. The non-alcoholic beverage sector, where bottled water, juice and carbonates make up the majority of drinks, posted growth of 14-21% for 2013 and CAGR for 2008-2013 of 12-20%, according to Euromonitor, compared to -2% for the brewery industry in 2013.” It cites Wateraid as stating that over 112 million people do not have access to adequate sanitised water in Nigeria, which is two-thirds of the population. This, it says explains the growth of the bottled water market, “ but with the largest player having 1% market share, there is little competitive advantage” “However, from a sales-value perspective carbonated soft drinks (CSD) has 27%, according to Euromonitor, which is where 7UP has a 46% market share (2014). 7UP sells both bottled water and CSD, making up ~3% and 97% of revenues respectively”. “We initiate coverage on 7UP with a BUY rating as we believe that the company has exhibited strong earnings growth despite the tough consumer environment. Furthermore, unlike other consumer companies in Nigeria, which are trading on an average P/E of 28x FY15E on Bloomberg consensus numbers, we think 7UP represents value at 12.7x, based on our estimates. We derive our TP using a combination of DCF (60%) and peer valuation on EV/EBITDA (20%) and P/E (20%). From this methodology we derive a TP of NGN262/share, implying 77% upside potential from current levels. Currency movement would be the key risk to our valuation, on which we conduct a sensitivity analysis in this report,” says Renaissance Capital . |