INTL BREWERIES: SETTLING THE ANAMBRA DEBATE

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Status: In Progress  |  Genre: Personal Finance  |  House: Booksie Classic

An in-depth analysis, review and follow-up inference on the debate surrounding the Anambra state govt "adventure" in international breweries Nig Plc; What you should know!

1st off, when it comes to political discuss, I continue to be NON-PARTISAN. ...so please be reminded that this article is strictly driven from an investing standpoint!
I shall attempt to clear the air on the issue surrounding the Anambra state govt's investment in SABMiller via the company's Onitsha subset, Intafact breweries. (now international breweries plc)
A brief...

In 2011, the then Governor of Anambra state, @ Sir Peter Obi facilitated a N2B (2 billion naira) investment for a 10% stake in INTAFACT BREWERIES through the state ministry of finance. ...an equivalent purported to be approx $20M based on the Fx rate at the time.
Fastward to 2017, and that 10% holding was collapsed to a 4.7% equity stake in INTEBREW following a "three-pronged" merger involving Interfact breweries, Pabod breweries and international breweries (all investment securities of SABMiller) after it's majority investor and world largest brewer (Belgium owned AB InBev), decided to up it's stake in INTEBREW to 75.1%.
Let's do a small math...

Prior to that 2017 merger, the state's 10% equity stake in INTAFACT BREWERIES was an equivalent of 1,400 ordinary shares of N100,000 each.
At a per share of N1 each, that 1,400 unit will compute to 1,400 x 100,000= 140M unit (dividing both sides by 100,000) ...and at 50k, it will compute to 140M x 2= 280M unit. (2 of 50k equates to N1)
...will highlight why I had to narrow down the per share estimate to 50k later.
So the state's stake was 280M (280 million) unit of INTAFACT BREWERIES. This became the vol/holding for which the @ Peter Obi led govt paid N2B in 2011.

Based on the MoU of the merger share exchange ratio at the time, INTAFACT BREWERIES would receive 29.09M shares of INTEBREW for every 10 unit of shares they own... with 5.302B shares issued at 50k each. (now you see why I did that 50k p/share estimate above)
For clarity, INTERNATIONAL BREWERIES is a quoted company on the NGX and by convention, listed coys almost always have a 50k p/share peg as benchmark.
On this backdrop, that 280M unit stake in INTAFACT belonging to the state expanded to 814.52M shares of INTEBREW (i.e if 10 unit equates 29.09M shares, then 280M unit will compute to [29.09/10] x 280= 814.52M)

At today's closing mkt price of N5.7, that would amount to a cash consideration of near N4.643B... implying an approx 132% ROI to the state govt in over a decade (11 yrs)
Just few weeks ago, the share price printed a 52-weeks/YtD high of N10.25... which would've been a 317% ROI from a sum capital of over N8.348B.
Again, the state ROI can print near 1,150% as CGY from a cash position of over N20.36B should the company's share price push up to N25 in the course of time. (It can... and yes this is an oppurtunity to key in)
The reason for the varying expected return/ROI is why the equity price of a security is largely the direct consequence of the forces of demand and supply.
It's VALUE though, would often encompass that to include several other pivotal lines.
As I always say; PRICE considers only the PRESENT, while VALUE looks at the PRESENT as well as the FUTURE! ...which is where key valuation input like Enterprise value, CGPR/CCC, AsQ, AsY, Earnings capacity etc, are factored in.
For instance, if you decide to estimate possible capital output based on Enterprise value (EV), the state's 4.7% stake will compute to near N7.9B... which is over N3.29B more than that from estimating the ROI based on the company's present mkt price. (mkt capitalization in view)
In retrospect, if the state government where to divest of her stake in INTEBREW today, then ROI considering VALUE will in all likelihood exceed that from looking at PRICE alone.

Weighing matters on a proper balance

Do I think the state govt investment has been a worthy one?
To answer that question, let's assume that @ Sir Peter Obi was an investor who took a LOAN of N2B with a tenure of 11 years from the state coffers to invest in INTERFACT BREWERIES in 2011.
The best way to quarry how the investment has faired is to look at the CONCEPT of the TIME VALUE OF MONEY... which states that a given amount of money today will usually be worth less at a later time in future, in light of surrounding risk from inflationary contributors.
To examine this, we shall look at 2 different scenarios...

SCENARIO 1;

By implication, if indeed the state's investment has performed well, that N2B in 2011 should be WORTH MORE than it's monetary and/or asset value equivalent today after compensating for surrounding risk, else it'll amount to an unfruitful investment.
So what then is the FUTURE VALUE of N2B in 2011? Put differently, what is the expected worth of a N2B fund received in 2011 right now?
Let's allow the Nos to guide us...

In finance terms, the future value of money is calculated using the formula FV= Icp x (1+r)^n.
Where Icp= initial cash position= N2B, r= interest rate= 10% or 0.1... this should be a good balance between the time change in inflationary peg (17.71% at present) and the predominantly low rate environment (safe for the recent rate hike)
while n is the period/duration= 11yrs.
Hence future value FV= 2B x (1+0.1)^11... which is about N5.706B
The interpretation of this is that 2B in 2011 is worth approx N5.706B today in view of the time value of money!
On the surface, this means that the state govt's current asset position shows a positive real return/ROI from a VALUE proposition standpoint, but mirrors a negative return from a PRICE inquisition standpoint.
That is; N5.706B compared to a N7.9B on value and near N4.643B on price respectively.
But we won't stop there!

SCENARIO 2;

What if the @ Peter Obi led govt had invested that N2B elsewhere. (say in a time or fixed deposit, T-bills or a play in the money or bond mkt)... could they have faired better?
The idea is to see if that N2B in 2011 put in a fixed income investment channel like T-bill/bond and continuously compounded would have delivered more VALUE than its done today.
Given the high surrounding risk premium, effective yield has been quite low but let's assume a 7.3% yearly interest/return over the 11 yr period. ...this should be a good average between the broadly low yield environment of <5% and the current benchmark rate of 13.5%.

Again in finance, there's something called the FUTURE VALUE (of money) WITH CONTINUOUS COMPOUNDING... calculated with the formula, FV w/cc= PV (e^rt)
Where PV= present value= N2B, r= 7.3%= 0.073, t= 11 while e is the Euler' constant.
Inputting values, FV w/cc= 2B x e^(0.073x11)= 4,464,455,152
For emphasis, the state would have derived approx N4.464B (N2.464B above initial capital) if they had invested that N2B playing a fixed income instrument in 2011 and compounding it to date.
Notice how the N4.464B value is less compared to what the state could make (both from a price and value driven standpoint) should it decide to liquidate her holding in INTEBREW today.
So from a perspective of the TIME VALUE OF MONEY to that of a search for better yield from similar asset class play, we can rightly say that the state's investment was indeed a worthy cause.

And for those who may want to argue that the said investment has been value destructive in dollar terms, please hear this;
Anambra is a state in South-Eastern Nigeria... a country whose legal tender is the Naira and not the $. All present and future return from the said asset play (intebrew) will also be derived in Naira. (i.e it's dividend is paid in Naira not $)
So the base currency to weigh the state asset performance/ROI can only be measured in Naira and NOT the $!
While it is true that the said investment value has eroded in $ terms, the logic behind that assertion can only hold water if the govt manages/run the affairs (budget income/expense) of Anambra state in $ or if the state was located in a country where $ is the legal tender.

The reason for the value eroding impact in $ terms is why your country's reserve has been woeful for near a decade, her foreign debt overbearing... her operating environment "drowned" with huge structural deficiencies and roof-top risk premium and her per capita income decelarating beyond measure. ...this I think, is what every concerned Nigerian should be bothered about.

Something about shareholding pattern

It's possible the state govt might hold a bit more than their initial 4.7% stake in INTEBREW at present.
An analysis of the company's current shareholding structure (Q1, 2022 financial print) reveals that the parent company, AB InBev currently holds a collective 87.29% via their Nigerian and German (Brauhasse intl) arm of business with 78.44% (ref: "the company") and 8.85% respectively.
Curiously, the stake of the directors that were highlighted in the coys financial print excluded those with substantial holding. (total: 1.65% with the highest promoter and former BoD chairman, Sir Olugbenga Awomolo having a 1.24% stake)
The exact promoter/name representing the interest of the Anambra state govt was not disclosed. However, we can extrapolate figures to guage matters...

Of the 87.29% total holding in the Nigerian and German subset, the parent company's previous total stake post the 2017 merger and before the coys rights issue in 2019 was 75.1%.
Now since the Nigerian business unit is 78.44%, it therefore means that @ AB InBev stake therein and prior to the 2019 rights issue was 66.25%. (i.e adding this figure to their 8.85% stake in the German business unit equates their initial 75.1% holding)
So by implication, the Anambra state govt current holding lies somewhere in the balance of 12.19% (78.44-- 66.25) from within the Nigerian business arm.
Note however that it can not be the entire 12.19% since this figure will in all likelihood also include the stake belonging to the Rivers state govt via its interest in Pabod breweries.

Sometime in Dec, 2019, INTEBREW in a bid to delaverage and restructure her balance sheet sought the nod of it's stakeholders to raise about N165B.
That transaction which was fully subscribed, sold out 18.3B units at an offer peg of N9 p/share with 17 ordinary shares matched for every 8 initially held by existing shareholders.
As I highlighted earlier, the Anambra state govt had a 4.7% stake equating to 814.52M unit prior to the rights issue exercise.
Assuming they took up their right in full, their total holding post rights will compute to 814.52 x 17/8= 1,730,855,000 unit.
So though the state's 4.7% stake may be unchanged, her cash position in PRICE terms is lower given that the company's current mkt price of N6.05 is N2.95 or approx 32.8% less than what they could've paid taking up their rights @ N9.
Using this hypothesis to gauge the state's ROI in PRICE terms shows a further downward deviation adjusting for surrounding risk. However in VALUE terms, the state's investment still prints a great positive real return.
Aside cashflow related return, the Anambra state govt must have also derived value from the investment through profit-oriented tax return including that from staffs employed by INTAFACT and later INTEBREW, the creation of direct and indirect employment, benefits from csr/sme supply related services and gains from the company generated waste for use in agriculture.

Verdict: YES, the Peter Obi led govt' N2B investment in INTEBREW was indeed a worthy course!
In fairness, it may not have be the best but any Jack with a God-given conscience will agree that it is much better than having to steal the fund or diverting same for spending on some futile recurrent expense.

The one million dollar question

Should I invest in INTEBREW?
As I stated earlier, based on EV, the share price should be much higher. (circa... 2.1x the current mkt price)
In recent times, i've done several analysis on INTEBREW so I wouldn't want to tour that path now. (this article is devoted to perusing through the Anambra state "adventure" in the asset)
However, I did recommend that investors should align with the stock at the time it was trading for <5. The share price eventually pushed up to a year high of N10.25 delivering a 105% return in a space of just 2 weeks! It has now pulled back to below N6 (technicals at play)... presenting a great OPPORTUNITY for VALUE investors!

Interestingly, INTEBREW is currently the cheapest coy in it's operating sector and should we discount surrounding risk from an appropriate blend of valuation model, it "screams" of a grossly underpriced asset. (ref: P2P comparison... Ev/Ebitda, Jpmg, Ocf/Npm, Cbr/Crm, Ncps etc)
...it's potentially a N21.65 stock!

Infact, I did highlight that buying INTEBREW @ <N5 then was like buying a bottle of Grand Malt for just N30 !!
I had given and still maintain a Buy/Outperform rating on the stock.
Again, BUY... ACCUMULATE... HOLD! …just ensure you have a mid to long term investment horizon.

CAVEAT: The need for due diligence should still take higher precedence ahead of this article. When in doubt, please do well to seek the service of a reputable investment adviser/manager for guidance.


Submitted: June 23, 2022

© Copyright 2022 SINCLAIR CHINONSO. All rights reserved.

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