Microsoft Word - Nigerian Bottling Company PLC Final

/BC Nigeria Equity Research
August 20, 2008
Initiation of Coverage
Nigerian Bottling Company Plc
Meristem Equity Research
Saheed Bashir saheedbashir@meristemng.com

+234-802-4546-575
Oluwakemi Adeneye kemi.adeneye@meristemng.com
Abiodun Keripe abiodun.keripe@meristemng.com
Ahmed Razaq razaq.ahmed@meristemng.com

0|Page
Kayode Tinuoye kayode.tinuoye@meristemng.com
Correspondence: info@meristemng.com
Nigeria Equity Research
August 20, 2008
August 6, 2008
Industry: Food/Beverages and Tobacco Current Price (N): 49.92 Fair Price (N): 65.77
FYE: ContentDecember
Highlight
Highlights
31 52-Wk H/L (N): 70.00/40.00 Premium/ (Discount): -14.39%
Mkt Cap (N/US$,bn): 64.11 ( 556.50m) Volatility (β): 0.48 Upside/ (Downside): 16.81%
Executive Summary………………………………………………
ummary………………………………………………. …….. 2
Industry Background…………………………………………
round………………………………………….…………
……… 3
Company Overview……………………………………………
erview………………………………………………………
………… 5
Strategic Update…………………………………………………
date………………………………………………….……...
…….... 6
Analysis of Financials…………………………………………
ncials………………………………………….………
………… 8
Stock Price Trajectory…………………………………………………

Trajectory…………………………………………… ….... 14
Valuation Methodologies and Results……………………….……….…

….… 15
Appendix……………………………………………………….………...
……………………………………………………….………... 17-19
Historical Financiall Statement………………………………………… 17
Abridged Financial Model and

and Forecasts……………………………... 18
Disclosures.……………………………………………………………
ures.……………………………………………………………
ures.……………………………………………………………... 19
1 Meristem Research
August 20, 2008
August 6, 2008
FYE: December 31 52-Wk H/L (N): 70.00/40.00 Premium/ (Discount): -14.39%
Executive Summary
• Nigerian Bottling Company Plc (NBC) is an indigenous Fig1: Summary of key investment statistics
company and a sole franchisee of the international brand; Key Metrics NBC Peer Avg
Coca-cola Inc. Spanning over six decades of operation, NBC is Per Share data
a market leader in the production of non-alcoholic
non beverage. Trailing EPS 2.51 2.29
• A softer than expected macroeconomic environment has Trailing SPS 53.74 29.06
posed challenges to the manufacturing sector of which NBC, as BVPS* 17.46 7.21
an integral part, has to come to grips with to stay ahead of the Valuation Metrics
pack. Major challenges facing the industry include weak Trailing PE (x) 19.49 24.49
infrastructural support facilities (especially power), unfair Tariling PS 0.91 2.94
competition from cheaper imported products and rising cost of P/BV (x) 17.46 9.29
fund, among others. Shares Outstanding (m) 1.31 2.71
• An analysis of the financial strength of NBC reveals an Market Cap (Nb)** 64.11 100.73
above-par
par performance in 2007. However, H in a 4-year Profitability
Net Profit Margin(%) 4.63% 10.54%
retrospect, we observed abysmal operational performance
ROE (%) 13.87% 38.99%
results in 2006. This was however reversed in 2007 with 13.91
ROA (%) 6.59% 16.04%
percent ROE and 201.69 percent growth owth in PAT.
Earnings Yield % 5.13% 4.85%
• Due to the FYE 2006 performance, NBC exhibited a very
risky financial profile, (based on Altman’s Z score). However, it * as @ last FYE
scaled through the gray areas to a healthy
health financial status in ** Based on August 13 market price
2007 with a Z-score above the 4-year year average. Q1 2008 results
result
show, respectively, turnover and PAT growth of 10.2 percent
and 11.7 percent. Our forecasts for FYE 2008 are 13.25
Fig 2:: NBC and NSE ASI Relative Trajectories
percent and 5.0 percent for turnover and PAT respectively
• In valuing NBC, we employed both the Discounted Cash NSE ASI: 52-Wk
52 Ret=-3.08% NBC:52-Wk Ret=-4.91%
140
Flow (DCF) and relative valuation
uation methodologies. We obtained
N13.57, N12.12 and N23.19 respectively from the Discounted 120
Dividend Method, Present Value of Growth Opportunities and
Residual Income valuations. Our relative
relativ valuation techniques 100
of Price-to-Earnings (P/E), Price-to to-Book Value (PBV) and

80
Price-to-Sales
Sales (P/S) yielded N55.75, N97.82 and N176.12
respectively. 60
• Attaching appropriate weights to each of the methodologies, 1-Aug-07 1-Dec-07 1-Apr-08 1-Aug-08
we arrived at a fair price of N65.77 with a discount to valuation Source: NSE and Meristem Research
of 14.39 percent and an upside potential of 16.81 percent.
• We therefore place a BUY recommendation on NBC for
medium and long term investment horizons.
horizons
2 Meristem Research
August 20, 2008
August 6, 2008
Industry Background
The Food/Beverage & Tobacco industry is one of the most
thriving and dynamic industries in the Nigerian economy. The
sector utilizes output from the agricultural sector as it’s
it main
input and contributes about 0.05 percent in turnover to Gross
Domestic Product (GDP) while its market capitalization of
N749.49bn* (US$6.41bn) relative to GDP**
GDP is estimated to be
about 3.28 percent up from 2.01 percent in 2003. It captures an
average of 31.4 percent share of the manufacturing sector. The
values index of the industry stock tremendously increased from
32,763.3pts in 2003 to 133,422.3pts in 2007.
MajorPrice, Promotion
challenges and Branding
facing the industry include
i the inadequate
supply of locally sourced raw materials, weak infrastructural
facilities, unfair competition from smuggled
smuggle cheaper foreign
products, high cost of fund and product adulteration among
others.
*as at August 4, 2008

** as at 1990 current basic prices
Fig 3: Food/Beverages and Tobacco Industry: Key industry statistics

2003 2004 2005 2006 2007 5-yr Avrg
GDP 9,913.5 11,411.1 14,572.2 18,564.6 22,848.9** 13,615.4
Market Capitalization
Food, Beverage & Tobacco 199.2 239.3 294.6 336.9 900.9 394.2
Manufacturing (Nbn) 618.8 782.8 853.7 1,187.0 2,706.0 860.6
Market share( Food/Bev. & Tobacco) 32.19% 30.57% 34.51% 28.38% 33.29% 31.4%
Market Capitalization/GDP
Food, Beverage & Tobacco 2.01% 2.10% 2.02% 1.81% 3.94% 2.0%
Manufacturing 6.24% 6.86% 5.86% 6.39% 11.84% 6.3%
Sectoral Value Index
Food, Beverage & Tobacco 32,763.3 39,359.8 48,452.0 53,934.5 133,422.3 61,586.4
Manufacturing 20,904.8 26,445.8 28,841.2 36,282.9 62,379.5 34,970.8
Index of Manufacturing Production 90.3 89.4 89.4 86.6* 90.1** 89.7
Soft drinks 53.7 50.5 53.2 53.6* 50.8** 52.5
Sugar confectionary 50.5 50.6 50.6 50.8* 57** 50.6
Source: CBN Draft Annual Report 2007
* Revised **Provisional
3 Meristem Research
August 20, 2008
August 6, 2008
Industry Background
In other to salvage the industry, government has formulated several
policy measures such as reduction in custom duty on machinery,
abolition of excise duty except for beers, wines, alcohol and
tobacco, ban on the importation of fruit juice, poultry products,
sugar confectionaries, sweets and chocolates to mention a few. The
re-structuring
structuring of National Agency for Food,
Food Drug Administration
and Control (NAFDAC) and Standards Organization of Nigeria
(SON) has in no small measure contributed to the growth of the
industry by regulating and ensuring quality standards for local and
imported products.
However, the effectiveness ss of the policy thrust will be determined

by the unfolding realities in the economy.
economy
4 Meristem Research
August 20, 2008
August 6, 2008
Nigerian Bottling Company (NBC) Plc

Company Overview Fig 4:Subsidiaries Associates
NBC Subsidiaries and Associated Companies
Nigerian Bottling Company, the largest bottler of non-alcoholic

non
beverage in Nigeria, has its operations dated back to 22nd Apapa Chemical Ind. Frigoglass Ltd.
November 1951 when it was incorporated as a subsidiary of A.G 100% 24%
Leventis Group and given the franchise to bottle and sell Coca-
Coca
NBC Benin Ltd. Valley Foods Ltd.
cola products in Nigeria. In 1972, it became a public Company
100% 23%
with its shares listed on the floor
loor of the Exchange. NBC kicked
off as a family business and has metamorphosised into a large
Sunvit Agro Ltd. Blaize Ind Ltd.
soft drinks Company.. It is a subsidiary of the Coca-cola
Coca 100% 40%
Hellenic Bottling Company (CCHBC), the emerging Company
in the merger of Hellenic Bottling Company S.A and CC Agricultural Seeds Kupa Farms Ltd.
Beverage Company Plc in 2000. NBC is capitalized to the tune Ltd. 60% 40%
of N65.33bn (US$ 556.50) with outstanding shares of N1.31bn
and accounts for about 8.72 percent of industry market Crown Product Ltd.
capitalization. 60%
Analysis of shareholdings reveals that CCHBC has a controlling

equity stake of 55.81 percent through Molino Soft Drinks S.A,
Luxembourg and 10.62 percent through CCBC Services Limited,
Ireland while the remaining holdings (33.57 percent) are held by
directors and other shareholders.
From a single manually operated bottling facility with a

production capacity of a few dozen cases per day within the
basement of Mainland hotel in Oyingbo, Lagos in 1953, NBC
currently operates 13 bottling plants with over 80 distribution
warehouses, 250,000 sales outlets and a staff strength of over
6,000 employees across the country. The Company since
inception has continued to soar above board and has remained
the largest bottler in Nigeria and the second largest in the
African continent commanding average annual sales of 1.8
billion bottles up from 1.0 million cases in 1960.
With 5 subsidiaries and 4 associated companies, NBC

manufactures and sells over 33 brands: Coca-cola,
Coca Fanta, Sprite,
5 Meristem Research
August 20, 2008
August 6, 2008
Nigerian Bottling Company (NBC) Plc

NBC has in recent times re-launched
launched and re-branded
re a number of
products such as the 50cl PET bottles and also introduced additional
products- Burn energy drink, can coke, etc to the market
NBC like many other firms in the manufacturing sector continues to

grapple with challenges of dilapidating basic infrastructure with
particular reference to power and transport (given the brittle nature of
their products).
Strategic Updates
In an environment with low income and high marginal propensity to
consume, soaring food prices have increasingly restricted consumer
discretionary spending and to a large extent re-ordered
re their choice of
commodity basket in favour of necessities. This could have
hav an adverse
effect on sales volume of companies like NBC.
NBC In the light of this,
NBC has initiated processes and products to mitigate attendant threats
likely to be posed in the nearest future ranging from operational to
economic-wide challenges.
launched one of its flagship products,

In early August 2008, NBC re-launched
Eva bottled water as part of its strategic decision to maintain market
leadership. The company re-packaged
packaged the product with tamper proof
and greater resilience to prevent adulteration and also to meet
consumer requirement.. In addition, the attractiveness of the package,
the ease of carriage and quality integrity is expected to boost revenue
for the firm.
Among the Company’s recent strategic moves is the product

portfolio expansion to provide wider range
r of quality products to
the whole gamut of consumers across the country while also
initiating processes to enhance its supply chain and working
capital management.
6 Meristem Research
August 20, 2008
August 6, 2008
Nigerian Bottling
ng Company (NBC) Plc
To this effect, the sum of N10bn (US$85.47m)
(US$ has been
committed to increase bottling capacity in Nigeria. Besides,
Besides Fig 6: Market Capitalization/GDP
there is an on-going
going partnership with CCHBC South Africa
11.8%
to recycle PET bottles. NBC recently commissioned its 12.0% Food, Beverage & Tobacco
Manufacturing
7th Effluent Treatment Plant (ETP) in the country at
NBC Apapa and plans to construct an ETP in each of its 9.0%
6.9%
other plants before the end of 2009. 6.2% 5.9%
6.4%
6.0%
The Company also has a strategic plan of building 15 3.9%
combined heat and power plant in 12 countries over the 3.0% 2.0% 2.1% 2.0% 1.8%
next two years with the Ikeja branch being the first
beneficiary. 0.0%
2003 2004 2005 2006 2007
Fig 5: Market Share of Food, Beverage & Tobacco Fig 7: Manufacturing Sector Value Index
40.0% Soft drinks Manufacturing

34.5% 33.3% 100.0 90.3
32.2% 89.4 89.4 86.6 90.1
30.6%
28.4%
30.0%
75.0
53.7 50.5 53.2 53.6 50.8
20.0% 50.0
10.0% 25.0
0.0% -
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
7 Meristem Research
August 20, 2008
August 6, 2008
Analysis of financials
DuPont Analysis
The swing in returns over the years has been conditioned by an
amalgam of the operating,g, investing, financial and tax-related
tax
decisions of the firm.
From 17.69 percent in 2004, ROE negotiated an inward bend

to 12.54 percent resulting in reverse leverage thus eroding
equity by re-investing
investing earnings at a return less than the
market capitalization rate of 13.63 per cent. This decline in
ROE is not unconnected with the fall in operating profit margin
from 7.65 percent to 6.71 percent resulting from a more than
proportionate increase in cost of sales of 19.01 percent relative to
sales which grew by only 16.59 percent. percent The operating
performance of the firm was further worsened by the low
utilization of assets.
Fig 8: Trend in Capital Turnover Fig 9: Trend in Operating Margin
2.0 1.96 12.0%

1.88
1.80 7.6%
1.8 8.0% %
6.7% 7.0%
1.65 4.3%
4.0%
1.6
0.0%
1.4
2004 2005 2006 2007
2004 2005 2006 2007
8 Meristem Research
August 20, 2008
August 6, 2008
In which case, capital turnover, a measure of asset efficiency shows
a decline from 1.88x to 1.65x as a result of a lower sales growth of
16.59 percent relative to growth in invested capital of 32.39
percent.. Considerations for the management of operating asset and
liabilities informed the preference for invested capital over total
asset turnover. In addition to the above
abo factors, 318.81 percent
jump in taxation capped
ped up the low operating margin. However,
NBC was able to salvage the overall performance by improved
financial decisions as seen in the upward movement in
financial cost and structure ratios.
Fig 10: Trend in Financial Structure Ratio Fig 11: Trend in Financial Cost Ratio
2.0 1.81 1.2

1.8 1.66
1.48 1.54 0.92 0.96
1.6 1.0 0.91
1.4
1.2 0.8
1.0 0.6
0.8
0.6 0.4
0.24
0.4
0.2
0.2
- -
2004 2005 2006 2007 2004 2005 2006 2007
9 Meristem Research
August 20, 2008
August 6, 2008
This downward trend perpetuated itself till FYE 2006 dropping as
low as 5.25 percent. Tax overprovision in prior year coupled with
improved asset utilization slightly compensated for operational
inefficiencies but could not raise ROE beyond
bey 5.25 percent.
Provided FYE 2007 performance is sustained, we expect ROE to

further improve to 15.32 percent in 2008. However, a better
performance can be achieved given more efficient cost and working
capital management. The debt composition of the firm is skewed
towardss short term financing and as a consequence, NBC has not
been able to achieve a current ratio of 1.0 in the last 4 years. By
implication it could not meet its short term obligations with its level
of current assets.
Fig 12: Trend in Tax Effect Ratio Fig 13: Trend in ROE
1.8 1.71 24.0%
18.0% 17.69%
1.2
0.91 13.91%
0.73 12.0% 12.54
54%
0.65
0.6
6.0%
5.25%
- 0.0%
2004 2005 2006 2007 2004 2005 2006 2007
10 Meristem Research
August 20, 2008
August 6, 2008
Growth Trends
Turnover growth ranged between the extreme growth rates of
16.59 percent and 7.63 percent in 2005 and 2006 respectively
averaging 13.02 percent in the review period. The operating
ambience of 2006 did not lend itself to a sustainable growth
performance in top line resulting in an increase of N4.23bn in
absolute terms but only a 7.63 percent rise over the levels achieved
in 2005. NBC however re-boun bounced in FYE 2007 almost
doubling the growth rate realized in 2006. A marginal growth
rate of 1.99 percent in non-current
current assets notwithstanding,
relatively more sales revenue were generated from fixed assets
as indicated by an increase
ease in fixed asset turnover ratio from
1.79 in 2006 to 2.01 in 2007. Consequently, margins leapt from
the negative abyss of 6.69 percent to 19.79 percent.
Fig 14: Growth in Key Financial Indicators

Historicals 2005 2006 2007 Average
Turnover 16.59% 7.63% 14.84% 13.02%
Cost of Sales 19.01% 15.08% 12.75% 15.61%
Gross Profit 12.21% -6.69% 19.79% 8.44%
Administrative Charges 14.36% -45.07% 19.20% -3.84%
Finance Cost -53.10% 340.00% -33.48% 84.47%
Total Expenses 12.88% 1.32% 7.11% 7.10%
EBDIT 7.96% -5.34% 44.89% 15.84%
EBIT 2.27% -30.99% 85.72% 19.00%
PBT 7.38% -90.79% 1220.26% 378.95%
PAT -23.26% -54.81% 201.69% 41.21%
Non-current Assets 23.19% 11.12% 1.99% 12.10%

Current Assets 20.63% -5.81% 6.88% 7.23%
Total Asset 22.37% 5.75% 3.37% 10.50%
Current Liabilities 45.33% 4.28% -13.51% 12.03%
Non-Current Liabilities 12.64% 3.45% 21.48% 12.52%
Shareholders Fund 8.26% 8.03% 13.76% 10.02%
Source: Company Financials, Meristem Analysis.
August 20, 2008
August 6, 2008
Although the overall financial charges grew by 340 percent, the
expenses profile of the company improved in 2006 growing
gr slightly
by 1.32 percent.. Operational efficiencies in administration brought
down the associated expenses by 45.07 percent. Efficient asset
utilization and cost management
ement translated into 85.72 percent
per
growth in EBIT.
Nevertheless, this improvement could not birth a positive growth

in PBT as a result of the negative
egative growth rate in gross profit. Tax
overprovision in the prior year could only assuage negative earnings
as PAT growth rate could have been worse than –54.81 percent
recorded in 2006. However, there was a phenomenal rebound
translating to 1,220.26 percent
cent and 201.69 percent growths in PBT
and PAT respectively in 2007.
Total assets have grown at an average of 10.50 percent over the

past 4 years. Both current and non--current liabilities grew at an
average of about 12 percent over the years. Current assets
asset which in
absolute terms fell short of current liabilities was not able to meet
up withh the pace of the latter save for 2007. Indeed, 2007 witnessed
a remarkable performance in most financial metrics as NBC was
able to improve on operations, finances and investments.
On the average, NBC performed fairlyfair relative to the industry.

With regards to its most recent results,
results it outperformed the
industry in major indices with earning yields of 5.04 percent, a
P/E lower than half the industry average and sales per share
of N53.74k relative to an industry average of N44.31k. As an
income stock, NBC has consistently paid dividend at an average
payout of 38.43 percent over the past 10 years save for 2000.
August 20, 2008
August 6, 2008
Liquidity and Solvency
The risk profile of NBC reveals an improving financial health status
over the review period. A careful analysis of events unfold that a
low current ratio of 0.67 in 2006, (unfavorable working capital
condition), a high proportion of short term fund relative to
long term debt in funding operations and plummeting EBIT
accounted for the shift in credit worthiness of the firm into the
bankruptcy region in 2006.
This is further supported by a decline in interest coverage from

25.85x to 4.05x in the same year. However, the downward trend was
partly offset by an increased return on equity relative to asset; by
implication a higher financial leverage index. The unimpressive
performance
mance recorded in 2006 took its toll on the share price with a
year return of –43.39 percent. The strategic re-positioning of
NBC in 2007 brought it back to a level surpassing the 2005
performance.
Fig 15: NBC’s Key Risk Metrics and Chart

Key Ratio 2004 2005 2006 2007 Anual Avrg.
Long term debt ratio 0.16 0.15 0.15 0.17 0.16
Short term debt ratio 0.36 0.43 0.42 0.35 0.39
Debt/Equity 1.10 1.37 1.32 1.11 1.22
Finnancial Leverage Index 2.10 2.37 2.32 2.11 2.22
Current Ratio 0.89 0.74 0.67 0.83 0.78
Interest Coverage 11.85 25.85 4.05 11.32 13.27
Z score 3.95 3.46 2.41 3.51 3.33
4.50
Z score
Healthy
3.00 Gray Area
Bankruptcy
possibilities(within 2 yrs)
1.50
High probability of financial
embarrassment
0.00
2004 2005 2006 2007
August 20, 2008
August 6, 2008
Stock Price Trajectory

NBC stock price has demonstrated swings in the past 4 years undulating
between successive highs and lows. However, within a time reference
of a year, price movement has been gravitating upwards with the
RSI (Relative Strength Index) within band for most months.
months With
unusually high volumes of NBC traded in late July 2007, NBC price
continued to soar high reaching N57.75 before trending downwards to
N44.00 in early August. During this period the RSI fell in the
overbought region but continued to decline until it came within
band and was sustained till ll late June 2008 before momentarily
nose-diving
diving into the oversold region.
region However, this time around it
was characterized by moderate volumes but with falling prices. NBC
stock price trailed an upward path from August 2007 to reach its all-time
all
high of N70.00.00 on March 3rd, 2008. It thereafter exhibited a step-step
movement to stabilize at N49.92 with an RSI of 29.03.
Fig 16: 12-Month Price-Volume

Volume and RSI Charts
80 Volume Price 14,000,000

000
12,000,000
000
60 10,000,000
000
8,000,000
40
6,000,000
20 4,000,000
2,000,000
0 0
2-Jul-07 2-Nov-07 2-Mar-08 2-Jul-08
100 RSI RSI(14)= 29.03

Overbought
75
50
25
Oversold
0
2-Jul-07 2-Oct-07 2
2-Jan-08 2-Apr-08 2-Jul-08
Source: Nigerian Stock Exchange (data

data), Meristem Research
August 20, 2008
August 6, 2008
Valuation Methodologies and Summary

A combination of Discounted Cash Flow methodology and
Relative Valuations were adopted in valuing NBC. The former
was utilized to determine the intrinsic worth of the firm while
the latter
ter gives a valuation methodology based on its
competitive stance in the industry. In using the discounted cash
flows, we employed the 2-stage
stage Dividend
Di Discount Method
(DDM), Present Value of Growth Opportunities (PVGO) and
the Residual Income Model (RI). Due to high investment in
fixed capital, NBC has not been able to generate a positive free
cash flow informing the exclusion of Free Cash Flow to Equity
(FCFE) based valuation in determining NBC’s fair value.
We used a risk free rate of 10.75 percent based on the current

rate on 10-year
year Federal Government of Nigeria (FGN) bond.
Other input variables include a risk premium of 6 percent and
2-year beta
ta of 0.48 resulting in a market capitalization rate or
cost of equity of 13.63 percent.
The intrinsic share price of NBC based on the DDM, assuming

a terminal growth rate of 7.60 percent, was estimated at N20.23.
N
The PVGO, assuming a growth rate based on the return on
equity of 12.68 percent and retention rate of 61 percent resulted
in a negative franchise factor of 0.55 but a positive growth
factor of 1.32 culminating in a projected share price of N12.12.
N12.1
Similarly,
ly, we derive a price of N26.87
N2 from the residual
valuation methodology taking into consideration non-recurring
non
items and violations of clean surplus accounting.
A sensitivity analysis of the discounted cash flow

methodologies reveals a maximum price of N62.92
N at a
growth rate of 12 percent based on DDM and a minimum
value of N15.46 at 5 percent growth rate derived from the
DDM as well.
August 20, 2008
August 6, 2008
Fig 17: Sensitivity Analysis of DCF Models to terminal growth rates

Growth Rates 5% 6% 7% 8% 9% 10% 11% 12%
DDM 15.46 16.91 18.79 21.35 25.01 30.68 40.67 62.92
RI 24.32 25.01 25.91 27.13 28.88 31.59 36.36 46.97
AVERAGE 19.89 20.96 22.35 24.24 26.94 31.14 38.52 54.95
From our relative valuation of NBC, we derived prices ranging

from N60.80 to N176.12 based on the Price-to-Earnings ratio
(P/E) and price-to-sales
ales (P/S) respectively. We also arrived at a
price of N98.51 from the Price to Book Value (P/BV).
Fig 18: Valuation Summary
Fair Price 65.77
RI 26.87
PVGO 12.12
DDM 20.23
P/S 176.12
P/BV 98.51
P/E 60.80
Giving due diligence to a number of factors, we are of the

opinion that the weights adopted in the determination of
the fair value of NBC is appropriate and fair. We arrived at
a fair price of N65.77 with a discount to valuation of 14.39
percent and an upside potential of 16.81 percent. We
therefore place a BUY recommendation on NBC for
medium and long term investment horizons.
August 20, 2008
August 6, 2008
Appendix I
Historical Financial Summary 2004 2005 2006 2007 Average

Turnover 47,553,874 55,444,504 59,674,516 68,529,128 57,800,506
Cost of Sales 30,638,654 36,464,205 41,963,985 47,313,777 39,095,155
Gross Profit 16,915,220 18,980,299 17,710,531 21,215,351 18,705,350
Other operating incomes 175,758 75,247 41,729 76,719 92,363
Share of profit from associated companies 202,880 282,825 151,233 159,737 199,169
17,293,858 19,338,371 17,903,493 21,451,807 18,996,882
Expenses
Administrative(Actual) 5,052,354 5,778,049 3,173,637 3,782,905 4,446,736
Administrative(adjusted) 2,353,787 2,657,661 (734,514) (831,492) 861,361
Selling and distribution 8,604,025 9,840,136 12,162,588 12,900,844 10,876,898
Operating Profit 3,434,599 3,437,361 2,416,035 4,608,321 3,474,079

Finance Charges 306,885 143,929 633,286 421,232 376,333
Total expenses 10,957,812 12,497,797 11,428,074 12,069,352 11,738,259
Total expenses(Actual) 13,963,264 15,762,114 15,969,511 17,104,981 15,699,968
EBDIT 6,336,046 6,840,574 6,475,419 9,382,455 7,258,624

Depreciation 2,698,567 3,120,388 3,908,151 4,614,397 3,585,376
EBIT 3,637,479 3,720,186 2,567,268 4,768,058 3,673,248

Interest 306,885 143,929 633,286 421,232 376,333
Profit before taxation and exceptional items 3,330,594 3,576,257 1,933,982 4,346,826 3,296,915
Exceptional Items - - (1,604,741) - (401,185)
PBT 3,330,594 3,576,257 329,241 4,346,826 2,895,730

Taxation 298,272 1,249,197 (437,007) 1,174,562 571,256
PAT before Extra-Ordinary items 3,032,322 2,327,060 766,248 3,172,264 2,324,474

Extra-ordinary items - - 285,248 - 71,312
PAT 3,032,322 2,327,060 1,051,496 3,172,264 2,395,786
Earnings Per Share 2.33 1.78 0.80 2.42 1.83

Dividend Per Share 1.20 0.60 0.30 0.75 0.71
Source: Company Financials, Meristem Research.
Research
August 20, 2008
August 6, 2008
Appendix II:: Abridged Financial Forecast Model
Forecasts 2007 2008F 2009F 2010F 2011F 2012F Average

Turnover 68,529,128 77,609,237 87,698,438 98,599,354 109,888,980 120,877,878 98,934,778
Cost of Sales 47,313,777 52,908,753 59,854,954 67,352,428 75,114,201 82,669,602 67,579,987
Gross Profit 21,215,351 24,700,485 27,843,485 31,246,926 34,774,779 38,208,277 31,354,790
Other operating incomes 76,719 104,928 115,441 127,148 219,778 302,195 173,898
21,451,807 24,805,413 27,958,926 31,374,074 34,994,557 38,510,471 31,528,688
Expenses
Administrative(Actual) 3,782,905 4,268,508 5,244,367 5,827,222 6,439,494 7,035,093 5,762,937
Administrative(adjusted) (831,492) (646,299) (325,865) (449,330) (567,825) (683,621) (534,588)
Selling and distribution 12,900,844 14,693,555 16,618,310 18,696,294 20,847,722 22,941,924 18,759,561
Operating Profit 4,608,321 5,843,350 6,096,250 6,850,558 7,707,341 8,533,455 7,006,191

Finance Charges 421,232 514,966 583,495 657,361 733,790 808,192 659,561
Total expenses 12,069,352 14,047,256 16,292,444 18,246,964 20,279,897 22,258,303 18,224,973
Total expenses(Actual) 17,104,981 19,477,029 22,446,171 25,180,877 28,021,006 30,785,208 25,182,058
EBDIT 9,382,455 10,758,157 11,666,482 13,127,110 14,714,660 16,252,168 13,303,715

Depreciation 4,614,397 4,914,807 5,570,232 6,276,552 7,007,319 7,718,713 6,297,525
EBIT 4,768,058 5,843,350 6,096,250 6,850,558 7,707,341 8,533,455 7,006,191

Interest 421,232 514,966 583,495 657,361 733,790 808,192 659,561
PBT 4,346,826 5,328,384 5,512,755 6,193,197 6,973,551 7,725,263 6,346,630

Taxation 1,174,562 1,448,788 1,498,918 1,683,930 1,896,109 2,100,499 1,725,649
PAT 3,172,264 3,879,596 4,013,837 4,509,267 5,077,443 5,624,764 4,620,981
Earnings Per Share basic 2.42 2.96 3.07 3.45 3.88 4.30 3.53
Dividend Per Share basic 0.93 1.04 1.10 1.24 1.44 1.59 1.28
Source: Meristem Estimates
August 20, 2008
August 6, 2008
IMPORTANT DISCLOSURES
Meristem Research equity analysis stock report and its attendant

recommendations are prepared based on publicly available
information and are meant for general informative purposes.
Meristem Research can neither guarantee the accuracy nor
completeness of thehe information as they are an expression of
our analysts’ views and opinions. Meristem Research cannot be
held responsible for any loss suffered by relying on the said
information as this information as earlier stated is based on
estimates and opinions and is meant for general information
purposes and not as solicitation to buy securities and financial
instrument.
© Meristem Research
MERISTEM SECURITIES LTD
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/BC Nigeria Equity Research

August 20, 2008

Nigerian Bottling Company Plc

Meristem Equity Research

Saheed Bashir saheedbashir@meristemng.com

Oluwakemi Adeneye kemi.adeneye@meristemng.com

Abiodun Keripe abiodun.keripe@meristemng.com

Ahmed Razaq razaq.ahmed@meristemng.com

Stock Price Trajectory…………………………………………………

Valuation Methodologies and Results……………………….……….…

Historical Financiall Statement………………………………………… 17

Abridged Financial Model and

of Price-to-Earnings (P/E), Price-to to-Book Value (PBV) and

*as at August 4, 2008

Fig 3: Food/Beverages and Tobacco Industry: Key industry statistics

However, the effectiveness ss of the policy thrust will be determined

Nigerian Bottling Company (NBC) Plc

Nigerian Bottling Company, the largest bottler of non-alcoholic

Analysis of shareholdings reveals that CCHBC has a controlling

From a single manually operated bottling facility with a

With 5 subsidiaries and 4 associated companies, NBC

Nigerian Bottling Company (NBC) Plc

NBC like many other firms in the manufacturing sector continues to

launched one of its flagship products,

Among the Company’s recent strategic moves is the product

40.0% Soft drinks Manufacturing

From 17.69 percent in 2004, ROE negotiated an inward bend

Fig 8: Trend in Capital Turnover Fig 9: Trend in Operating Margin

2.0 1.96 12.0%

2.0 1.81 1.2

Provided FYE 2007 performance is sustained, we expect ROE to

1.8 1.71 24.0%

Fig 14: Growth in Key Financial Indicators

Non-current Assets 23.19% 11.12% 1.99% 12.10%

Nevertheless, this improvement could not birth a positive growth

Total assets have grown at an average of 10.50 percent over the

On the average, NBC performed fairlyfair relative to the industry.

This is further supported by a decline in interest coverage from

Fig 15: NBC’s Key Risk Metrics and Chart

Stock Price Trajectory

Fig 16: 12-Month Price-Volume

80 Volume Price 14,000,000

100 RSI RSI(14)= 29.03

Source: Nigerian Stock Exchange (data

Valuation Methodologies and Summary

We used a risk free rate of 10.75 percent based on the current

The intrinsic share price of NBC based on the DDM, assuming

A sensitivity analysis of the discounted cash flow

Fig 17: Sensitivity Analysis of DCF Models to terminal growth rates

From our relative valuation of NBC, we derived prices ranging

Fig 18: Valuation Summary

Fair Price 65.77

Giving due diligence to a number of factors, we are of the

Historical Financial Summary 2004 2005 2006 2007 Average

Operating Profit 3,434,599 3,437,361 2,416,035 4,608,321 3,474,079

EBDIT 6,336,046 6,840,574 6,475,419 9,382,455 7,258,624

EBIT 3,637,479 3,720,186 2,567,268 4,768,058 3,673,248

Exceptional Items - - (1,604,741) - (401,185)

PBT 3,330,594 3,576,257 329,241 4,346,826 2,895,730

PAT before Extra-Ordinary items 3,032,322 2,327,060 766,248 3,172,264 2,324,474

PAT 3,032,322 2,327,060 1,051,496 3,172,264 2,395,786

Earnings Per Share 2.33 1.78 0.80 2.42 1.83