Heineken’s Nigeria Unit Wary of Devalued Naira Before Vote

Heineken NV’s Nigerian unit, the nation’s largest brewer, said a possible currency devaluation by the central bank would hurt the company’s earnings, suppressing profit ahead of next year’s elections.

The Central Bank of Nigeria may be forced to lower its currency peg if foreign reserves continue to dwindle, analysts at London-based Standard Chartered Plc and Paarl, South Africa-based NKC Independent Economists wrote in notes to clients last week. Nigeria’s reserves have declined 13 percent this year to $37.9 billion. Godwin Emefiele, who takes the post of governor in June, said March 26 a devaluation of the naira would be “devastating” for the economy.

Nigerian Breweries Plc imports an average of about 40 percent of the raw ingredients it needs to produce beverages in Africa’s most populous nation, including its flagship Star lager, Chief Executive Officer Nicolaas Vervelde said in a March 31 interview at its headquarters in Lagos. That percentage is higher for Heineken-branded beer, which requires a greater proportion of imported malted barley, he said.

“A devaluation of the naira would certainly have some effect,” said Vervelde, 55. “Things like hops you can’t get locally and every beer up to now needs hops.”

The naira weakened to an all-time low against the dollar after President Goodluck Jonathan suspended Governor Lamido Sanusi in February for “financial recklessness and misconduct,” allegations he denies. The currency strengthened 0.3 percent today to 163.45 per dollar in Lagos, paring its decline for the year to about 2.1 percent.

Cash Handouts

Nigerian Breweries “will hedge a bit more” to counter the currency decline though the company is expecting an earnings boost later this year as politicians increase spending ahead of elections in 2015, according to Vervelde. Consumption of beer tends to track rising disposable incomes, he said.

The Nigerian government increased its budget about 17 percent before the last presidential elections in 2011 to fund campaigning. Nigeria will hold elections on Feb. 14 next year, when the ruling People’s Democratic Party may face its toughest electoral challenge since it came to power in 1999 after a series of defections to the opposition All Progressives Congress, which is promising to create jobs and fight corruption.

“What we hope is what we’ve seen in the past,” said Vervelde. “That also this year there’s pre-election spend and that it flows through in 2015 and with that basically that the market accelerates in terms of growth.”

Weak Consumption

The shares of Nigerian Breweries, the second-largest company listed on the local bourse by market capitalization, have fallen 10 percent this year, compared with a 6.7 percent decline in the Nigerian Stock Exchange All-Share Index. The stock gained 0.5 percent to 151 naira in Lagos today, valuing the company at 1.14 trillion naira ($6.9 billion). Heineken owns about 38 percent of the company.

Full-year revenue rose 6.3 percent to 268.6 billion naira in 2013, while net income advanced 13 percent to 43 billion naira.

Heineken, the world’s third-largest brewer, said in February that sales would increase this year after reporting a decline in 2013 profit because of falling consumption in central and eastern Europe. The Amsterdam-based company said volume growth in developing markets including Africa would offset weaker trading in its main markets.

Population Growth

An expanding economy and population growth means Nigeria remains a promising market, said Vervelde. “Those fundamentals haven’t changed over recent years,” he said. Nigeria’s economy will probably expand 7.4 percent this year, according to the International Monetary Fund.

Nigerian Breweries said business in the north of the country is suffering amid an Islamist insurgency that has left 1,500 people dead this year, according to Amnesty International. Fighting between government forces and insurgents loyal to Boko Haram, the main Islamist rebel group, intensified last month in the northeast, where a state of emergency has been called in three states. Christians and Muslims live in Northern Nigeria.

While the company sold more non-alcoholic malts and soft drinks in 2013, alcoholic beverage trading in the conflict-affected region has been “difficult,” Vervelde said. “There is very little activity going on there,” he said. “People are more reluctant to go out, the trade is reluctant to invest in stock.”