Description

CERTAIN STATEMENTS CONTAINED HEREIN REFLECT THE OPINION OF THE AUTHOR AS OF THE DATE WRITTEN. NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT. YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. The company information, including financial and other company related data, has been sourced from public materials produced and distributed by Murree Brewery unless otherwise noted. The author believes the data to be generally accurate as of the date of publication. Please see additional Important Disclaimers at the end of this analysis.

Background

Murree Brewery is the main producer of alcohol in Pakistan with a monopoly position in beer. It was established in 1860 and is not only the oldest continuing enterprise in Pakistan, but also one of the first modern breweries in the entire Asia sub-continent. The company generates roughly 50% of its sales from alcohol and the other 50% from non-alcoholic branded food & beverage products. It generates compelling economics that one might expect of a monopoly brewer and leading fast moving consumer goods (FMCG) producer, with mid-to-high teens operating margins and pre-tax returns on capital of roughly 20%. Revenue has increased by an average of 18% per annum over the past couple decades in local currency terms, or ~9% p.a. in USD. Management has consistently reinvested to drive sustainable long-term growth, including factory upgrades in recent years and a 40% expansion of the group’s capacity for non-alcoholic products that came online in 2023. The balance sheet is net cash, and the family owner-operator management team has rewarded shareholders every year through consistent dividend payments, which the most recent dividends implying a yield of 9 – 10%. The high dividend yield underpins a valuation of less than 6x P/E and 3x EV/EBIT. The valuation is also supported by substantial asset value, including net cash and investments worth almost 50% of the market cap. When one considers the PP&E and inventory on the balance sheet, Murree trades at just 80% of tangible book value. And recent insider buying suggests that those who know the company best are also keen on the investment opportunity as well:

Overview

One can speculate about why a monopoly brewer and leading FMCG would be available at such a valuation, but we would posit that it’s actually quite simple: This is Pakistan. This is alcohol production in Pakistan. This is a $40m market cap alcohol producer in Pakistan. That is quite the cocktail of filters for the typical investor who would need to overcome trading constraints to deploy capital in a frontier market and ESG restrictions related to alcohol production in a predominantly Muslim country, all for a company whose market cap and thin liquidity likely make it uninvestable for most to begin with.

While some of these factors are technical and operational, Murree does beg the fundamental question of how one can underwrite investing in an alcohol producer in a predominantly Muslim country whose population is largely forbidden to consume alcohol on religious grounds. To this we put forth three arguments. First, Muree has been doing this for quite a while. When a company has a track record of doing something for 160 years, we believe it’s reasonable to think they will continue to do so going forward. Murree has been brewing beer and selling alcohol to Pakistanis since Abraham Lincoln was running for President of the United States; since Darwin was arguing the concept of evolution. That’s a long time to provide proof of market, over which Murree has built an expansive portfolio of leading beer and spirit products. Some examples are below:

Second, it ain’t just alcohol. Recall that roughly half the business is a leading FMCG that produces non-alcoholic branded beverages and food items like juices and energy drinks. For those who aren’t convinced by over a century and a half of alcohol production, it’s difficult to argue there isn’t value in the company’s wide portfolio of non-alcoholic products that include things like soda, juice packs, energy drinks, fruit jams, bottled water, vinegar, and sauces. Below are some pictures to give readers some flavor:

We estimate that if one ascribes zero value for the alcohol business, which we consider too severe, the current price would imply the non-alcohol side of the business is valued at a HSD multiple of EBIT. Which brings us to argument number three: price matters. One can cut this in different ways, but Murree looks cheap however you slice it and that provides an important margin of safety. A LSD multiple of EBIT for the whole pie; or a HSD multiple of EBIT for the FMCG business with a free monopoly brewer attached; or a L/MSD multiple of EBIT for a monopoly brewer with a free FMCG business attached. A near-10% dividend yield that provides a real return to put cash in the pocket along the way. Plus substantial asset value including net cash and investments worth almost 50% of the market cap, and an implied multiple of only 0.8x price / tangible book.

Now for those that still aren’t satisfied by single digit multiples and 10% dividend yields for monopoly brewers and FMCG businesses, and are keen to better understand the somewhat unusual activity of producing alcohol in Pakistan, we offer additional context below:

History

Murree Brewery was established in 1860 to satisfy the British army’s demand for beer that followed British annexation of the Punjab and sovereignty over India established in the 1850s. The initial brewery was set up in Ghora Galli in the western Himalayas. Two English families were closely connected with the founding of the original brewery, in particular a gentleman named Edward Dyer who was a British India brewing pioneer that operated the original brewery. The company established additional breweries in Rawalpindi and Quetta between 1885 and 1890, and also acquired an interest in Oticcumand (south India) and Norailiya (Ceylon) breweries. Murree also established a distillery next to the main brewery in Ghora Galli.

The beer at Ghora Galli became very popular among British troops who were largely barracked in the hills, and the local population became consumers as well. In 1935, a massive earthquake destroyed the Quetta brewery, and water scarcity also became a significant problem at the main Ghora Galli brewery. As a result, most of the brewing was transferred to the Rawalpindi site and the Ghora Galli property was eventually sold. Murree installed German-inspired brewing capacity in the 1960s and launched a development initiative to build malting capacity for mature malt whisky. Over the ensuing decades, Murree imported oak casks and vats from North America, Australia, and Spain. It now has two underground cellars that hold over half a million liters of malt whisky for varying periods of maturation up to 12 years.

Another wave of modernization was undertaken in the 1990s with the installation of new beer canning and modern bottle filling facilities from Germany. They also procured units of alcohol rectification columns from Italy and France to produce extra neutral grades of potable alcohol from molasses. These enhanced the company’s vodka and gin operations. In addition, the company enhanced its beer fermentation capacity by renewing the systems that had originally been installed in the 1930s.

Murree diversified outside of alcohol around 1970 by establishing the Tops Food and Beverages division. Tops mainly processes and produces fruit juices and products, with manufacturing facilities in Rawalpindi and Hattar. The non-alcoholic business has grown at an impressive rate and now accounts for close to half of the entire group revenue. And this side of the business looks primed for continued growth, considering that management expanded the division’s production capacity by 40% last year.  

In 1977, Murree suffered a significant setback when the Pakistan government imposed a total alcohol prohibition for all Muslims, while non-Muslims could continue consuming alcohol by presenting government credentials at licensed outlets. However, 97% of Pakistan is Muslim, so Murree had to scale back production. It slowly recovered thereafter as enforcement was gradually relaxed, albeit with additional regulatory headwinds along the way such as judicial challenges in the Sindh region.

Social Context

Alcohol is highly restricted in Pakistan, but is nonetheless accessible in areas like Karachi and the Sindh region where licensed shops are allowed to sell alcohol to non-Muslims. Alcohol was much less restricted prior to 1977. It was common to have nightclubs, bars, and roadside cafes serving alcohol for example, until a 1977 prohibition resulted from political protest by an alliance of political parties (Pakistan National Alliance, or PNA). This resulted from several political movements against alcohol that had occurred since the 1950s. In 1974, Prime Minister Bhutto banned alcohol in army mess halls, but not yet in bars, nightclubs, coffee houses, or liquor stores. However, after his 1977 election, the PNA began a tense protest movement against his government. They demanded his resignation and had strong support in Karachi in particular. A number of liquor stores and nightclubs were attacked and looted, and Bhutto eventually agreed to close down bars, liquor stores and nightclubs. Shortly after, General Ziaul Haq launched a successful military coup and established a new government with Islamic underpinnings to make Pakistan a “true Islamic state.” The alcohol prohibition remained in effect, and a new punishment of 80 lashes was added for anyone defying the ban (this was repealed decades later).

The prohibition remains in effect today. However, wine shops licensed by the government are allowed to operate so long as they technically sell to non-Muslims that carry government issued permits granting them the right to purchase alcohol. In practice, Muslims reportedly account for almost 90% of all alcohol from these shops. In addition to relaxed enforcement, there is also a thriving black market.

Nonetheless, alcohol consumption per capita is very low in Pakistan. The table below shows beer consumption per capita for various countries in 2021 as reported below by World Population Review.  

Per capita beer consumption is significantly lower in predominantly Muslim countries, even when adjusting for differences in GDP per capita:

• Pakistan – 0.03L
• Indonesia – 0.7
• Bangladesh – 0.02
• Egypt – 0.8
• Morocco – 2.33
• Iran – 1.14
• Niger -0.75
• Sudan – 0.05

Pakistan in particular has lower consumption per capita than 98% of all other countries in the world. And Pakistan is one of only a few predominantly Muslim countries where alcohol is illegal. 

The above data is for beer specifically, but the trends hold true for spirits and alcohol more broadly. For example, below are the world’s top-10 alcohol consuming countries, measured by liters of alcohol consumption per capita for ages 15+ in 2019as reported below by World Population Review):

Meanwhile, the lowest consuming countries in the world are predominantly in the Middle East:

Below is alcohol consumption vs GDP per capita. One can see the countries below the regression line, where consumption is much lower than others based on GDP per capita, are primarily Middle Eastern / Muslim countries:

Source: Our World In Data (https://ourworldindata.org/grapher/alcohol-consumption-vs-gdp-per-capita); Data Source: World Health Organization. Gross domestic product (GDP) per capita is adjusted for differences in price levels between countries.

Conclusion

Murree is the main brewer and alcohol producer in Pakistan, which is somewhat peculiar in light of the country’s demographics and socio-political structures. This does not come without risk, but Murree has endured for over 160 years as not only the country’s main producer of alcohol, but also a leading provider of branded FMCG food & beverage products. We think it is excessive to assign zero value for the alcohol business in light of its heritage and market dominance, but the valuation is compelling even if one prefers to underwrite the FMCG business and treat the alcohol business as a free option (or vice versa). The dominant position in alcohol, attractive FMCG portfolio, continuous reinvestment including recent factory upgrades and capacity expansions, a cheap valuation, and substantial asset value including net cash and investments worth almost 50% of the market cap altogether provide multiple ways to win at the current price. And this is underpinned by a real return of cash via consistent dividends that we believe are likely to persist in light of the net cash balance sheet and owner operator management team. Who, by the way, appear to be thinking along similar lines considering their recent insider buying.

Important Disclaimers

The provision of this report does not constitute (and should not be construed as) a recommendation, financial promotion, investment advice, encouragement or solicitation to buy, sell, or hold the security of the subject issuer (the “Security”), or any other securities, discussed herein. This report is for informational purposes only. All of the information contained herein is based on publicly available information with respect to the security and the author’s analysis of such information. Past performance is no guarantee, nor is it indicative, of future results.

Certain statements reflect the opinions of the author as of the date written, may be forward-looking and/or based on current expectations, projections, and/or information currently available. The author cannot assure future results and disclaims any obligation to update or alter any statistical data and/or references thereto, as well as any forward-looking statements, whether as a result of new information, future events, or otherwise. Such statements/information may not be accurate over the long-term. The views are those of the author acting in his individual capacity and not as a representative of the firm.  The author’s opinions on this Security may change at any time in the future and the author will not, and disclaims any obligation to, update this report to reflect any change in opinion. The author further disclaims any obligation to respond to any comments or questions posted regarding the Security discussed herein.

NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT.  YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. AN INVESTMENT IN THE SECURITY DOES NOT GUARANTEE A POSITIVE RETURN AS STOCKS ARE SUBJECT TO MARKET RISKS, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL.

The author or his or her respective employer or employer’s clients, affiliates, officers, managers, directors, and other associated parties, may or may not hold positions in the Security noted in this article. These parties may trade at any time, without notification to this community, and will not disclose this information to this community. The author and his employer disclaim any liability for investment losses that you may incur under any circumstances.

Catalyst

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