Guinness: Reduced interest burden to further support earnings growth
Recently at the Nigerian Stock Exchange (NSE), Guinness Nigeria Plc published its half year (H1) results for the period ended December 31, 2017.
Guinness Nigeria Plc, which is Nigeria’s second largest brewer, delivered revenue of N70.6 billion as against N59.49billion in the corresponding period of 2016, which represents an increase of 19percent.
According to Guinness, this growth was supported by rise in volumes sold across spirits and beer, reflecting the expansion of the company’s portfolio. Gross profit stood at N24billion, representing an increase of 31 percent when compared to N18.36billion in H1’2016.
The results show Guinness Nigeria Plc reported profit before tax (PBT) of N3.54billion, a remarkable increase from loss before tax (LBT) of N4.66billion in H1’16.
Also in the review H1’17 period, Guinness Nigeria Plc profit after tax (PAT) rose to N2.13billion, from a loss after tax (LAT) of N4.66billion in H1’16. Earnings per Share (EPS) has risen to 97kobo, against loss per share of 310kobo in H1’16.
Last year, Guinness Nigeria Plc raised N40billion through a Rights Issue which was aimed at helping the company mitigate impact of increased finance costs, optimise its balance sheet and improve the Company’s financial flexibility.
Guinness’ brand portfolio includes premium Guinness Foreign Extra Stout, mainstream Harp Lager, Malta Guinness and Orijin. Parent company, Diageo owns a 58percent stake in Guinness.
The market capitalisation of Guinness Nigeria Plc is worth N240.9billion at N110 per share as at Monday, February 12, 2018. With 2,190,382,819 units of shares outstanding, the company is listed on the consumer goods sector (beverages -brewers/distillers subsector) of the NSE mainboard.
The stock price had reached a 52-week high of N120.25 from a 52-week low of N59.51. In 2016, Guinness Nigeria Plc acquired exclusive rights to distribute Diageo’s International Premium Spirits brands in Nigeria and brands from United Spirits Limited (Diageo’s Indian subsidiary).
“In a difficult operating environment, notwithstanding recent signs of economic recovery, we delivered a strong performance with net sales growth of 19percent for the half year with growth in spirits and benefits of an expanding portfolio and also against the backdrop of lapping inventory reduction from prior year” Peter Ndegwa, Managing Director/CEO, Guinness Nigeria Plc said while commenting on the half year results.
“We believe in the continued execution of our strategy, allowing us to navigate a tough environment characterized by down trading of consumers as disposable income is subjected to additional pressure. We have made significant progress in driving productivity especially in the supply chain and the commercial function, even though cost pressures and inflation takes its toll,” he added.
“In this half we have also continued to innovate with increased marketing spend across our portfolio to drive the growth on our core brands and to fund our expanding portfolio and innovation pipeline,” the CEO said.
Ndegwa said the utilisation of the N40billion rights issue proceeds which led to significant reduction of the Diageo loan and other borrowings, “has resulted into a 32percent reduction in the net finance charges and improved our debt to equity ratio from 82percent to 2percent.”
In a February 1, 2018 equity commentary, Ifedayo Olowoporoku’s team of equity research analyst at Vetiva Capital said Guinness operating expenses came in 8percent lower than Vetiva researchers expected “as the brewer’s productivity agenda continues to create cost savings.”
“Supported by this, half-year (H1) 2018 Earnings Before Interest & Taxes (EBIT) came in 10percent above our estimate at N6.6 billion, and much better than N85 million operating loss in H1 2017”, Vetiva researchers noted.
While Guinness Nigeria Plc management has guided on softer sales in the mainstream beer segment (circa 70percent contribution to beer volumes), Vetiva Capital analysts are optimistic over the company’s revenue in H2’18, “given the mild topline outperformance and continued benefits from the expanded spirits portfolio.”
They have revised higher their 12-month Target Price (TP) for Guinness Nigeria Plc to N78.76 (previously: N71.96). They however maintained a SELL rating for the stocks.
“We revise our full year (FY) 2018 revenue growth estimate to N140 billion (previous: N135 billion) – translating to an 11percent year-on-year (y/y) growth. Meanwhile, volatility in gross margin despite modest stability in the cost environment remains a worrying feature; we lower our FY’18 gross margin estimate marginally to 35percent (previous: 36percent),” the analysts said.
“Our earnings estimates are however sizably supported by expectations of further decline in net interest expense (amidst the lower debt balance and noting that the H1’18 figure was bloated by FX losses), as well as a lower operating expenses forecast. “Overall, we revise our FY’18 profit after tax (PAT) to N6.7 billion (Previous: N5.3 billion, FY’17: N1.9 billion) – representing a 215percent y/y rise.”
For Christian Orajekwe-led research team at Cordros Capital, the continued growth in revenue and the savings on both operating and financing costs bode well for Guinness Nigeria Plc earnings in 2018.
The analysts, who noted that Guinness Nigeria Plc gross debt stands at N12.5billion post-Rights Issue, added that the resulting reduced interest burden will remain supportive of earnings for the rest of 2018.
“However, continued weakening margins dampen earnings growth expectation from 2019, as the effect of low revenue and finance cost bases tapers. The stock has gained 20percent year-to-date (YtD), and positive reaction to the result is expected. Our estimates are under review,” Cordros Capital research noted.
Olajumoke Okeowo-led team at FBNQuest Capital Limited in their February 1, 2018 first reaction on Guinness Nigeria Plc results attributed the marked year-on-year expansion in gross margin to lower input costs “due to the improvement in FX liquidity”.
FBNQuest Capital noted that the significant reduction in the company’s interest expense likely relates to the deleveraging of the firm’s balance sheet, with the proceeds of its N40billion rights issue.
“The company’s shares have broadly tracked the index this year. We rate Guinness Nigeria shares Underperform. Our estimates are under review”, FBNQuest Capital research analysts said.
By ‘Underperform’ rating, the analysts expect the stock to underperform the NSE All Share Index (ASI) over the next twelve months or the specified investment horizon.
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