Guinness: Why shareholders should take their rights
Although high operating and financing costs remain sour spots for Guinness Nigeria Plc, analysts expect both lines to moderate by year-end on lower marketing spend and reduced FX losses. Already, some analysts target prices for the company shares ahead of on-going Rights Issue show upside potential, writes Iheanyi Nwachukwu
The Rights Issue
Currently, Guinness Nigeria Plc is undertaking a Rights Issue in its plan to raise about N39.70billion. At an issue price of N58 per share, the offer price is 12.25percent discounted from the N66.10 it closed last Friday July 21, 2017.
The company is offering a total of 684,494,631 ordinary shares of 50 kobo each to existing shareholders in the ratio of five (5) new ordinary shares for every eleven (11) ordinary shares held by shareholders, whose names appeared on the register of members of the Company at the close of business on Wednesday, 15 March, 2017. Stanbic IBTC Capital Limited is the issuing house to the offer which opened on Monday July 24, 2017 and will close on Wednesday August 30, 2017.
Ownership structure, the Rights Issue, and possible implication
Parent company, Diageo owns a 54percent stake in Guinness Nigeria through Guinness Overseas Limited (46.4percent) and Atalantaf Limited (7.8percent); while other shareholders account for (45.7percent). This ownership structure clearly shows Diagoe as the majority shareholder and in the event that anyone of the “other” shareholders fail to take his Rights, Diageo will have no option that to mop them up, thereby having privilege of increasing its stake in Guinness Nigeria Plc.
Questions on offer pricing
The pricing targets for some investment companies tracked by INVESTOR are above the Rights Issue price which makes the Rights offer attractive for existing shareholders who are considering if they should take up their Rights.
For instance, Vetiva Capital Management analysts had in their comment after the third-quarter (Q3) 2017 results of Guinness Nigeria Plc set a Target Price (TP) of N72.92 for the brewer.
Also, after weighing possible risks to their 2017-2018 expected earnings for Guinness Nigeria Plc, analysts at FBN Quest increased their price target by only 5percent to N72.5.
Also, analysts at Lagos-based United Capital have a ‘Hold’ rating for Guinness Nigeria with Target Price at N72.3, an upside potential of about 13percent from its Friday close.
From all indications, there is a potential for capital gains based on the Rights price and current outlook for both Nigerian economy and its stock market.
Guinness is listed on the Beverages –Brewers/Distillers subsector of the Consumer Goods sector of the Nigerian Stock Exchange.
“Consumer Goods companies are set for significant recovery in 2017, benefitting from an all-round improvement in the state of the economy as well as easy comparables from the previous year. First-quarter (Q1) 2017 earnings already prove a testament to this, with most reported earnings in the sector beating analysts’ estimates.
“With economic arrows indicating a slow but steady recovery, the operating environment in second-quarter (Q2) 2017 has been a tailwind for companies”, according to Ifedayo Olowoporoku-led team of analysts at Lagos-based Vetiva Capital Management.
The share price of Guinness Nigeria Plc stood at N66.1 on Monday, having reached a 52-week high of N100.80 and 52-week low of N59.51. With a market capitalization of N99.539billion, the company’s shares outstanding stood at 1.505billion units.
At Facts Behind the Issue presentation
Two days ago at the Nigerian Stock Exchange, Guinness Nigeria Plc at a Facts Behind the Issue presentation presented a detailed breakdown of its plans to raise the N39.7billion by way of Rights Issue. The event was attended by a cross section of stakeholders including shareholders, fund/portfolio managers, regulators, auditors, issuing houses and registrars.
The net proceeds of the Issue, already approved by the Securities and Exchange Commission (SEC) and Nigerian Stock Exchange (NSE) will help the company repay outstanding loan obligations. It will also help to improve the operational and financial flexibility of the Company. At its Extra-ordinary General Meeting in January 2017, shareholders of the company had authorized the Board of Directors to proceed with the Issue.
Purpose and use of the Rights proceeds
The Rights Issue is being undertaken to enable Guinness Nigeria optimise its capital structure by deleveraging its balance sheet, thereby reducing financing costs. The proceeds will be applied towards the repayment of the Company’s various outstanding loan obligations. Between 2015 and 2016, the company obtained loan facilities from various financial institutions. These were obtained to fund the Company’s working capital needs and to expand operations. A loan was also obtained from Diageo in 2016 to manage foreign exchange related obligations. These loans have led to significant increase in gearing ratio and net finance costs, thereby putting pressure on the company cash flows.
The company estimates that it will ensure the use of the proceeds is completed in fourth quarter (Q4) of 2017. Details show that N19.19billion will be used to reduce obligations to financial institutions while N19.57billion will be used for the repayment of a portion of the related party loans. Diageo, the parent company of Guinness Nigeria Plc indicated that it is fully committed to the success of the brewer’s Rights Issue and is willing to take up its rights in full.
The financial scorecard
In the nine months to March 31, 2017, Guinness Nigeria Plc reported revenue growth to N89.872billion from N69.618billion in the corresponding period of 2016. Gross profit was N32.17billion from a low of N30.26billion.
Operating profit increased to N4.19billion from N3.60billion. Net Finance Cost rose to N6.65billion from N2.39billion. Loss Before Taxation (LBT) stood at N2.464billion from N1.204 Profit Before Taxation (PBT) in the corresponding period of 2016.
The company report Loss After Taxation (LAT) of N2.555billion in the review period against profit after tax (PAT) of N864.18million in corresponding period of 2016. Loss Per Share was 170kobo against Earnings Per Share of 57kobo in corresponding period of 2016.
Babatunde Savage, Chairman, Guinness Nigeria Plc, stated that this process is part of the Company’s long term plans to continue to invest and return to profitability, commenting “We have been in Nigeria for 67 years and, while it has been challenging in recent times for many Nigerian businesses, we remain committed to this market as evidenced by our decision to offer this Rights Issue. We are grateful for the support that we have received from our shareholders and various other stakeholders up to this point.”
Peter Ndegwa, managing director of Guinness Nigeria Plc said: “This Rights Issue will allow the Company to deliver on its strategic objectives and give all our shareholders a unique opportunity to increase their shareholding in the company. Our expectation is that funds raised will help mitigate the impact of increasing finance costs, optimize our balance sheet and improve the Company’s financial flexibility.”
About the company
Guinness Nigeria Plc was established in 1950 and listed on The Nigerian Stock Exchange in 1965. It is currently Nigeria’s second largest brewer with brand portfolio which cuts across premium Guinness Foreign Extra Stout, mainstream Harp Lager, Malta Guinness and Orijin.
With a shareholder base of over 75,000 shareholders, it is also one of the foremost quoted companies in Nigeria. The company built its first brewery in Ikeja in 1962, and currently has facilities in Ogba, Benin City and Aba. Included in its portfolio are such acclaimed brands – Guinness Foreign Extra Stout, Guinness Extra Smooth, Malta Guinness, Malta Guinness Low Sugar, Harp Lager beer, Smirnoff Ice, Satzenbrau Pilsner, Dubic Lager Beer, Harp Lime, Orijin, SNAPP, Johnnie Walker, Ciroc, Baileys and many others. Guinness Nigeria is a subsidiary of Diageo plc, a global leader in beverage alcohol with an outstanding collection of brands across spirits and beer categories.
In 2016, Guinness Nigeria Plc became the first total beverage alcohol company in Nigeria by acquiring the rights to distribute international premium spirits like Johnnie Walker whisky and Baileys liqueur in the country and later commissioning a N4.7billion spirits line for locally manufactured spirits at its Benin plant.
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