Guinness Nigeria’s overall volumes picked up in Q2 2020 (end-Dec), with net sales up 4% y/y to N41.4bn and 5% ahead of our forecast. This was boosted by strong double-digit growth in the premium stout and mainstream spirits categories, as well as the price increases implemented late last year. However, gross margin widened by just 6bps y/y and was -326bps narrower than forecast because the price and volume upsides were mostly eroded by absorbed costs. Over the coming quarters, we see more cost pressure coming from this year’s VAT increase.
In view of this challenge, management has hinted that it plans to tactically pass on the costs in the form of higher prices. However, this move will likely be constrained by an aggressive pricing strategy implemented by International Breweries in its bid to grow market share. Given these headwinds, we have modeled lower gross margins over the 2020-22E period, translating to an average EPS cut of -16%. Nevertheless, our new target price of N31.4 is -5% lower because we rolled over our valuation to 2021E.
Guinness shares are flattish year-to-date but have underperformed the broad market index by â€“4%. The shares are trading on a 2021E P/E multiple 15.7x for an average EPS growth of 25% in 2021-22E. From current levels, our new price target implies a potential upside of 4%. We, however, retain our Underperform rating given the challenges that we anticipate for the beer industry.
PBT down -10% y/y
Guinness’ PBT decline for Q2 was largely driven by 6% y/y and 39% y/y increases in opex and net interest expense to -N9.2bn and -N573m respectively. Although gross margin widened by 6bps to 28.7%, this was not strong enough to offset the increases in opex and borrowing costs. On a sequential basis, gross margin contracted by -80bps q/q while opex increased by 25% q/q.
As such PBT fell significantly q/q. Q2 PBT of N2.3bn was -25% behind our forecast of N3.1bn, largely due to a -326bp negative surprise in gross margin.