Guinness Nigeria Plc – Heading Back to The Woods?

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A combination of weak consumer demand heightened competition, and an overall weak the macroeconomic situation hit Guinness Nigeria Plc (‘the Company’) hard, as reflected in its Q3’20 results.

According to the recently released result for nine months ended March 31, 2020, the standalone Q3’20 results showed that revenue declined by 18% year-on-year (YoY), from N33.61bn in Q3’19 to N27.69bn in Q3’20.

The 18% year-on-year decline was the biggest quarterly topline decline since the start of the Company’s financial year which began in June 2019.

Although revenue declined by 4% YoY in Q1’20, there was a rebound in Q2’20 with the Company growing revenues by 4% YoY in Q2’20. The momentum could not be sustained in Q3’20, as revenue plummeted.

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When compared with the other two major players in the brewing industry – Nigerian Breweries Plc and International Breweries Plc within the January – March 2020 period, the performance of the Company fell short, as it fell behind the most with an 18% revenue decline.

International Breweries grew top line by 1% while Nigerian Breweries reported a flat revenue. The double-digit dip in revenue for Guinness Nigeria suggests a declining market share, amid weak demand in the industry and increased competition from its peers.

However, we note that of the three major players, the Company has more export sales. Hence, the land border closure policy in September 2019 possibly affected sales during the period.

Guinness Nigeria Plc - Heading Back to The Woods? - Brand Spur

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On a positive note, the cost of sales in Q3’20 declined by 26% year-on-year, from N22.59bn in Q3’19 to N16.74bn in Q3’20. Thus, the Company’s cost margin stood at 60% in Q3’20 relative to 67% in Q3’19.

The cost margin improvement in Q3’20 also resulted in an overall cost margin decline from 71% as of H1’20 to 68% as of 9M’20 (9M’19: 69%). As a result, the decline in gross profit (-1% YoY) was much lower than the decline in revenue (-18% YoY). Gross profit in Q3’20 stood at N10.95bn relative to N11.01bn in Q3’19.

Evidently, the cost management mitigated the extent of the decline in gross profit.

However, an 11% YoY increase in operating expense worsened the Company’s performance
Q3’20. Operating expense rose from N8.46bn in Q3’19 to N9.43bn in Q3’20, induced by higher administrative expenses (+16% YoY from N2.49bn to N2.89bn) and higher marketing and distribution expense (+9% YoY from N5.97bn to N6.53bn).

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The inability to generate more revenue to accommodate increased expenses resulted in a higher operating expense margin of 34% in Q3’20 from 25% in Q3’19. Therefore, operating profit nosedived by 38% year-on-year, from N2.69bn in Q3’19 to N1.66bn in Q3’20.

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Finance cost surged by 495% YoY, from N280.46mn in Q3’19 to N1.67bn in Q3’20. The increase in finance cost was consistent with the 33% year-on-year increase in total borrowings, from an average of N15.44bn in Q3’19 to an average of N20.52bn in Q3’20.

We attribute the spike in total borrowings to the liquidity constraints faced by the Company, amid weakened sales and cash flows. On the other hand, finance income grew by 78% YoY from N45.77mn in Q3’19 to N81.46mn in Q3’20.

Overall, profit before tax plummeted by 97% YoY from N2.46bn in Q3’19 to N71.40mn in Q3’20. Profit after tax dipped by 97% YoY as well, from N1.67bn in Q3’19 to N46.43mn in Q3’20.

Guinness Nigeria Plc - Heading Back to The Woods? - Brand Spur

Outlook

We expect the downward trend in earnings to persist in Q4’20, majorly due to the impact of
the COVID-19 (coronavirus) pandemic. The closure of bars, hotels, and other major sales point is expected to weigh heavily on topline growth and cash flows. We also maintain that the sustained land border closure in the economy will continue to negatively impact topline
growth.

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We are particularly concerned about the rising debt levels of the Company. Although we
understand that the Company’s gearing ratio of 0.24x is well below that of its peers (Nigerian Breweries Plc: 0.57x; International Breweries Plc: 0.66x), we yet express concern on the rising levels of working capital deficit of the company, which raises significant worry on the liquidity position of the Company. We recall that the Company, in 2017, raised equity capital of N37.84bn to pay down foreign-denominated debts and build working capital to pursue growth opportunities.

However, the challenges in the industry have yet to make the Company invest in any growth opportunities. Given persistent pressure on cash flows and earnings due
to weak demand and expected increased credit sales; we expect to see increased debt levels going forward.

Overall, we forecast an EPS of N0.31 for FY’20, and we do not expect the Company to declare a dividend for FY’20. Our rationale for a non-declaration of dividend stems from an
assumption that the liquidity challenges faced by the Company might prompt it to retain cash ahead of uncertainties surrounding the coronavirus pandemic. At current prices, the Price-to-earnings (P/E) multiple of the Company stands at 55x – significantly above our benchmark P/E multiple of 17x.

Therefore, the stock trades at a 70% premium to our fair value estimate of N5.12. Hence, we recommend a SELL.

WSTC Securities Limited (WSTC)

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Guinness Nigeria Plc - Heading Back to The Woods? - Brand SpurGuinness Nigeria Plc - Heading Back to The Woods? - Brand Spur

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