As a testament to the ongoing downturn that has been brought about by the pandemic, and in keeping with the company’s forewarning in June, Guinness Nigeria has released a not-so-shocking FY’20 result, reporting a 21% y/y decline in Revenue to ₦104.4 billion (Vetiva: ₦112.2 billion).
Who/what is to blame?
The lockdown phase of the pandemic in several cities enforced the decline in patronage of bars and lounges for a part of the Guinness’ Q4 period, while the curfew and social distancing measures imposed during and after the lockdown phase continues to impact night-time activity.
Additionally, in the last quarter, two of their brewing houses (Benin and Ogba) had been closed for some time and this had affected production and trading activities. This disruption to sales and production severely impacted the Guinness’ capacity to roll out meaningful volumes in the last quarter (with substantial de-stocking across several segments leading to a fall in Revenue).
Furthermore, the combined impact of the pandemic and increasing inflation on various sectors of the economy has ensured a decline in consumer disposable income and purchasing power, exacerbating the demand problem. The immediate impact of these headwinds is evident in the drastic 72% decline in Q4’20 Revenue to ₦8.4 billion (Q4’19: ₦30.1 billion, Vetiva: ₦16.2 billion).
That’s not all; although exports comprise less than 5% of total revenue, the 72% decline in revenue from exports is another factor that has contributed to the y/y decline, given the strict border controls implemented in the latter part of 2019.
Has the Spirits play been worth it?
Previously a strong lager player in the Nigerian market, Guinness Nigeria has seemingly deprioritized its lager segment for a Spirits play in a market where it sees enormous potential. With a portfolio that bridges both the lower and premium segments of the spirits market, it has seen some progress in expanding its market share, albeit with the bulk of it coming in the mainstream space.
While management’s target of growing spirits revenue to account for 25% of topline seems ambitious in the near term, the segment has grown by 4% over the previous 3 years to account for 18% of topline in 2019. That said, the spirits play has been somewhat threatened in the past half-year.
Segment contribution to topline fell c.1ppts to 18% from Q2’20 (previously expected: 20%) as the previously mentioned problems ravaged sales. The segment was mainly propped up by Mainstream Spirits (MSS), growing 15% y/y, as International Premium Spirits (IPS), which seemed to be most affected by the pandemic, saw negative volume rollout in the last quarter.
Furthermore, Lager and Malt continued to underperform, with the contribution to revenue declining c.18% and c.10% respectively in the past three years. However, on a positive note, Brand Guinness and RTDs have grown considerably seemingly due to the decline from the other poorer performing segments. We believe that the Nigerian market would continue to favour Lager and locally distilled spirits over premium and mainstream packaged spirits in the near term due to income constraints.
However, given the relatively weak cash and branding position of Guinness (ex-flagship brand) compared to the two lager giants, the spirits play for Guinness remains a solid push.
The main upside in this play remains the relatively stronger margins of the spirits portfolio, albeit weighted more towards the IPS. Success for Guinness would therefore hinge on transitioning its MSS customers to its IPS space, a tough task in a country with consistently shrinking consumer purchasing power. Notably, we see this coming to play in the previous year, with gross margin expanding 1ppts y/y to 32% (FY’19: 31%) in spite of the reduced scale as well as the pandemic and Fx drove inflationary pressures.
A few surprises – the hard road of impairments
Defying industry trend, Guinness Nigeria’s Administrative expenses grew 45% y/y (+₦4.5 billion) to ₦14.3 billion. This was driven by increased personnel and external labour expenses, necessitated by business continuity plans in the wake of the pandemic. Although Distribution expenses decreased by 15% y/y, operating expenses still jumped 39% y/y to ₦32.8 billion (Vetiva estimate: ₦25.1 billion) causing operating margin to shrink by 4ppts y/y to 10% for the year.
Furthermore, as intimated by Management in June, the strategic review of the business – borne out of a sizeable downswing in Guinness Nigeria’s share value, revealed an ₦11.7 billion impairment loss on fixed assets which was majorly on assets from discontinued brands and as a result of downtime from trading activities. Guinness Nigeria also recognized a ₦2.0 billion impairment loss on trade receivables.
Consequently, Loss before interest and tax printed at ₦12.8 billion (FY’19 EBIT: +₦9.0 billion). Although Finance costs had reduced significantly in 2019, we saw a notable 74% jump this year, despite the favourable interest rate levels in the past year. We attribute a portion of this to Guinness Nigeria increased borrowings, noting that this increase, in addition to stronger operating cash flows has helped Guinness Nigeria maintain a 4x expansion in cash balances.
Overall, accounting for the elevated finance costs, Loss before tax printed at ₦17.1 billion (FY’19 PBT: +₦7.1 billion). However, allowing for a ₦4.5 billion tax credit, Loss after tax printed at ₦12.6 billion, a contraction from its FY’19 performance (+₦5.5 billion) resulting in a loss per share of ₦5.74 (FY’19 EPS: ₦2.50).
What does the future hold for Revenue?
With the worsening performance of its Lager segment, Guinness Nigeria has decided to concentrate on its Guinness, malt and Spirits brands in the coming year. Given that the major headwinds to Sales have been somewhat mollified, with the prospective re-opening of major alcohol sales outlets, we are slightly optimistic of a rebound in Revenue. However, a challenge we see is the further 14% increase in excise duties to ₦20/l for Spirits that was set to take effect in July.
Furthermore, we expect the pressure on consumer wallets to keep beer consumption repressed (ex-festive quarters) and impede Revenue growth. Also, we expect that the company’s tighter credit policy stance may have a further sobering effect on Sales. That said, we project Revenue for FY’21 to print at ₦112.7 billion (+8% y/y), given the weak 2020 base.
Based on this figure, we expect gross profit to jump 15% y/y to ₦38.3 billion (Gross margin: +2ppts to 34%) buoyed by the focus on Spirits, a high margin segment. Taking into consideration the firm’s recent “own-a-bar” route to market strategy with the use of its employees, we foresee distribution expenses maintaining its current momentum while maintaining the run rate for admin expenses. We project a 7% decline in total operating expenses to ₦30.4 billion for FY’21.
Whilst the company is currently exposed to Fx volatility on account of its USD denominated related party loans, (c.$23 billion) we forecast a 52% moderation in finance costs to ₦2.2 billion as we expect management to refinance these loans to cheaper naira loans before the end of the year. Furthermore, we believe that the company’s naira loan restructuring efforts would support this moderation. Thus, we project an EBT of ₦6.5 billion (FY’20 LBT: ₦17.1 billion).
Accounting for taxes, we estimate a PAT of ₦4.4 billion and an EPS of ₦1.26 (FY’19: -₦5.74). We value the stock at ₦17.06 which arrives at a forward P/E of 13.5x. We rate Guinness Nigeria BUY.