Management Reiterates Commitment to Strategy
For most investors, Guinness Nigeria second-quarter results (Full Year is June) still leaves a lot to be desired from the brewer, particularly after the underwhelming end to the last financial year.
Cumulatively, H1:2021 revenue is up 5.89% YoY to NGN72.35bn, building on the recovery recorded in the prior quarter (revenue grew 11.62% YoY) when restrictions on on-trade sales channels were lifted.
On a standalone basis, however, Q2 numbers look less encouraging, considering that support came from price upward adjustments on selected Spirits brands to cope with higher excise duties and the effect of festivity- associated demand (October–December is historically GUINNESS’ strongest sales period).
Adjusting for both factors leaves us with a clearer picture of the brewer’s relatively inferior performance. Even so, management has reiterated commitment to its strategy of focusing investments around its high margin spirits portfolio (including International premium spirits and mainstream spirits) – which now jointly accounts for c. 25% of overall revenue (vs. 15% as at 2018FY).
With the exception of Brand Guinness, sales growth was positive across the brewers’ product categories (Brand Guinness: -1%, Mainstream spirits: +46%, Premium Spirits: +12%, Malts: +5% and RTDs: +1%).
Although we remain concerned about topline growth sustainability, over H2:2021 we foresee slightly better numbers (due to a lower base from H1:2020). Thus, we have reviewed our revenue forecast upwards to NGN109.59bn – a 5.00% growth from 2020FY levels.
Cost to Sales now at 74.31%
Guinness Nigeria’s production costs increased by NGN30.75bn in Q2:2021, pushing overall costs to NGN53.77bn and cost to sales up to 74.31% (vs. 70.95% in H1:2020 and much higher than its 6-year historical average of 62.97%).
Gross margins bore the brunt of a faster rise in costs relative to sales, tumbling by 337bps year on year to 25.69%. Although operating expenses provided some respite, thanks to lower marketing (-4.14% YoY) and distribution (-13.17% YoY) expenses, net finance charges and a higher tax bill (including a one-off tax charge) dragged PAT lower.
While finance income was up 16.34% to NGN335.28mn, the 1.49x YoY hike in net finance costs to N2.42bn was driven largely by a 44.09% jump in finance costs to NGN2.76bn (owing to the remeasurement of FCY balances).
Following the retirement of Letters of credit and short-term loans in the prior quarter, total interest-bearing liabilities dropped even further to N11.65bn (from NGN13.28bn in Q1:2021 and NGN22.80bn in 2020FY). These interest-bearing liabilities are now made up of related party loans of NGN8.99bn (maturing in May 2021) and NGN2.66bn worth of commercial papers.
Though the brewer ended the quarter with NGN524.22mn in profits, losses from the preceding quarter dragged PAT for H1:2021 to negative NGN317.42mn (vs. NGN1.32bn in profits in H1:2020). For 2021FY, we forecast bottom-line would settle at negative NGN795.48mn.
Financial Highlights (NGN billion) GUINNESS NIGERIA PLC H1:2021 Unaudited Results
Liquidity Ratios Show Mild Improvement
GUINNESS’ working capital position remained weak at the end of the period, with short-term liabilities outweighing liquid assets by NGN4.82bn.
However, current and quick ratios improved from previous levels, ticking up to 0.93x and 0.61x (vs. 0.89x and 0.40x respectively), reflecting slightly stronger growth in current assets (vs. current liabilities) and improved cover for its short term obligations, even as management continues to pursue tighter credit terms and improved receivables collection.
Outlook and Recommendation
For 2021FY, we forecast EBITDA would come in at NGN14.25bn and maintain a target EV/EBITDA of 1.24x. We arrived at a price target of NGN16.99 – an implied downside of 10.58% to yesterday’s (4th February 2021) closing price. Thus, we place a SELL rating on the counter.