Guinness Nigeria: Strong Bottomline Growth Despite Cost Pressures

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Guinness Nigeria Plc (Guinness) reported a strong earnings growth in Q3 2021, attributed to price and volume improvements during the period. In Q3 2021, revenue grew by 54% YoY to N42.61bn from N27.69bn in Q3 2020.

Operating profit rose by 137% YoY from N1.66bn in Q3 2020 to N3.93bn in Q3 2021, while profit before tax grew from N71mn in Q3 2020 to N3.17bn in Q3 2021.

Higher Prices Drive Revenue Growth

Guinness Nigeria’s topline performance improved materially on the back of gradual economic reopening, after an initial pressure in previous quarters, owing to the coronavirus pandemic between March 2020 to September 2020. The closure of bars and hotels implied the shutdown of major sales points of the Company.

Therefore, we believe that as the economy gradually reopened towards the end of 2020, more volumes were sold. Also, we posit that price increases took place during the quarter, to reflect the impact of higher input costs – due to exchange rate pressures.

Margins Decline Due to High Costs

The Company recorded a 72% YoY increase in the cost of sales from N16.74bn in Q3 2020 to N28.76bn in Q3 2021.

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Given the Company’s exposure to the exchange rate, we link the higher costs to be induced by the currency devaluation in 2020. We note that the 54% revenue growth relative to the 72% cost increase suggests that the Company did not pass the entire cost burden to customers, which we attribute to the intense industry competition.

Consequent to the higher cost of sales incurred in Q3 2021, the Company’s gross margin shrank by 800 basis points from 40% in Q3 2020 to 32% in Q3 2021.

Lower Finance Cost and Other Cost Optimisation Efforts Support Bottomline Growth

Operating expense margin declined from 34% in Q3 2020 to 24% in Q3 2021. The decline in operating expense margin majorly resulted from lower administrative expenses incurred, and a relatively slow increase in marketing and distribution expenses.

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The cost-saving recorded in operating expense (in the form of a lower margin) totally offset the decline in gross margin. Operating profit surged by 137% YoY from N1.66bn in Q3 2020 to N3.93bn in Q3 2021. By implication, the operating margin improved from 6% in Q3 2020 to 9% in Q3 2021.

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Net finance cost declined by 52% YoY from N1.59bn in Q3 2020 to N755mn in Q3 2021, thus boosting profit before tax from N71mn in Q3 2020 to N3.17bn in Q3 2021. Profit after tax grew from N838mn in Q3 2020 to N2.16bn in Q3 2021.

Q3 Historical Trend

Guinness Nigeria
Source: Company Accounts, WSTC Research

Earnings Rebound but Below Historical Levels

On a cumulative basis, revenue grew by 20% YoY from N96.02bn in 9M 2020 to N114.96bn in 9M 2021. Operating profit grew by 46% YoY from N5.22bn in 9M 2020 to N7.64bn in 9M 2021, while profit before tax grew by 123% YoY from N2.01bn in 9M 2020 to N4.46bn in 9M 2021.

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Outlook

We forecast a N2.20 FY 2021 EPS for the Company (previous: N1.29), which incorporates the strong Q3 2021 performance, and our expectations of sustained revenue growth driven by higher volumes and sale of higher-margin products. We also note the low base in Q4 2020, where the Company incurred significant impairment losses on assets. We do not expect the asset impairments to recur in Q4 2021, thus resulting in a potentially higher bottom line growth.

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Based on our revised earnings and dividend projections, we arrived at a N28.19 fair value. At the current market price of N29.00, the total return (price return and dividend yield) on the stock, based on our estimates, stands at 2%.

Hence, we recommend a HOLD.

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