April 4, 2012

•Guinness turnover for the 9months ended March 31st 2012 grew a tepid 2.5%YoY to N92billion on the back of slower volumes, even as sales continued its single digit run so far this year.

•Q3 turnover of N29billion declined 4.4%YoY-a 0.51% deviation from our forecast.

•At 43% gross margin were slightly below 45% 3 year average as the impact of a slight increase in commodity prices in Q 1 2012—sorghum and barley inched ~3% and ~6% within Q3 2012—was largely offset by a 3.6% appreciation in the naira over the same period.
 

OPEX and interest expense continue to weigh on bottomline 

•Notably, a 24% YoY rise in opex to N26billion (28% of sales) reflects increased marketing expenditure as well as an ~722ppt YoY increase in interest expense to N822million, which resulted in a 24%YoY decline in  PBT to N13.34billion.

•Similarly, PAT for the 9months and Q3 declined ~24% and 58% YoY respectively to N9billion and N1.9billion. Effective tax rates were stable at 32%.
 

We expect a rebound in 2013 financial year          

 •Guinness’ N55billion capacity expansion which we expect to come fully on stream in time for the commencement of FY2013 in July 2012 should provide a substantial boost to sales. Importantly, this should ease the production constraints which see current utilisation rates at ~90% contributing to the tepid sales growth through FY’12. We thus expect a rebound of strong double-digit turnover growth from FY’13.

•This capacity addition should provide much needed support for its fast growing Harp Lager brand, which has gained a ~35% share of lager market in recent years, and further consolidates its position in the stout segment where it dominates with ~80% share of market.

•We are also optimistic that Guinness’s foray into the mass market segment with the relaunch of Dubic beer in April 2012, an economy brand popular in the South East, will give it a foothold in the rapidly expanding mass market. We believe that such a differentiation strategy across the beer segments positions it effectively to weather the threat of market share erosion as consumers trade down in light of expected constrictions in discretionary income. We however expect much of the upside of this relaunch to materialise from FY 2013, accounting for the lead time required for its marketing drive to yield fruit.

•Another consideration which has to varying degrees affected the broader consumer goods sector is the volatility in northern Nigeria. However, to the extent that regions other than the north contribute the larger share of sales, the company is somewhat insulated from the shocks.

•In light of a sub-par performance so far, and the fact that Q3 contributes ~22% to annual sales, we maintain our FY ’12 top-line forecast at N132billion (7% YoY growth) factoring marginal volume increase in Q4.

•We also leave our COGS (19%YoY) and opex (13%YoY) estimates unchanged as we expect steady commodity prices in Q4’12. Thus, having already incorporated expected volume growth, our previous valuation assumptions remain essentially intact.
 

Still expensive in our view… 

•We retain our current TP of N201.55, which puts current market price at a~20% premium. From a relative valuation perspective, Guinness trades at a FY 2012 P/E and P/B of 24.18x and 7.56 x, compared with NB’s 16.66x and 8.49x. Thus, we reiterate our SELL rating of the stock.
 

Source: Company financials, ARM Estimates

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ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:

Reference: GUINNESS declares N9.1b PAT in Q1 '12 result,(SP:N237.03k)

 http://www.proshareng.com/quote/GUINNESS

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