Wednesday, February 03, 2016 2:56 PM / FBNQuest Research
Rolling over to 2017E; maintaining Neutral rating
Guinness Nigeria’s (GN) Q2 2016 (end-Dec) results came in significantly weaker than expected. Despite the potential benefits of its recent acquisitions in the spirits segment, we have cut our EPS forecasts by 45% on average over the 2016-18E period. Regardless of these sizable cuts, our new price target of N110.5 is only 6% lower because we have; (i) rolled forward our valuation to 2017E, (ii) reduced our capex forecasts by an average of N1.0bn over the 2016-18E period and (iii) lowered the beta driving our DCF to 1.0 from 1.2 previously. Although the shares are trading on a 2016E (end-June) P/E multiple of 43.3x for 43% EPS growth in 2017E, the earnings growth is flattered by weak comparables in 2016E. The stock is trading around our fair value estimate of N110.5. As such, we retain our Neutral rating on the shares.
Weak Q2; PBT down 58% y/y
Guinness Nigeria’s Q2 2016 (end-Dec) results showed that PBT and PAT both declined by 58% y/y to N1.1bn and N809m respectively. An 18% y/y reduction in sales to N28.1bn and a gross margin contraction of 140bps y/y were the major drivers behind the y/y decline in earnings. Although opex and interest expense both fell by 10% y/y and 43% y/y respectively, the combination of weak growth on the topline and the y/y contraction in gross margin completely offset the positives. Sequentially, sales, PBT and PAT were up by 29% q/q, 119% q/q and 122% q/q respectively. However, the q/q growth was down to very weak comparables in the prior quarter.
Spirits business to provide a breather
Guinness’ weak results were due to a decline in volumes for Orijin and a volume-price mix skewed to value brands. Although the company recorded growth in the Malta Guinness and Guinness Stout brands, this was not enough to offset the impact of the unfavourable volume-price mix. Going forward, we believe that GN’s recent acquisitions of the distribution rights of Diageo Brand’s spirit business and the manufacturing and distribution rights of United Spirit’s Nigerian business should provide a boost to sales and earnings in the near-to-medium term. Despite the estimated additional revenues of around N9bn annually from the acquisitions, we have cut our 2016E sales and EPS forecasts by 11% and 47% to N109bn and N2.57 respectively on the back of the weak Q2 results.
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