Guinness Nigeria Plc - Uphill Battle for Brewer


Thursday, September 22, 2016 3:54pm / Vetiva Research

·         Volume shock cuts FY’16 sales to lowest since 2008
·         ₦3.5 billion FX loss undercut earnings
·         Reports ₦2 billion LAT in FY’16
·         Bleak outlook, forecasts revised, shares rated SELL


Revenue slump amidst volume rout, lower price mix
In line with guidance from parent company Diageo,
GUINNESS reported a 14% revenue decline for its financial year ended 30 June 2016.

Whilst the brewer continued to shore up volumes in its value segment (up 33% y/y) with strong growth in Satzenbrau, significantly lower volumes from mainstream brands (particularly Orijin and Harp), and underperformance in the premium segment (mostly Guinness Foreign Extra Stout) dragged topline.

Amidst a fast evolving consumer landscape, star product Orijin (upper mainstream Ready-to-Drink brand) had a poor performance due to consumer down trading and increased competition.

We recall rival NB and SABMiller introduced lower priced RTD Ace Roots and 1960 Roots respectively. Thus, the decline in revenue was as a result of overall weaker volumes and a lower price-mix from the faster growing value segment.

Sky high costs derail earnings, posts 2 billion loss
Gross margin contracted 537bps y/y to 41.0% (Vetiva: 41.5%) reflecting the impact of currency depreciation on imported raw materials and the growth of “lower priced-lower margin” products in the period. Though lower in nominal terms, elevated operating expenses (as a % of sales) further trimmed margins, bloated by a one-off restructuring cost totaling ₦2 billion.

The most significant spike in costs was however recorded in the finance expense line following a ₦3.5 billion loss on foreign exchange transactions (impact of weaker naira). Also noteworthy is the 90% rise in total borrowings following ₦11.3 billion Commercial paper (CP) issuance and ₦7.4 billion long term loan from Diageo – putting debt/equity ratio at 94% (2015: 51%).

Overall, GUINNESS reported a FY’16 loss after tax of ₦2.0 billion, dwarfing Consensus and Vetiva estimates of ₦1.8 billion and ₦247.0 million PAT respectively. Despite this, the Board of Directors have recommended DPS of 50 kobo (FY’15: ₦3.20) from its retained earnings.

Bleak earnings outlook for FY’17, SELL rating maintained Whilst we see prospects for higher volumes in FY’17 from the value segment and the new Spirits business, we expect the volume rout in the premium segment will remain a revenue depressor. We note that GUINNESS has only Satzenbrau in the value lager segment competing for market share with NB’s Goldberg and Life, and SABMiller’s Trophy and Hero.

However, following statement from Management about some price increases already taken, we expect a marginally better revenue performance and revise our revenue forecast to ₦106 billion (Previous: ₦97 billion).

Whilst we note some staff cuts were implemented in Q4’16, we expect advertising and promotion costs to remain elevated in FY’17 as the company continues to support its brands in a highly competitive terrain.

We also foresee more FX losses amidst further depreciation of the currency since 30 June 2016. As GUINNESS integrates the United Spirits Limited brands, following acquisition of production and distribution rights in 2016, we foresee higher capital expenditure in order to develop the brands and route to consumer.

Thus, our FY’17 EPS estimate is revised lower to ₦0.39 (Previous: ₦2.25). Consequently, our 12-month target price is also revised downward to ₦76.81 (Previous: ₦88.22).

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