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Guinness Nigeria Plc FQ2 17 - Currency Pressures Drive Another Sober Result

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Tuesday, January 31, 2016/ 9.15 AM / ARM Research 

Guinness Nigeria Plc (Guinness) released its unaudited 6M 17 financial statements which revealed post-tax loss of 4.66 billion. The weakness in earnings was largely driven by elevated input cost (+55% YoY to 43.9 billion) which offset impact of revenue growth (+19.4% YoY to N59.5 billion) in the review period.  
 

FX loss and unfavourable sales mix weigh on margins 

Similar to FQ1 17, Guinness was faced with an elevated input cost environment which drove COGS sharply higher (+72% YoY, +67% QoQ) to N27.5 billion (FQ2 17E: N27.0 billion). At the earnings call, management noted that 53% of input cost pressures emanated from FX fluctuations as, relative to FQ2 16, the naira was 55% weaker. Elsewhere, Guinness reported further pressures from higher refined sugar prices (+191% YoY) as well as sharp jumps in sorghum (+227% YoY) and maize (+ 104% YoY) prices. Accordingly, gross margin plunged (-18.4 pps lower YoY) to a 20- quarter low of 24.6%.  
 

FX loss exerts double-layered pressure on earnings

In the review period, Guinness remained strongly exposed to currency weakness via its dollar loans (FQ4 16: $26 million), which again resulted in FX translation loss of 900 million (33% of finance expense). On a QoQ basis though, finance expense was 21% lower at 2.7 billion due to tamer naira contraction in the period. Thus, the relatively tapered FX concern provided offset for the impact of ~16% QoQ jump in debt levels to 49.8 billion.  For us, the rise in debt levels was underpinned by a draw down on the company’s Diageo line of credit ($95 million) following sustained dollar shortage.   

Price hikes and strong value beer volumes underpin topline expansion
Beyond input cost and FX woes, revenues rose sharply for the second consecutive quarter (+29.8% YoY to N36.5 billion), relative to  our expectation for a milder growth to N26.8 billion over the quarter. In our view, revenues were buoyed a combination of factors including management’s implementation of price hikes on majority of its product portfolio in November, strong performance posted by its spirits division and exports in the period under review.   

FX and input cost pressures to drive a second consecutive FY loss
We expect the troika of factors which impacted COGS negatively (FX illiquidity, currency weakness and elevated domestic grain prices) in the current period to underpin pressures over subsequent quarters. In the light of these expectations, our blended FVE for Guinness has been revised downwards to N62.2 which is at a discount to its last trading price of N64.9. Having booked a loss in FY 16, Guinness P/E is negative on current and forward basis. On current EV/EBITDA of 14.25x, the stock is at a premium to Bloomberg Middle East and Africa peers at 10.5x. Given the pressured earnings outlook, we retain our SELL rating on the stock. 

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