Monday, October 31, 2016 5:23 PM / FBNQuest Research
Event: Guinness Nigeria reports Q1 2017 (end-Sep) results
Implications: Marked downward revisions to consensus 2017 PBT forecast likely; market likely to react negatively
Positives: Opex declined 25% y/y and surprised positively
Negatives: Guinness reported pre-tax and post-tax loss of –N2.2bn
Late last week, the NSE published Guinness Nigeria’s (Guinness) Q1 2017 (end-Sep) results. The results showed sales growth of 6% y/y to N23bn and a pre-tax loss of -N2.2bn.
The pre-tax loss compares with PBT of N518m reported in Q1 2016. Despite the y/y sales growth and a -25% y/y decline in opex, a gross margin contraction (-1,424bps y/y to 28.6%) and an increase in net finance costs (+212% y/y) were significant and drove the losses reported.
Further down the P&L, the company reported a post-tax loss of -N2.2bn which compares with PAT of N362m reported in Q1 2016. On a sequential basis, sales declined by -29% q/q which we attribute to seasonality - the end-Sep quarter is one the brewers’ weaker quarters.
The pretax loss compares with –N3.6bn in Q4 2016 while the post-tax loss compares with –N2.9bn in Q4 2016. Despite the q/q sales decline and a -713bp q/q gross margin contraction, an opex decline of -45% q/q and net finance charges declining by -34% q/q helped to reduce the magnitude of the pre-tax loss during the quarter.
Similar to most consumer goods names, Guinness has been hit hard by the current fx challenges. We recall that the CBN implemented a floating exchange rate regime which saw the interbank rate moving downwards by a further 10% over the June to September period, after an initial 30% as of end-June.
Despite the sales growth of 6% y/y and a healthy decline in opex, the fx pressures weighed on both gross margin and net finance costs lines. We estimate that Guinness imports around 70% of its raw materials.
As for the finance charge, the company reported a -N2.2bn loss on fx translations which was as a result of a US$-denominated loan of around US$26m the company took on in Q4 2016 (end-Jun).
Compared with our estimates, sales came in marginally ahead, by 3%, and fared slightly better than rival Nigerian Breweries which reported a sales growth of 3% y/y in the same quarter. PBT and PAT missed our estimates significantly.
The reason for the variance was the negative surprise on the gross margin and net interest charge lines.
Given the weak set of numbers, we expect to see marked downward revisions to consensus FY 2017 (end-Jun) PBT and PAT estimates of N686m and N484m respectively.
Year to date, Guinness shares have shed -33.6% and have underperformed the broad index which is down -4.7% this year. We expect the market to react negatively to these numbers.
We rate Guinness Nigeria shares Underperform. Our estimates are under review.
Guinness Nigeria Q1 2017 (end-Sep) results: actual vs. FBNQuest Research estimates (N millions)
Source: NSE; FBNQuest Estimates
1. Guinness Nigeria Plc Q1'17 Results - Fiscal Year Kicks Off Negative, SELL