February 1, 2018 /3:50 PM /Vetiva
· H1’18 revenue slightly above estimate, up 19% y/y
· EBIT margin strengthens on operating cost improvement
· Debt burden fading, loans down 250% y/Y
· PAT strengthens to ₦2.1 billion in H1’18 (H1’17: ₦4.7 billion LAT)
Volumes drive revenue growth in H1’18 results
Printing slightly ahead of Vetiva estimate, GUINNESS recorded a 19% y/y revenue growth in H1’18 to ₦71 billion. Unsurprisingly, the Q2’18 selling season contributed the bulk of this figure (58%) given the stronger beverage consumption recorded in the festive period. According to GUINNESS, this growth was supported by a c.14% y/y rise in volumes sold. This was mainly due to a lower base from the prior period (amidst an inventory reduction) and an expanded portfolio of spirits brands.
In terms of segments, growth remained strong and weighted towards the nascent mainstream spirit portfolio, with the category now contributing 15% of total sales. Meanwhile, as consumer wallets remain pressured, cheaper priced products remain more favourable across the beer segment in H1’18. Notably, GUINNESS’ mainstream beer category (primarily Satzenbrau beer) also came under pressure amidst sustained consumer down trading and interest has been diverted to its value beer brands (primarily Dubic beer).
Improvement in operating costs support EBIT margin expansion
Though gross margin expanded 787bps y/y (prior period severely impacted by FX market conundrum), lingering effects of sustained inflationary pressures continued to drive a negative trend in margins q/q. Gross margin came in below our 36% estimate at 34% in Q2’18 (Q1’18: 36%; Q4’17: 45%). On the contrary, operating expenses came in 8% lower than we expected as the brewer’s productivity agenda continues to create cost savings. Supported by this, H1’18 EBIT came in 10% above our estimate at ₦6.6 billion, and much better than ₦85 million operating loss in H1’17.
With proceeds from its rights issues utilized in repayment of outstanding debt obligations, GUINNESS’ total borrowings declined from ₦34 billion in H1’17 to ₦10 billion in H1’18 – bringing its debt to equity ratio to 0.12x (Previous: 0.8x). As such, positive signs have begun to surface in financing expenses – Q2’18 finance cost down 75% q/q to ₦956 million. Overall, H1’18 net finance expense declined 32% y/y and came in 5% below our expectation. With this, H1’18 PAT beat our estimate by 6%, coming in at ₦2.1 billion (H1’17 LAT: ₦4.7 billion).
Expect consolidation on H1 performance
Whilst Management has guided on softer sales in the mainstream beer segment (c.70% contribution to beer volumes), we are optimistic for revenue in H2’18 given the mild topline outperformance and continued benefits from the expanded spirits portfolio. Thus, we revise our FY’18 revenue growth estimate to ₦140 billion (Previous: ₦135 billion) – translating to an 11% y/y growth.
Meanwhile, volatility in gross margin despite modest stability in the cost environment remains a worrying feature; we lower our FY’18 gross margin estimate marginally to 35% (Previous: 36%). Our earnings estimates are however sizably supported by expectations of further decline in net interest expense (amidst the lower debt balance and noting that the H1’18 figure was bloated by FX losses), as well as a lower operating expenses forecast. Overall, we revise our FY’18 PAT to ₦6.7 billion (Prev: ₦5.3 billion, FY’17: ₦1.9 billion) – representing a 215% y/y rise. We revise our 12-Month Target Price higher to ₦78.76 (Prev: ₦71.96), and maintain a SELL rating.