Tuesday, September 12, 2017 9:23 AM / Cordros Capital
The management of GUINNESS recently guided to the drivers of the margin recovery in H2 of 2017 to specifically include pricing and cost-saving productivity initiatives. Although management provided no further guidance on prices, it is our view that subsequent pricing action is more likely to be upside than downside. Also, management plans to double capex in 2018F, and will commit part of the spending to productivity and efficiency projects.
In addition, stable FX has reduced margin headwinds in the short term. Altogether, these should temper the impact of (1) negative mix from consumers' increasing preference for lower priced accessible brands and (2) higher raw materials prices (Sorghum +124% y/y and Barley +18% y/y). Consequently, we increase gross margin estimate over our forecast period to 43%, from 32% previously.
Aside margin recovery, lower finance charges are a potential tailwind for GUINNESS' earnings. From a record N9.8 billion in 2017FY, finance charge is expected to more than halve in 2018F on (1) the reduction of borrowings upon completion of the rights issue and (2) possible non-recognition of FX loss.
Both respectively accounted for 68% and 32% of total financing cost in 2017FY, and 5% and 3% respectively of revenue in the last two years.
Conversely, we revise revenue growth forecast over 2018F lower to 5%, from 11% previously, after sales in Q4-17 came in lower (by 9%) than we expected. It is management's view that Nigerian beer consumers' purchasing power remains pressured, notwithstanding the seeming improvement in the macro environment.
It is our view that the strong revenue growth experienced from both spirits and oversea sales (notably to South Africa) in 2017FY (from zero bases) will likely stabilize in 2018F.
We are also concerned that having sold strongly in 2017 owing to brand awareness campaigns, the growth of Satzenbrau may taper with increasing consumers' familiarity with the product, and also considering that the brand is sold at a higher price point compared to a year ago.
Meanwhile, we retain the 2019-2023 revenue CAGR of 8%, in line with stronger economic and consumer recovery expectation.
Our estimate for tax rate has been revised higher to 32% (previously 29%) in line with guidance from management. GUINNESS' effective tax rate averaged 25% in the last five years.
Net impact of the above changes is for EBITDA and net profit growth of 45% and 384% respectively in 2018F, and 2019-2023 CAGR of 8% and 8.5% respectively.
Following the upward review to estimates, we have increased our 2018F TP to N91.11 (previously N80.02). The TP also reflects the planned doubling of capex in 2018F. HOLD
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