Monday, July 04 2016 12:02PM /FBNQuest Research
Significant cuts to earnings estimates and price target:
Following Guinness Nigeria’s (GN) Q3 2016 (end-Mar) results which came in significantly weaker than expected, we have cut our earnings estimates over the 2016-17E period by 56%. However, we have reduced our price target by a slimmer margin of 21% to N87.51.
GN shares are trading on a 2016E P/E multiple of 83.0x (compared with the brewery sector average of around 45x) for average EPS decline of -3.1% y/y over the 2017-18E period. Year-to-date, the shares have shed -12.8%, underperforming the broader index which has gained 2.3%. From current levels, we see downside potential of -16.6% to our price target. As such, we have downgraded our rating on the stock to Underperform.
Weak Q3; pre and post tax losses of -N449m and -N309m resp.:
GN’S Q3 sales declined by 33% y/y to N19.8bn; the company reported pretax and after tax losses of -N449m and -N309m (compared with profits of N2.5bn and N1.8bn in Q3 2015) respectively. The weak sales drove a gross margin contraction of -259bps y/y to 44.8%. Although a -17% y/y decline in opex provided a partial offset, the combination of weak growth on the topline and the y/y contraction in gross margin proved more significant. Thanks to a tax credit of N140m, the after tax loss narrowed to -N309m. Sequentially, sales were down 30% q/q. However, the pretax and after tax losses compare with PBT and PAT of N1.1bn and N809m in Q2 2016.
No silver lining on the horizon in the near term:
GN’s weak results were primarily due to a contraction on the topline arising from a slowdown in the growth of Orijin. Given the devaluation of the naira, we do not expect to see any significant improvement in gross margin in the near term. We estimate that the company imports c.45% of its raw materials. Therefore, for our view on the stock to become positive, we would need to see the company regaining market share, especially in the value segment and/or improvements in its cost base. We have forecasted sales and EPS declines of -18.7% y/y and -75.6% y/y respectively for 2016E.
1. GUINNESS Q3 sales hit 6 year low