Tuesday, September 12, 2017 / 1:24 PM /Vetiva Research
· Volume growth, pricing benefit drive 23% y/y revenue growth
· Gross margin moderates for a third consecutive year
· Lower than expected OPEX, finance costs support outperformance
· FY’17 PAT prints at N1.9 billion (Consensus: N1.0 billion LAT)
· Post Rights Issue Target Price estimated at N50.43
A tale of two halves for Guinness Nigeria
After a tumultuous first half, GUINNESS released its FY’17 results for the financial year ended 30 June 2017, reporting an impressive N1.9 billion profit after tax figure, much better than the N0.2 billion and N1.0 billion loss after tax expectation from Vetiva and Consensus Analysts respectively.
Whilst bottom line was deeply in negative territory as at H1’17 (N4.7 billion LAT), a combination of sales and margin improvements drove a solid recovery in the second half (N6.6 billion PAT). The Board of Directors declared a dividend of N0.64/share (FY’16: N0.50/share) – implying a dividend yield of 0.9% (Peer Average: 2.8%).
Revenue recovers on improving volumes, price
Flattered by prior year’s low top line base, GUINNESS recorded a 23% rise in revenue for FY’17 benefitting from higher prices as well as a reported c.15% overall volume growth from an expanding portfolio. Per parent company Diageo, growth was largely driven by sustained traction gained in the accessible beer and mainstream spirits brands. Specifically, net sales from Satzenbrau (value lager beer) rose 61% y/y as consumers’ preference in the beer market remains skewed towards value products.
This rise was sufficient to offset the incessant rout in more expensive alternatives such as Guinness Stout and Harp. Likewise, strong volume ramp up persisted in the recently launched spirit lines amidst increased investments.
On the other hand, the ready to drink category continues to reel (down 15% y/y) amidst sustained underperformance from Orijin. With the “value for money” trend expected to persist in the beer market in the short-mid term as consumer wallets remain pressured, we expect volume growth in GUINNESS’ brand portfolio to remain driven by Satzenbrau, Dubic Malt (for the non-alcoholic segment) as well as its mainstream spirits in FY’18.
Cost improvement underscores margin outperformance
Amidst continued cost bombardments, GUINNESS’ gross margin contracted for a third consecutive year to 38% in FY’17 (FY’16: 41%, FY’15: 47%). Whilst the brewer had recorded a dismal gross margin of 26% in H1’17, a strong recovery to 50% in the second half significantly improved its margin. Further supported by operational efficiencies, operating margin improved 376bps y/y to 8% (H2’17: 15%). With this, FY’17 EBIT rose 131% y/y to N10.2 billion – 18% above Vetiva estimate.
Furthermore, following a moderation in FX losses in Q4’17, net interest expense came in 15% better than our estimate at N7.5 billion, albeit 11% higher y/y. With this, the brewer returned to profitability following four quarters of losses – PBT rose to N2.7 billion, compared to the N2.3 billion loss before tax for FY’16.
Following the impressive result, we expect GUINNESS to continue to benefit from its expanded portfolio and forecast a 7% revenue growth to N135 billion in FY’18. Further supported by improvement in the cost environment, a less volatile FX environment and the brewer’s productivity agenda, we estimate a 213bps expansion in PAT margin and forecast N4.6 billion PAT for FY’18. Our 12-month Target Price pre-rights issue is raised to N75.82, SELL. The stock currently trades at a FY’18 P/E of 32.9x, compared to 23.3x for the Consumer Goods sector.
Post Rights Issue Target Price estimated at N50.43
With an above average debt to equity ratio of 0.98x (Peer: 0.4x), management has earmarked the N40 billion rights for the repayment of debt obligations (c.N40 billion including bank overdrafts). Having closed its rights issue August 30th 2017, Guinness Nigeria PLC’s capital raise is nearing completion, with the listing of the shares scheduled to be completed in October. If fully subscribed, we anticipate a 45% to increase in shares outstanding to 2.2 billion.
With an average interest cover of 1.55x in the last three years, we expect a successful issue to reduce the interest burden sizably and raise PAT by an average 61% y/y through FY’22. Despite the higher shares outstanding post issue, we expect the capital raising to be modestly accretive in nature and estimate an average 10% y/y EPS growth within our forecast period. That said, our post-rights 12-Month Target Price is estimated at N50.43.
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