Thursday, February 08,
2018 09:23 AM / FBNQuest Research
Increase to earnings estimates; PT unchanged
Guinness Nigeria’s (Guinness) Q2 2018 (end-Dec) results were
stronger than we expected. Although sales were in line and gross margin was
softer, these were offset by interest expense and operating expenses surprising
positively. As such, we have increased our earnings estimates by 11% on average
over the 2018-19E period.
However, we have left our price target unchanged at N91.3 because
our long term view of the company has not changed significantly. Having
underperformed the broad index by 23% last year, the shares are up 17% this
year (NSEASI: 14%). Guinness shares are trading on a 2018E P/E multiple of
31.4x for EPS growth of 57.5% y/y in 2019E. From current levels, the shares
show a -17% downside potential to our price target. We have maintained our
Underperform rating on the stock.
Positives on major key P&L items in Q2 2018
Q2 2018 sales grew by 12% y/y to N40.7bn. PBT and PAT advanced to
N3.5bn and N2.1bn compared with pre-tax and after-tax losses of -N2.4bn in the
corresponding period of 2017. The strong y/y growth in earnings was driven by a
gross margin expansion of 601bps y/y to 33.5% and a 70% y/y reduction in
While we attribute the marked y/y expansion in gross margin to
lower input costs due to the improvement in fx liquidity, we believe that the
significant reduction in interest expense is likely related to the deleveraging
of the firm’s balance sheet, with the proceeds of its N40bn rights issue. On a
sequential basis, sales grew by 36% q/q, largely driven by seasonally stronger
sales in the final quarter of the year. Thanks also to the clean-up of the
firm’s balance sheet, PBT and PAT accelerated by 50-85x.
Our outlook for the sector remains broadly positive. We continue
to expect topline growth to be driven by the value segment. During its last
conference call, management alluded to the fact that the value segment is now
the largest segment and accounts for c.67% of total volumes.
We also expect the company’s focus on the spirits business to bode
well, even if modestly. We see topline growing by 15% y/y in 2018E. The
completion of Guinness’ rights issue has also helped to improve earnings. Net
interest expense declined by -70% y/y following a -64% y/y reduction in total
debt (including overdrafts). Consequently, for 2018E, we see strong PBT growth
of 250% y/y.