May 18, 2020 / 10:32 AM / By FBNQuest Research / Header Image Credit: Guinness Nigeria
-34% average cut to 2020-22E EPS
Guinness Nigeria's (Guinness) PBT for Q3 2020 (end-Mar) declined by -97% y/y to N71m and missed our forecast of N690m by -90%. This was largely driven by a 7x increase in net interest expense to -N1.6bn, which missed our forecast by 3.4x. In Q3 2020 alone, the company incurred an unrealised fx loss of -N1bn versus an fx gain of N900m in Q3 2019. These were grouped under interest expense/income. The other disappointing line item in Q3 was net sales, which declined -18% y/y (-20% negative surprise), in stark contrast to flattish y/y growth delivered by competitors over the same period.
The results suggest that volume losses in Nigeria and Ghana (malt market), and the impact of higher excise taxes fueled Guinness' net sales decline. Together with the foregoing challenges, our new forecasts have taken into account the impact of a weaker naira and slower demand in the beer market amid the COVID-19 environment. Consequently, we have cut our 2020-22E EPS estimates by an average of -34%. The chief driver behind the cuts is a 70% average increase in net interest expense over the forecast period. The effect of these changes is a -36% reduction in our price target to N20.0.
We have also modelled a 150bp increase in our risk-free rate assumption to 7.5%, which further impacted the new price target. Guinness shares have sold off by -42% year-to-date, underperforming the broad market index by â€“31%. The shares are trading on a 2021E P/E multiple 12.3x for an EPS growth of 42% in 2022E. From current levels, our new price target implies a modest upside potential of 15%. We however retain our Underperform rating given the anticipated decline in earnings over the coming quarters and greater upside potential elsewhere within our coverage universe.
Bottomline pressured by sharp increase in net interest expense
Besides the -18% y/y decline and 7x y/y increase in sales and net interest expense respectively, opex rose 12% y/y. Although gross margin expanded by 679bps y/y, this was not strong enough to offset the negatives.
On a sequential basis, sales were down 60% q/q whereas gross margin expanded by 1,049bps q/q. Other income was down -50% q/q, whereas opex and net interest expense were down -43% q/q and -2% respectively.
Essentially, PBT fell by -96% q/q. Compared with our forecasts, PBT missed by -90% on the back of the negative surprise in net interest expense..