THURSDAY, 17 JUNE 2010 01:08 IHEANYI NWACHUKWU
The business description of Guinness Nigeria plc shows that it is involved in brewing, packaging and marketing of alcoholic and non-alcoholic drinks. Analysts at FSDH Securities had said that Guinness stocks are currently trading at 13.14 percent above their fair value.
According to them, in their equity research report in the early part of this month, if a shareholder chooses to hold Guinness stock and earn the expected dividend of N5.57kobo, he will record a loss of 7.89 percent on his investment. However, according to them, “if he chooses to sell and buy back when the price drops to our fair price without earning dividend, he will earn a total return of 8.48 percent. Weighing the two alternatives, it is better for the investor to sell at the current market price and buy back latter at a lower price. We therefore place a SELL on Guinness stock at the current market price of N153.00kobo.”
Rationale behind FSDH analysis In arriving at a fair value for Guinness, “we maintained our top-line forecast but adjusted the bottom line figures based on the latest result. We estimated Turnover (TO), Earning Before Interest Tax Depreciation and Amortization (EBITDA) and Profit After Tax (PAT) for the financial year (FY) ending June 30, 2010. We project a TO of N102.52billion, based on our view that the TO will increase by 15 percent, over the previous year. We project EBITDA of N23.02bilion based on EBITDA margin of 22.45 percent and a PAT of N11.57billion based on a PAT margin of 11.29 percent. We used 1.47billion Ordinary Shares currently in issue. The Forward Earnings Per Share (FEPS) generates N7.85kobo. We estimated the Dividend Per Share (DPS) of N5.57kobo based on a dividend payout of 70.92percent. Applying Enterprise Value (EV)/EBITDA multiple of 9.27x, a P/E multiple of 16.50x, we arrived at N139.93 per share using EV/EBITDA multiple and N129.48 per share using price earnings multiple. Applying a weight of 55 percent on N139.93 and 45 percent on N129.48kobo, we arrived at N135.23 per share, which is our fair value. The forward earnings yield and dividend yield based, on our fair value generate 5.80 percent and 4.12 percent respectively.
What the analysts say on Q3 financials The unaudited Q3, 2010 result of Guinness Nigeria Plc (Guinness) for the period ended March 31, 2010 shows that its Turnover (TO) increased by 25.39 percent to N80.58billion, compared with N64.26billion in the corresponding period of 2009. However, the growth in turnover did not translate to growth in profitability on account of rising costs. We could not ascertain the nature of the rising cost as efforts to speak with the management was not successful. Nevertheless, we think the bottom-line was affected adversely because of the inability of the management to pass the costs to the consumers of Guinness products. Profit Before Tax (PBT) decreased by 14.49 percent between 2009 and 2010 to N13.75billion from N16.08billon. The tax provision decreased marginally by 6.85 percent between 2009 and 2010 to N4.70billion from N5.05billon and resulted in the Profit After Tax (PAT) of N9.05billion, down from N11.03billion in 2009, representing a decline of 17.99 percent.
The PBT Margin in Q3, 2010 decreased over the Q3, 2009, and over the FY 2009 figure. The PBT margin decreased to 17.07 percent in Q3, 2010 from 25.03 percent in Q3, 2009, and from 21.30 percent in June, 2009.This shows that the company’s total costs as a percentage of TO stands at 82.93 percent, up from 74.97 percent recorded in the corresponding period of 2009. PAT margin currently stands at 11.23 percent, down from 17.17 percent in the corresponding period of 2009, and down from 15.19 percent as at FY 2009.The result also indicated that the percentage of TO, PBT, and PAT in the Q3, 2010 to the Full Year Audited TO, PBT and PAT for the period ended June, 2009 are: 90.38 percent, 72.42 percent and 66.83 percent, respectively. “This indicates that the current year’s profitability may be lower than the previous year’s,” FSDH Securities said.
“A cursory look at the balance sheet position as of Q3, 2010 compared with the position as of June, 2009 shows that the company’s fixed assets declined marginally. This may be linked to the impact of sale or write-off of some fixed assets during the period. Fixed assets decreased marginally by 3.74percent to N36.68billion from N38.10billion in FY 2009, also the net assets decreased marginally by 6.38 percent to N29.51billion from N31.52billion as at FY 2009. Cash and bank balances decreased from N5.82billion in FY 2009 to N3.40billion in Q3, 2010. The drop in the net assets was partly attributed to the payment of final dividend from the reserves of the company. The short-term borrowing stood at N1.07billion as at Q3, 2010, representing a decrease of 84.53 percent over the FY 2009 position of N6.90billion. Guinness might have deliberately paid down the short term loan to avoid excessive charges. Stocks increased by 14.17 percent to N19.24billion from N16.85billion during the review period.
The trade debtors increased by 13.69 percent to N7.22billion from N6.35billion, while trade creditors increased significantly by 114.90 percent to N12.88billion in Q3, 2010 from N5.99billion as at FY 2009. The management needs to watch its trade creditors so that its creditors will not downgrade their risk assessments of Guinness,” the analysts said.
FSDH stated: “Our analysis of the operating environment shows that the demand for brewery products remain strong in spite of economic downturn and decline in consumer purchasing power. Available data shows that the brewery industry recorded a turnover growth of 25 percent in 2009. The beverage industry operators launched and re-launched both old and new brands in the market, leading to increased competition in the industry, even as consumption volume, especially in the beer segment increased significantly. However, the industry is bewildered with high production cost, because of rising energy, power and packaging costs, thus putting pressure on profit margin. In addition, the industry is highly vulnerable to consumer income and spending, infrastructure deficits, political instability and exchange rate volatility.
A strong contender to consumer’s disposable income in Nigeria is telecommunication products and services. This has reduced the income allocated to brewing products. In order to capture a good proportion of the remaining income, brewing firms embarked on all forms adverts, designed at young people with strong purchasing power. In addition, producers are incapacitated to increase product prices thereby reducing profit margin. The industry, like other manufacturing business in Nigeria, is riddled with multiple taxes thus limiting its contribution to the GDP, notwithstanding the huge market potentials within the country and in the neighboring countries. Governments at both federal and state levels continue to legislate or demand various forms of taxes, levies and financial supports, which increase the costs of doing businesses in Nigeria. The contribution of the manufacturing sector to the Gross Domestic Product (GDP) as at December 2009 is 4.20 percent. This is considered too low for a country that has a huge consumption power like Nigeria having an estimated market size of 150million growing at 2.3 percent per annum. This is in addition to the increasing export opportunities in neighboring countries. We expect increased revenue from pre-election spending and political rallies ahead of 2011 election.”
According to them: “The capital employed by Guinness as at June 30, 2009 was such that equity, deferred taxation and staff gratuity & other long term employee benefits accounted for 73.78 percent, 18.94 percent and 7.27 percent of the capital employed respectively. Its total Assets stood at N73.87billion, while total liabilities stood at N42.34billion. The short term liabilities stood at N31.14billion, accounting for 73.55 percent of the total liabilities while the long-term liabilities stood at N11.20billion accounting for 26.45 percent of the total liabilities. It had no long term debt as at June 30, 2009.
The company’s product line include: Guinness Foreign Extra Stout, Guinness Extra Smooth, Harp Lager, Satzenbrau, Gordon’s Spark, Smirnoff and Malta Guinness. Looking at the shareholding structure as at June 30, 2009, Guinness Overseas Limited held 46.03percent, Atalantaf Limited held 7.77 percent, the balance of 46.20 percent of the shares were held by other shareholders.”