Guinness Nigeria Q2 2017 Results Review - Neutral Rating Maintained


Friday, February 03, 2017 11:18 AM / FBNQuest Research

Possibly moving into oversold territory
Guinness Nigeria’s (Guinness) Q2 2017 (end-Dec) results were weaker than expected. The weak results were driven by negative surprises on the gross margin and net finance cost lines.

The company is exposed to fx risks arising from the importation of raw materials and the service of fx-denominated loans. As such, we have cut our earnings estimates markedly over the 2017-18E period.

Despite the sizable cuts to our forecasts, our new price target of N69.2 is only 5% lower because we have rolled over our DCF valuation to 2018E. Ytd, Guinness shares have shed -23.5% (NSEASI: -3.5%) having already declined by -31.0% in 2016 (NSEASI: -6.2%).  From current levels, the shares now show a 9% upside potential to our price target.

Although the shares are moving into oversold territory, we stop short of upgrading our Neutral recommendation because we believe the risk of negative surprises remain. As such, we have maintained our Neutral rating on the stock.

Pre-tax and post-tax losses recorded again in Q2 2017:
The only positive in GN’s Q2 2017 results was a sales growth of 30% y/y to N36bn. The company reported pre-tax and post-tax losses of –N2.4bn. These losses compare with the PBT and PAT of N1.1bn and N810m reported in the corresponding quarter of 2016 respectively.

The strong y/y sales growth was significantly offset by a -1,843bp y/y gross margin contraction to 25% and a 112% y/y rise in net interest expense and led to the weak bottom line.

Operating expenses were down slightly, by -2% y/y. On a half year basis, H1 2017 sales grew by 19% y/y to N59bn. The company reported pre-tax and post-tax loss of -N4.7bn vs. PBT and PAT of N1.7bn and N1.2bn in H1 2016.

Fx taking a toll
Despite the healthy topline, again, Guinness’ Q2 2017 results were weighed down by gross margin contraction (-1,843bps y/y) and finance charges. To reduce its existing fx liabilities, the company plans to raise N40bn via a rights issue this year. GN’s debt-to-equity ratio for FY2016 was 120% (vs. c.48% average between 2010 and 2015).

On gross margins, we do not expect to see a significant turnaround owing to the continued pressure on the currency.

However, the company’s plan to focus on the spirits business (which ordinarily attracts higher margins than the mainstream beer segment) may help offset some negatives. Our outlook on the company may turn positive when we see recoveries on the gross margin and finance cost lines. For FY 2017E, we see sales growth of 17% y/y and a pre-tax loss of –N6.5bn.

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