We retain our target price for Guinness Nigeria (Guinness NL) of NGN54.80 (ETR: 35%) and our Hold recommendation. We will revisit our numbers in light of the weak sentiment in the industry and the broader market.
Volume pressure dragged on performance. Guinness’s earnings were weaker in FY 19, as net income fell by 18% yoy to NGN5.5bn; however, this surpassed our projection of a 28% contraction. We attribute this earnings beat to 1) a 12% yoy decline in operating expenses and 2) a sustained reduction in finance costs (down by 54% yoy). The top-line trend was equally weak, as net revenue fell by 8% yoy (roughly in line with our projection of 6%), due to sustained volume pressures from Harp and Snapp in the lager and RTD segments, respectively. The quarterly performance was also poor, as net revenue and net income slid by 10% and 26% qoq, respectively. The weak volume trend reflects sustained pressure on consumer spending and the intense competition for market share in the Nigerian breweries industry.
Maintain Hold recommendation and TP at NGN54.80. Our outlook for Guinness’s financial performance remains tepid due to: 1) sustained pressure on consumer spending; 2) the company’s limited ability to adjust prices upwards (in light of rising costs), owing to the intense competition within the industry; and 3) an expected uptick in operating costs due to higher marketing and distribution expenses on new product launches. We will revisit our numbers in light of the weak sentiment in the industry and the broader market. The stock currently trades at PE and EV/EBITDA of 12.5x and 4.8x, respectively, relative to Nigerian peers at 17.0x and 6.5x.
Operating weakness persisted. Consistent with the weak top-line trend, Guinness’s EBIT fell by 31% yoy. Bucking the trend seen at other brewers, operating expenses declined by 11% yoy. However, the opex/sales ratio marginally reduced by 1.1ppt to 24%. The gross and EBITDA margins also weakened, falling by 3.5ppts and 1.1ppts yoy, respectively.
Net operating cash flow increased by 27% yoy, as payables expanded in the period. Capital expenditure was down by 2% yoy, while the capex/sales ratio marginally increased, by 1ppt, to 13%.