Equity Analysis /

Guinness Nigeria: Weak earnings reflect tough operating environment; reiterate Hold

    Eronmosele Aziba
    Eronmosele Aziba

    Equity Research Analyst, Consumers

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

    Tellimer Research
    10 May 2019
    Published by

    9M 18/19 EPS fell by 16% yoy to NGN54.78, trending ahead of our FY 19 forecast for a 27% yoy dip in earnings. Despite lower operating costs (down 2.2% yoy) as well as finance charges (down 61% yoy), we attribute Guinness’ earnings weakness to the poor top-line trend. Turnover declined by 4% yoy (in line with our FY 19 growth forecast of 6%), largely driven by lower volumes as prices remained relatively flat. On the upside, there was a sharp drop in finance charges (noticed across other consumer goods companies), due to lower borrowings.

    Reiterate Hold with a TP of NGN54.78 and an ETR of 16%. We maintain our bearish outlook on Guinness’ earnings for FY 19 due to: 1) expected volume deterioration; 2) higher excise duties, and 3) the limited ability to fully pass the impact of higher costs to consumers due to intense price competition. We expect these factors to continue to weigh on top-line growth and margins. Furthermore, even as we expect finance charges to trend lower, we believe the impact will be offset by mounting operating expenses, which will pressure bottom-line growth. The stock currently trades at PE and EV/EBITDA of 16.8x and 7.3x, relative to frontier peers within our universe of 18.9x and 16.7x, respectively.

    Volume weakness drags top-line. Guinness’ top-line growth remained under pressure in 9M 18/19 due to: 1) intense price competition in the brewing industry; 2) sustained volume pressures in the mainstream segment given customers preference for discount products (a segment in which we believe Guinness is noticeably weak versus competition); and 3) pressured consumer spending.

    Lower finance costs reduce earnings pressures. Despite the weak performance, a noticeable positive for Guinness was the significant reduction in finance charges as borrowings have trended lower. We expect this to be sustained till the end of the year, reducing pressures on the bottom-line.

    Margins deteriorate as cost pressures persist. Guinness’s margins weakened in 9M 18/19. Gross profit and EBIT margins each fell by 3ppts to 31.1% and 7.2%, respectively, below frontier peer average of 39.5% and 15.1%, respectively. We note that the margin downtrend in Guinness is broadly in line with that noticed in Nigerian Breweries.