Guinness Nigeria: Q3’16 result a further surprise to the downside

At the Nigerian Stock Exchange (NSE) last week, Guinness Nigeria plc released its unaudited financial statements for the third-quarter (Q3) to March 31, 2016. Guinness Nigeria Plc, the country’s second-biggest brewer reported revenue declined to N69.618billion in Q3’16 from N84.750billion in the corresponding period of 2015. Gross profit also declined to N30.266billion from N39.735billion;  operating profit declined to N3.603billion from N10.600billion in Q3’15.

Profit Before Taxation (PBT) dropped to N1.204billion from N7.134billion in Q3’15; while the company’s profit for year stood low at 864.178million against N5.216billion in Q3’15. Basic earnings per share declined to 57kobo from 346kobo in the corresponding quarter of 2015. The company’s finance cost dropped to N3.346billion from N4.142billion in Q3’2015; while finance income rose to N946.604million from N675.938million in Q3’ 2015.

Management speaks

Peter Ndegwa, Managing Director/Chief Executive Officer,  Guinness Nigeria plc in a statement last Friday that, “Third quarter sales were impacted by a tough operating environment and the lapping of a very strong quarter in the previous year – particularly with distribution gains for the Orijin brand. The economic slowdown and rise in inflation continue to cause a shift towards lower margin value products.”

“However, we are starting to make progress in the broadening of our portfolio and also seeing resilience in our core brands. We are also focused on driving efficiency throughout our operations to address the continuing pressure on margins. We anticipate that the year will be challenging as we incur one-off costs to reshape our business and continue to broaden our portfolio in order to drive future growth,” Ndegwa said.

Analysts comment

Pabina Yinkere-led team of analysts at Vetiva Capital Management said “Our observation of the Q3 numbers indicates that sales for the three month period were insufficient to cover GUINNESS’ current cost profile, hence the loss reported for the quarter. However, we think a traditionally strong Q4, which has contributed an average 28% of annual sales in the last 3 years, should provide room for GUINNESS to increase volumes. We forecast Q4’16 revenue of N26.5 billion (Q3’16: N19.8 billion) and net profit of N1.2 billion”

“We have revised our beer volume estimate for the year ending 30 June 2016 to 4.0 mhl (Previous: 4.8 mhl) to reflect the challenges so far and cut our forecasts through 2018. Reflecting the weakness of this Q3 result, our FY’15/16 revenue estimate, which includes sales from the Spirits segment (effective January 2016) is revised to N96.1 billion (Previous: N110.2 billion) whilst our EPS estimate is revised to N1.37 (Previous: N1.59). Consequently, our 12-month target price is revised to N96.30, SELL (Previous; N124.47, HOLD),” Vetiva analysts added.

In their first reaction to the results, Tunde Abidoye team of research analysts at Lagos-based FBNQuest said, “While consumer goods companies have been impacted by the macro-headwinds and a marked slow-down in consumer discretionary spend, the Q3 results validate our view that Guinness has been more impacted than its rivals. Apart from the challenging macro-environment, we believe that Guinness’ limited representation in the value category has been a major factor constraining top-line growth. Although the wide market acceptance of “Orijin”, Guinness Nigeria’s herbal brand, supported top-line growth in FY 2015(end-June), we believe that the marked slowdown in that category contributed to the weak growth on the top-line. Given the challenges with sourcing transportation fuel in the last few months, it may also be that the company was faced with logistics / distribution issues during the quarter”.

FBNQuest analysts added, “In contrast to the y/y decline in sales reported by Guinness Nigeria, Nigerian Breweries’ (NB) Q1 2016 results which were published early this week showed that Q1 sales grew by 11% y/y. The weak y/y growth on the topline implies that Guinness most likely lost market share to NB during the quarter. We believe that the gross margin contraction y/y is reflective of fx pressures, particularly given that a number of consumer goods companies have reportedly been sourcing fx at a c60% premium on the parallel market.

“Guinness’ PBT is tracking well behind consensus full year PBT forecast of N5.4bn. Consequently, we expect to see marked downward revisions to consensus estimates and a negative reaction from the market. On our published forecasts, Guinness Nigeria shares are trading on a 2016E (end-June) P/E multiple of 38.9x for 43.3% EPS growth in 2017E. However, the double-digit earnings growth is due to base effects y/y. Guinness Nigeria shares have underperformed the index this year.

They have shed -18.6% ytd, compared with the -13.3% return on the index. We rate Guinness Nigeria shares Neutral. Our estimates are under review,” FBNQuest analysts further stated.

Quoted CPs gives Guinness Nigeria access to short-term funds

In the first quarter (Q1) 2016, FMDQ OTC Securities Exchange admitted the Guinness Nigeria plc N7.225billion and N2.774billion Commercial Paper (CP) Notes for quotation on the Exchange. These CPs represent series 2 and 3 under the organisation’s N10billion Commercial Paper Issuance Programme.

“The quoting of this CP has allowed us successfully diversify our short-term funding sources at a reduced cost whilst delivering value to our shareholders. We will continue to access the CP markets for optimal funding as ideal windows open for Guinness Nigeria to access funds from a varied pool of investors,” Ndegwa had said.

About the company

Guinness Nigeria plc, a public Company quoted on the Nigerian Stock Exchange was incorporated on 29th April 1950, as a trading company importing Guinness Stout from Dublin. Listed on the consumer goods sector (Beverages – Brewers/Distillers), Guinness Nigeria plc has a market capitalization of N146.071billion and shares outstanding of 1,505,888,188 units. Its share price trend reveals a 52-week high of N192 and 52-week low of N92.87.

The Company has since transformed itself into a manufacturing operation and its principal activities continue to be brewing, packaging, marketing and selling of Guinness Foreign Extra Stout, Guinness Extra Smooth, Malta Guinness, Malta Guinness Low Sugar, Harp Lager, Smirnoff Ice, Smirnoff Ice – Double Black, Satzenbrau Pilsner Lager, Dubic Lager, Dubic Dark Ale, SNAPP, Orijin RTD, Orijin Bitters and  Top Malt.