Share price of Nigeria’s second largest brewer traced an upward trajectory despite eroding bottomline to underscore investors’ confidence in the 64-year-old brewer, revered for the signature brand Guinness Stout.
On a day the local unit of London-based Diageo announced missing profit expectations with net income falling to N9.57 billion ($48.3m) in the nine months through March, compared with N11.86 billion a year earlier, its share price stayed rooted on N180 at 12:03pm in Lagos trading.
The stock made further gains the day, after opening at N180.50.
Thus, despite missing profit target for the year, investors are rallying behind the company conscious of the company’s ability to wring long-term value for shareholders.
A leading shareholder organisation’s leader says the reasons are not farfetched as they are looking at the company’s trajectory in the long run while noting that the fourth quarter performance is better than previous quarters.
He highlights the brewer’s consistency in dividend pay-out as a strong reason for their clinging on the stock, despite the company halving payouts to N3.2 from N7. “Shareholders are pleased,” says Boniface Okezie, who is president of the Progressive Shareholders Association.
This is “because it (dividend payment) ranks GN among the companies with consistent dividend payout,” growth rate analysts put at 3.13 percent in the last five years.
“There is also renewed optimism among shareholders as they notice that the strongest showing of the company came in the last quarter of the year under review,” and this Okezie attributes to the company’s aggressive marketing strategies that have seen it introduce new brands and rev up advertisement spend in the bid to win more market share.
“We must commend the efforts of the management of the company for turning around the financial fortunes of the company under very difficult economic conditions,” he said.
The payout, analyst at Exotix Frontier Equities, says “is positive for the business as it can reserve cash and reduce the need for additional debt financing.”
Although the analyst projects that “the market will likely respond negatively due to the sensitivity of shareholders to the annual dividend,” the overwhelming shareholder optimism indicates the contrary.
Technical analysis
With a beta of 0.5863 (according to the Financial Times), which indicates that the stock is less likely to swing with market vagaries; and a solid historical performance, the stock remains a darling of Portfolio managers and Brokers who cling to it in their managed portfolios.
The stock has experienced significant pullback since last July when the stock had a Relative Stock Index (RSI) of over 70 (when the stock was overvalued) ebbing now (September 5) at 35.48, indicating that it is a candidate for a ‘hold’ recommendation. It is also a short hand way of saying ‘don’t sell!’
After last year’s results were unfolded on the floor of the Nigerian Stock Exchange (NSE), an analyst was quoted as saying, “For those seeking to invest now, the stock represents a hedging opportunity in a market that has witnessed volatility amidst feeble fundamentals”.
Fundamentals
In the year under review gross revenue took a few steps backward from N122.46 billion to N109.202 billion on the back of eroding consumer demand and value corroding inflation. The effect was a less than impressive showing in the consumer sector of the economy. The brewing industry was badly hit in the inevitable descent down the plateau of sagging profits.
Analyst say, the southward ride is “is systematic to the brewing industry this financial year as consumers suffer a contraction in disposable income.” Much of the contraction was also traceable to increased competition within the industry as new entrants gnawed at the available but inelastic pie.
Despite the manufacturers of Malta Guinness effectively taming cost of sales Gross Profit slipped in the period. Cost of sales or the amount spent to sell the company’s products was controlled to N51.33 billion from N56 billion, a 12 percent improvement. This helped minimise the fall of Gross profit by only 8.7 percent to N51.33 billion from N56.08 billion.
Operating costs proved a little too hot to handle in the period doing a disservice to operating profit which ebbed 23 percent from N20.93 billion to N16.12 billion.
Bottom-line figures of pre-tax and net profits inevitable travelled in the wrong direction with the heavy weight of cascading operating returns and the haemorrhage occasioned by unwieldy financial costs though the costs remained near constant for 2014 as in 2013.
Debts incurred in previous years conspired to erode profits as their effects emerged in servicing costs of roughly N4billion every year in interest cost (capitalised or not). This will have a deleterious effect on earnings per share.
Pre-tax profits swooned 31 percent to N11.68 billion from N17 billion while net profit followed with a 59 percent slump from N11.86 billion to N9.57 billion. All trading margins besides the gross profit margins show a company managing efficiency.
Gross profit margin at 47 percent was two steps better than the 45 percent achieved earlier but operating profit margin, a strong indicator of effective cost management shrank to 14.7 percent from 17.1 percent.
For gross returns, it means for every naira earned, gross profits make up 47 kobo compared to the earlier year when 45 kobo was made from every naira. The figures also suggests that for every naira in revenue, operating profit makes up 14.7 kobo compared to 17.1 kobo achieved in the previous year.
Pre-tax margin was 10.7 percent which is lower than the previous year’s showing of 13.9 percent. Net profit margin didn’t veer too far from the previous year’s performance ending at 8.8 percent compared to 9.7 percent made in the 2013 financial year.
Despite its challenges and not very savoury results of the company, analysts tip the Brewer for ratcheted profits in the near future provided it would take advantage of its formidable assets across the country and scale up marketing strategies.
Management’s take
Management of Guinness Nigeria plc says they are optimistic of the prospect of the company, despite the performance in the last financial year.
Much of the optimism is coming from the fact that analysts estimate the Nigerian beer market to be worth over $2.7 billion with projected average annual growth of 23.45 percent between 2011 and 2014.
In a release on the floor of the Nigerian bourse, Guinness management reiterated its confidence in the maker of the drink bearing the signature of Sir Arthur Guinness describing the business as ‘resilient.’
“We are confident that our strategy which is focused on improving our route to consumer, maximising value creation from our core brands and innovation and finance cost reduction will improve both top and bottom line performance in the current financial year. The Board is confident that we have the right brands, people and structure to win in Nigeria,” the Guinness statement said.
Seni Adetu, managing director/CEO, believes that winning the future boils down to “the various innovations we have launched in recent times, especially Orijin Bitters and Orijin Ready to Drink (RTD) have been quite successful, and we expect to further dial up our play in the value segment with Satzenbrau and Dubic Lager.”
Babatunde Savage, chairman, Guinness Nigeria, encapsulated the company’s future on its people and capabilities. “The board of Guinness Nigeria is confident that we have the right people and capability to guarantee the delivery of our strategic priorities of driving out cost to invest in growth, turning the business around by strengthening and accelerating our premium core brands, innovating at scale to meet new consumer needs, and extension of our route-to-consumer advantage.”
