Sell! Sell! Sell! Investors advised to jilt Guinness Nigeria shares

Investors are advised to jilt Guinness Nigeria stock after a disappointing performance attracted a downgrade by investment house Cardinal Stone Partners.

The second largest brewer in Africa’s largest economy recorded its first loss after tax of N488 million in 15 months.

While the Nigerian brewer has been profitable in the last 14 months amid a tough and unpredictable environment, its top and bottom lines have been receding and analysts are of the opinion that the company needs urgent and proactive strategies given intense competition from rival companies.

Guinness Nigeria sales fell 33 percent as its mainstream Ready-to-Drink (RtD) brand, which had previously contributed significantly to top lines,  was soft in Q1’16 as a result of rising competition in the herbal RtD segment.

Also, the company’s two brands are smaller compared to market leader Nigeria Breweries’ six.

The recent economic slowdown caused by a significant dip in crude price by 60 percent, rising inflation and foreign exchange restrictions means subsequent quarters could be a thunderbolt for the beer maker.

“After adjusting for the weak Q1’16 results, coupled with our negative outlook for earnings given the unfavourable operating environment, we cut our target price (TP) for Guinness Nigeria to N96.25 (previous: N138.25),” said analysts at Cardinal Stone Partners (CSP).

“Hence we downgrade our rating on the counter to a SELL. GUINNESS is trading at a forward P/E of 103.7x (from a trailing P/E of 43.7x) compared to emerging market peer average of 21.4x,” said analysts at CSP.

Guinness Nigeria had bemoaned the currency restrictions imposed by the Central Bank as the policy was hindering it from procuring the foreign exchange needed to bring in raw materials.

To protect the external reserve of Africa’s most populous nation from continued haemorrhaging, the apex bank imposed a hard currency peg as well as banning 41 items for its official currency window.

Inflation rate have risen six year high to 13.70 percent while the economy contracted -0.36 percent in the first quarter.

This left manufacturers with no option than to source FX from the black market that goes for N350, a more expensive rate compared to the scare official rate of N197-N199.

 

Manufacturing contracted by -7.0 percent y/y in Q1, and its largest segment (food, beverages and tobacco) even more rapidly, by -11.2 percent, according to data from the National Bureau of Statistics.

Hard times lie ahead for Guinness and other beverage producers as the recent spike in the price of sugar at the international market means there could be an increase in cost of production since sugar is a raw material component in the production of beverages.

Price of sugar has jumped 24 percent this year, trading at levels last seen in October 2013. This is as a result heavy rains and El-Nino disrupting harvests Brazil, Thailand and India- the world largest producers of the commodity.

“Price increases will probably be uneven across the products of the consumer goods firms. In other words, the price adjustments will reflect the protection of profit margin,” said Tajudeen Ibrahim, team head Chapel Denham Hill Limited, in an emailed note to BusinessDay.

“The major concerns for the broad economy are two. The first is a further pressure on FX as sugar refiners demand for more US$ to import raw sugar as prices increase. The second is higher food inflation as the relevant companies pass input cost increases to consumers in Nigeria,” said Ibrahim.

The aforementioned uncertainties validate a recent report by Moody Investor Service that the country’s beverage industry would experience slow growth.

The Managing Director of Guinness Nigeria – Peter Ndegwa stated that the company is making progress in broadening its products portfolio to drive future growth.

In March 2016, the company unveiled “Orijin Zero” to capture a share of the non-alcoholic carbonated soft drink segment. While general market reception of the brand was positive, we believe the brand is not strong enough to support future top-line growth,” said analysts from CPS.

BALA AUGIE