Analysts Downgrade Guinness Nigeria Stock over Poor Q1 Outing
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Analysts Downgrade Guinness Nigeria Stock over Poor Q1 Outing

Guinness Nigeria –a Gold sponsor of TV Reality Show Big Brother Naija, was able to boost top line, but cost of sales increased faster than revenues..
In its unaudited first quarter of 2021 financials, the brewer reported a loss after tax of ₦842 million, as against loss after tax of ₦370 million in Q1-2020.
The company’s sustained loss position was primarily linked to elevated costs of sales in the quarter, though demand pressure was moderated significantly.Analysts Downgrade Guinness Nigeria Stock over Poor Q1 Outing
In the period, Guinness Nigeria announced 11.6% year on year increase in revenue to ₦30.02 billion, which signal a strong recovery when compare with ₦26.9 billion in Q1:2020.
On quarterly comparison, recorded shows a healthy recovery as revenue surged 259.2% from ₦8.4 billion in Q4 2020, translating to a recovery point to pre-pandemic levels.
Analysts at CSL Stockbrokers noted that the recovery in Q1 2021 comes on the back of lifting of the ban on gatherings and the consequent resumption in social activities and opening of on-trade channels like bars and clubs.
In addition, CSL Stockbrokers stated that the recovery is despite the increase in excise rates per cl in Q1 2021 due to the final upward adjustment in June.
As a result, analysts think revenue growth was also aided by the price adjustments to distributors implemented in November 2019 and February 2020.
However, cost of sales as adjusted for depreciation rose by more than double the growth in revenue.
The company’s financials showed that cost of sales grew 25.9% year on year to ₦21.5 billion in Q1 2021 from ₦17.1 billion in Q1 2020.
Quarter on quarter basis, Guinness Niger cost of sales also grew faster than revenue, up 466.5% as against 259.2% quarter on quarter revenue growth.
“In our opinion, while the surge in cost of sales partly reflects recovery in volume, the faster than revenue cost growth gives us some concern given commodity prices (particularly barley) remain significantly below pre-pandemic levels.
“We also think the rise in carriage costs (due to supply chain disruption) and impact of FX devaluation on naira is inadequate to account for the high cost growth to pre-pandemic levels.
“As a result, we think the company’s inventory recognition policies must have impacted Cost of sales recognition in Q1 2021”, CSL Stockbrokers said.
Meanwhile, the faster surge in cost of sales drove gross profit lower by 13.2% year on year to ₦8.5 billion in Q1:2021 from ₦9.8 billion in Q1:2020.
Then, gross margin contracted by 8.1 percentage points to 28.4%.
After adjusting for depreciation, operating Expenses declined by 9.0% to ₦6.1 billion in Q1 2021 from ₦6.7 billion in Q1 2020.
Analysts said the decline in operating expenses was driven by synchronized 5.9% decline in administrative expenses adjusted for depreciation to ₦1.9 billion.
CSL Stockbrokers stated that this was also supported by 10.2% drop in marketing & distribution expenses adjusted for depreciation to ₦4.2 billion.
Despite the decline in operating expenses, the company’s earnings before interest tax and depreciation (EBITDA) declined 18.6% to ₦2.7 billion in Q1 2021 from ₦3.3 billion in Q1 2020.
Thus, analysts noted a 19.8% drop off in depreciation & amortisation declined in Q1:2021 but operating profit still dipped by 14.0% to ₦0.6 billion.
Taking a cursory look at its financing, it was discovered that net cost of obtaining funds declined 14.1% to ₦0.9 billion in Q1:2021 as against ₦1.1 billion used up in the comparable period.
The decline according to CSL Stockbrokers, was driven by higher finance Income which rose up 96.9% year on year, thus erased modest 6.2% increase in finance cost to ₦1.4 billion.
On what drove growth in finance income, analysts attributed this to an improved cash generation in Q1: 2021.
In the period, cash and cash equivalent had grew by 57.4% year on year to ₦18.9 billion.
On the other hand, despite the lower debt balance, finance cost grew which reflects the FX loss on re-measurement of foreign currency receivables.
But Chapel Hill Denham believes that plunged finance cost was driven by the company’s higher cash liquidity in the quarter, with cash and cash equivalents increasing by 57.4% year on year and 258% year to date.
As a result, Guinness recorded a pre-tax loss of ₦0.3 billion in Q1:2021 which is 14.3% lower than Q1 2020 pre-tax loss.
Furthermore, the company recorded a tax expense of ₦0.5 billion in Q1:2021. Consequently, Loss after Tax printed at ₦0.8 billion in Q1:2021.
“We have a target price of ₦15.08 with a SELL recommendation on the stock”, CSL Stockbrokers advised investors.
In its note, Chapel Hill Denham believes that the improvement in Guinness’ revenue is driven by a favourable price/volume mix.
Analysts at the firm recall that Guinness increased prices in February 2020, but could not benefit from the price increase due to the material impact of Covid-19, especially between April and May 2020.
It was however observed that volumes recovered in the quarter on the easing of lockdown restrictions as consumers resumed on-trade consumption of alcohol.
“We note that Q1-21 revenue of ₦30.02 billion is the company’s highest recorded revenue in a Q1 over the last 5 years as well as the highest quarterly revenue since Q3-2018”, Chapel Hill Denham said.
Chapel Hill Denham said operating expenses dropped despite the fact that management sponsored the recently concluded Big Brother Naija (BBN), a TV reality show, as a Gold sponsor.
Decomposed, the company’s marketing & distribution expenses fell by 11.1% year on year to ₦4.62 billion while administrative expenses decreased by 7.9% to ₦2.01 billion.
In the period, Guinness reported a stronger net operating cash flow in Q1-21, rising to ₦25.72 billion as against ₦2.62 billion in Q1-2020.
“We believe this was supported by efficiency in working capital management.
“Notably, inventory declined by 26.8% to ₦20.68 billion, trade and other receivables also fell by 75.6% to ₦6.27 billion while trade and other payables increased by only 2.4% to ₦36.74 billion year on year.
Expressing concerns over high cost of sales, Chapel Hill Denham said while management did not break down the elements of cost of sales in the financial results, analysts believe naira devaluation played a key part in the high increase in cost of sales during the period.
“This is given that a significant portion of Guinness’ portfolio is imported (that is, the premium spirits), as local manufacturing of these brands are currently impossible.
“We also think that the commencement of phase III of the excise duties with duty on spirits increasing to ₦200/litre (from ₦175/litre in June 2019) may impacted production costs.
“This is the final phase of the increase in excise duty, with beer and wine duties unchanged at ₦35/litre and ₦150/litre respectively”, analysts explained.
Specifically, analysts explained that Guinness recorded an exchange loss of ₦748 million in Q1-21, which drove finance expenses higher by 6.2% to ₦1.37 billion.
This was despite the 50.2% year on year and 42.0% year to date decline in total borrowings to ₦13.50 billion.
Based on the results, Guinness reported ₦18.01 billion debt repayment in Q1-21 and a new borrowing of ₦8.45 billion, making a net repayment of ₦9.56 billion.
Analysts however said the company’s debt as at Q1-21 was split between related party loan of ₦8.70 billion, which is an FCY loan and Commercial paper of ₦4.58 billion.
After considering value placed on the company’s performance, Chapel Hill Denham maintained neutral position on the company’s stock.
“We have a HOLD rating on Guinness with a 12-month target price of ₦14.25”, analysts explained in an equity note.
Chapel Hill Denham said at its last analyst call, Guinness Nigeria disclosed that it is de-emphasizing Lager, and focusing on Spirits (which is 3 times more profitable).
“We are tracking financial year 2021 turnover at ₦125.75 billion (above annualised Q1-21 estimate of ₦120.10bn).
“While we think the 11.2% year on year increase in revenue in Q1-21 is impressive and commendable, we remain cautious of Guinness’ ability to sustain the growth”, Chapel Hill Denham said.
Analysts explained that the cautious stance is due to the overall stiff and competitive conditions within the Nigeria brewery industry.
Nonetheless, analysts expect Q2-20 (October to December 2020) to be stronger on festive celebrations, driven alcohol demand.
In addition, the elevated cost of sales in Q1-2021 calls for cost efficiency control concerns, with cost-to-sales ratio rising to 76.6% (from 70.5% in Q1-20 and 68.1% in FY-20).
On debt, Guinness’ debt to equity ratio fell to 18.7% in Q1-2021 (from 30.6% in Q1-20 and 31.9% in 2020), which is the lowest level over the past five years.
Guinness issued a ₦5 billion commercial paper in June 2020, which is currently trading at a yield of 4.60% (Dec 2020) and 4.07% (Mar 21) respectively.
This looks pricey compared to the implied yields on similar Nigerian Treasury Bills of 0.63% (Dec 2020) and 0.69% (Mar 21) respectively.
However, analysts said Guinness Nigeria’s management has disclosed holding-off from FX dominated debts in 2021, due to FX risks.

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Analysts Downgrade Guinness Nigeria Stock over Poor Q1 Outing