Analysts See Higher Prospects as Guinness Nigeria Scaled Hurdles
With a flooded beer market, Nigerian consumers are spoilt for choice as companies struggle to take larger market share amidst tightened households’ incomes. However, deviating from the usual strategy, few dare to compete on price slash as high production costs become a pressure point in the industry.
Diageo-backed Guinness Nigeria Plc has N82.14 billion market capitalisation on the Nigerian Exchange, having traded at N37.50 on 2.19 billion shares outstanding. The company’s financial statement for 2021 indicated that Diageo owned about 60%, followed by Stanbic IBTC nominees and Mutima Opportunity Fund.
Following the release of the first quarter 2022 earnings, Guinness Nigeria bucks trend, moved from loss making to profitability and it came stronger. Some analysts however believe that the result was flattered by base effects.
Irrespective, a new record has been set as the economic recovery continues. Looking at the numbers from equity analysts perspective, Guinness Nigeria may be set for a wild ride in the brewers market in the year.
To some equity analysts in the industry, there is a lot to like about Guinness Nigeria, though share performance hasn’t been really impressive.
Analysts’ team led by Abdulrauf Bello of WSTC Securities said in an equity report on Guinness Nigeria that the brewer outperformed expectation significantly in the first quarter of the fiscal year 2020 result recently released to market regulators and investing public.
Thus, Guinness Nigeria Plc.’s share fair value was upgraded to N66.32, effectively implying a justified price to earnings ratio of 7.59x based on recent earnings bear and positive outlook for the company.
MarketForces Africa noted that analysts expectation translates to about twice the company’s stock market price as of Wednesday, Nov.10, 2021.
Rated buy, analysts said the stock trades at a 4.16x forward price-to-earnings (24% earnings yield), which implies an 83% price discount to fair value estimate. In addition to an expected 5% dividend yield, the stock offers an 88% total return, WSTC said.
Meanwhile, a rather bullish team of analysts hinted that Guinness Nigeria Plc estimates upgrade was driven by a positive outlook on the business, cited Q1 2022 profit after tax which printed at N4.04 billion, saying it translates to 69% of the full-year profit after tax of N5.85 billion initially forecasted.
“We had a cautious expectation of profitability growth, owing to the impact of FX-induced rise in cost However, cost margin declined materially in Q1 2022, suggesting that an effective pricing took place during the period”.
WSTC Securities analysts believe that the growth trajectory is sustainable, however, the growth rate could lower over the subsequent quarters due to high base and normalisation.
As the economy continues to heal, the beer market has started seeing a recovery. Guinness Nigeria reported a stellar performance in the first quarter of the financial year 2022 scorecard.
Sales revenue accrued to the stout producer improved, though upward price adjustment was noted amidst a steep inflationary position in its key market.
The company’s first quarter of 2022 result shows that revenue jumped significantly, rising by 58% from the comparable period in 2021 to N47.47 billion.
The company’s sales had been impacted negatively due to the covid-19 outbreak and associated induced pressures on operations and sales.
Across the industry, demand for beers moved downward as households were taken off the streets and clubs houses, cinemas and other sales channels locked down. Data from its financial statement scorecard shows that Guinness Nigeria operating margin expanded significantly to 14% in Q1-2022, from 2% in Q1-2021.
Guinness Nigeria rebounded to profitability to record a N4.04 billion profit after tax compared with a loss after tax of N842 million in the comparable period in 2021.
Analysts at WSTC Securities Limited attribute the significant revenue growth to the impact of higher pricing of products.
But a general observation among corporate Nigeria today is that companies are adjusting prices to offset rising input costs. Pressures on price level emanate amid global supply chain disruption and challenges in sourcing foreign exchange in the domestic foreign exchange market.
For Brewers, it is a double whammy when considering the impacts of excise duty and naira devaluation on production costs that continue to damage the industry’s margin.
Its cost margin lowered to 68% in Q1-2022, from 77% in Q1-2020, according to WSTC Securities analysts review, translating to an improved bottom line.
“We link the decline in cost margin to higher price realisation and improved product mix”, analysts at WSTC stated.
Analysts cited that the management had expressed renewed focus on the higher-margin Spirits segment. In the financial year 2021 result, WSTC noted that the Spirits segment grew by 88% year on year, added that the momentum sustained into Q1 2022.
Given the company’s effective pricing and improved product mix, gross profit grew by 117% year on year to N15.24 billion.
Meanwhile, the stout producing company saw its operating expense jump 35% year on year, with most of the increase from marketing activities.
Specifically, marketing-related expenses rose 42% year on year to N6.58 billion, accounting for 83% of the overall increase in operating expenses.
“We attribute the marked growth in the marketing expense to the need to invest behind brands to deepen market penetration, amid heightened competition in the market”.
Despite the increase in operating expense, analysts spotted that Guinness Nigeria operating expense margin lowered by 300 basis points to 19% in Q1 2022 from 22% in Q1 2021. As a result, operating profit sees a sky-high jump of 1,010% to N6.51 billion in Q1 2022.
Supported by a 22% decline in finance cost, profit before tax grew to N5.95 billion in Q1 2022, from a loss position of N317 million in Q1 2022. Profit after tax grew by 580% to N4.04 billion.
Outlook
Although, analysts hinted that they are less optimistic about the brewery industry due to its weak structure, yet they expect Guinness to continue capturing value in its fast-growing Spirits segment.
In the Spirits segment, analysts said Guinness Nigeria operates as a monopoly – given that its other major peers do not have a strong foothold in that space.
“Therefore, the ability to extend market share and exert pricing power is less constrained”. WSTC Securities analysts’ team also noted the Company’s strong balance sheet and improved liquidity levels.
According to the result, WSTC said the gearing ratio (debt to equity) stood at 0.26x, below the industry average of 0.52x and also the industry lowest ratio.
In addition, Guinness Nigeria’s financial leverage of 2.30x ranks the lowest in the industry as well as below the 2.63x industry average.
“The implication of this is that Guinness is less risky when compared to peers. Better put, the prospects of Guinness are higher with an even lower risk”.
Risks to Outlook
In the equity note, analysts said potential risks to estimates include foreign exchange illiquidity, considered as a major bottleneck to outlook. Unavailability of the exchange rate to import the required raw materials for production, equity note stated.
Also, analysts consider a higher exchange rate negative for the Company due to higher costs to be incurred. In addition, it was noted that a currency devaluation would result in foreign exchange losses for Guinness Nigeria due to its foreign-denominated payables.
“In our view, the Company could leverage its relationship with the parent company Diageo to manage its foreign exchange issues”, analysts added.
The report also cited that weak investor sentiment in the Nigerian equities market could take extended periods -more than one year- to reach a fair value estimate due to the general weak sentiment of foreign investors in the Nigerian equities market.
“Capital controls, unfavourable FX pricing, and macroeconomic policy uncertainties are some of the factors driving the weak sentiment”, WSTC Securities analysts posited.
Substantial Shareholding
The issued and fully paid-up share capital of the Company is 2,190,382,819 ordinary shares of 50 kobo each. The Register of Members shows that the following Shareholders held more than 5% interest in the Company.
Audited report for the financial year 2021 shows that Guinness Overseas Limited, a subsidiary of Diageo Plc, with 1,099,230,804 ordinary shares, constituting 50.18% shareholding.
Atalantaf Limited, another subsidiary of Diageo Plc, owns 171,712,564 ordinary shares constituting 7.84% shareholding. Stanbic IBTC Nominees Limited owns 119,250,813 ordinary shares constituting 5.44% while Mutima Opportunity Fund owns 112,502,111 ordinary shares, constituting 5.14% shareholding as of the financial year 2021. #Analysts See Higher Prospects as Guinness Nigeria Scaled Hurdles
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