Guinness Nigeria Rated ‘Hold’ as FX Loss Darkens Earnings

Guinness Nigeria Plc’s stock market performance remains unimpressive. While the Nigerian Exchange is booming, Guinness Nigeria stock has lost 2.60% of its market valuation year to date. Reviewing the company’s figure, analysts at Cardinalstone cut target price estimates with a hold recommendation.

This indicates Guinness Nigeria’s share has limited upside potential – less than 15%. The company’s poor share price performance may not be unconnected with its weak earnings performance amidst rising competition for consumers’ wallets.

Valued at N147. 85 billion, the brewer’s share price has been flat at N67.50 in the last seven trading sessions in the stock market. Guinness Nigeria has 2.19 billion shares outstanding, and a majority of it is under the control of its parent company – Guinness Overseas Limited.

According to its regulatory filing, Guinness Overseas own 50.18% of the company’s shares outstanding as of December 2022. Atalantaf Limited owned 7.84% – both companies control 58.02% of Guinness Nigeria Plc in the stock market.

The brewer declared it has a free float percentage of 30.09% as of 31 December 2022, which is compliant with the Nigerian Exchange’s (NGX) free float requirements for companies listed on the Main Board.

Earnings

Guinness Nigeria’s foreign exchange losses continue to eclipse earnings performance. In its second quarter result ended in December 2022, the company profit slumped 54.4% to N4.024 billion from N8.820 billion in the comparable period in 2021.

The brewer’s key issues include rising costs, finance costs and exchange rate movement which appears to be persistently unfavourable. Profit deflated even with reduced tax expenses. At the end of its account period in December, the company reported that its earnings per share nosedived to N1.84 from N4.03 in a similar period in 2021.

In its equity report on Guinness Nigeria, a multi-asset investment banking firm, Cardinalstone go neutral on the company’s stock. Citing its management, analysts noted that Guinness Nigeria Plc will likely sustain the transfer of cost burden to consumers in the near term despite potential negative implications for volumes.

“In our view, the net positive impact of this strong pricing resolve, which cascaded to the 15.8% year-on-year expansion in gross profit in the first half of 2022/23, could be supported by the company’s aggressive e-commerce penetration and marketing campaigns.

The firm hinted that this position drove its analysts’ forecast for the financial year 2022/23 revenue of N233.3 billion ahead of the expected increase in excise duty. It said the revenue projection also captures expectations for an increase in election-related spending, which may place a floor on volume contractions and boost management’s confidence in its current pricing strategy.

However, analysts view the strong pass-through of higher prices on earnings could be eroded by the combined drag from higher personnel expenses and FX-induced finance cost pressures.

“Per our estimate, these factors will likely result in a 45.7% plunge in 2022/23 earnings per share (EPS) to N3.90”, Cardinalstone stated. Analysts at the firm said a potential naira depreciation to between N550 and N600 per dollar could bloat the cost of debt and worsen interest coverage to 1.9x from 11.2x in the financial year 2021/22.

“… We note that the company even had to recently pause repayment on part of its gross borrowings, which is entirely foreign currency denominated, due to naira weaknesses and FX illiquidity”.

However, analysts said in the equity report that they like the company’s continued commitment to the local sourcing of raw materials, which adds to the positive impact of favourable prices on gross margins.

Though commendable, the report stated that the gains of this strategy may be masked by the recent increase in personnel expenses and the negative impact of higher diesel & freight costs in the first half.

Analysts keep Guinness Nigeria in hold rating class as the 12-month target price declined to N69.05, citing an increase in employee costs and the impact of inflation. # Guinness Nigeria Rated ‘Hold’ as FX Loss Darkens Earnings