Guinness Nigeria Sees 360 Degree Earnings Turnaround on Pricing, Volume Growth
Guinness Nigeria Plc bucked its negative profit performance, company’s profit spiked to about N9 billion in the first half of the financial year 2022 result published on the Nigerian Exchange.
In the comparable period, the company had dropped low when it reported a N317 million loss in the first half of 2021. Like rivals in the beer market, the company performed better as the Nigerian economy continues its healing process.
According to the result for the first half of 2022, the brewer’s earnings surged over a combination of better pricing and market penetration strategy that appears to be paying off.
Nigerians are adjusting strongly to increased prices of goods and services across the nation, driven in part by weak government policies, high double-digit headline inflation rate and lower purchasing power of naira.
Following a healthy earnings outing, a slew of equity analysts has started raising estimates, lifting the stock from hold, sell to buy and projecting that Guinness Nigeria will be able to sustain growth momentum.
Who Owns Guinness Nigeria Plc?
With a 50.18% stake, Guinness Overseas Limited remains the majority shareholder in the Nigerian subsidiary. Also, Atalantaf Limited, a distant second-largest shareholder owns 7.84%.
Other influential shareholders are Stanbic IBTC Nominees with a 5.44% stake followed closely by Mutima Opportunity Fund which owns 5.14% while the company has a free float of N31.39% as of December 2021 in the stock market valued at N26.816 billion.
On earnings projection, analysts are seeing a better outlook, citing economic growth and general price advantage among other margin strengthening factors. However, it is doubtful if volume growth would beat the pre-pandemic period so easily as household finances come under pressure.
In the just concluded week, equity investors at the Nigerian Exchange currently value the company’s 2.19 billion outstanding shares at about N146 billion after the earnings beat. A detailed review shows that the brewer’s profit inched higher to N8.821 billion on increased pricing with better sales volume in the second quarter in particular.
WSTC Securities Limited said in a note that the investment firm is expecting Guinness Nigeria Plc earnings per share for the full year 2022 to rise to N7.90 from N0.57. Unaudited financial statement for the year shows that Guinness Nigeria sales expanded significantly, rising by 51% to N109.125 billion from N72.351 billion in the comparable period in 2021.
The brewer’s sales costs increased, but the growth undercut revenue growth reported in the period thus providing a better margin. The cost of sales rose more than 35% to N72.617 billion at the end of the first half of 2022, from N53.767 billion a year ago.
A stronger other income line helped the company’s operating income expansion, douse the impact of rising operating expenses growth, providing a support base for the bottom line growth in the period.
According to its financials, from N697 million, the other income line grew to N1.374 billion in the period. Amidst rising cost pressures driven by higher headline inflation and weak naira, Guinness Nigeria operating expenses expanded to 24.291 billion from N15.567 billion in the comparable period.
The increase was attributed to the strong penetration strategy embarked upon after the pandemic-induced pressures on sales and earnings in 2020. Read: Guinness Nigeria Rated BUY after Tough Close to 2020 Earnings
Higher spending on marketing and distribution expenses drove overall operating expenses upward, and there was a moderate upsurge in administrative expenses at the same time.
An unaudited financial statement shows that Guinness Nigeria expended a total sum of N18.831 billion to drive marketing and distribution functions in the first half of 2022. This was more than 76% above N10.699 billion used in the comparable period.
In its equity report, WSTC Securities analysts said the strong topline performance reflected a successful execution of the Group’s strategy of focusing on segments with higher margins, and where it benefitted from a competitive advantage.
The revenue breakdown showed that within the stout segment, revenue grew by 33% year on year, according to analysts note. In the mainstream spirits, revenue grew by 38%, while revenue grew by 59% in the premium spirits segment.
In the malts segment, WSTC Securities equity analysts said revenue grew by 149% year on year while ready-to-drink products recorded an 80% growth. They added that the revenue driver was price increases because of the need to offset the impact of rising local and imported input costs.
Analysts also noted that higher pricing accounted for 55% of the total revenue growth recorded in the first half of 2022, adding that improved product mix – increased sales of higher-margin products – accounted for 25% of the total revenue growth.
WSTC Securities said volume growth accounted for the remaining 20% of total revenue growth, noting that the group marketing efforts were geared at making products available in every part of the country. Guinness Nigeria recorded gross profit growth of 96% year on year to N36.51 billion in the first half of 2022, from N18.586 billion 12-month earlier.
Operating expenses increased by 56% in the year above the previous period, according to a report filed with the regulator while the company expended more on getting the product to the consumers in order to stay competitive and grow brand equity.
Inflationary pressures and higher distribution expenses, induced by insecurity in some parts of the country, also factored in the higher operating expense incurred in the period, analysts said in the note. In addition, it was noted that in the period Guinness Nigeria Plc reviewed its staff salaries as a way of investing in talent and human capital.
“We expect increased volume sales and a further improvement in product mix to drive revenue growth. We estimate N7.90 earnings per share in 2022 from N0.57 reported in 2021”.
WSTC Securities estimate a value of N64.84 for Guinness Nigeria, representing a justified price-to-earnings multiple of 8.18x, adding that the stock trades at a 33% price discount to fair value.
In an equity report, analysts at Cordros Capital Limited said the company’s revenue growth was underpinned by an efficient route-to-consumer strategy, significant investments in its brand, price increases across its product categories, and improved sales mix, all of which drove volume growth.
Guinness Nigeria earnings per share (EPS) came in at N4.03 when compared to a loss per share of N0.14 in the first half of the financial year 2021, its financial statement published on Nigerian Exchange shows.
“We expect the favourable price/volume mix across its product portfolio and Guinness Nigeria robust balance sheet management to remain supportive of earnings in 2022”, analysts at Cordros Capital stated.
According to Cordros Capital, the brewer’s portfolio optimisation strategy drove solid growth across its product categories as the Malts, Ready to Drink (RTD), premium spirits, mainstream spirit, and Guinness stout categories all delivered impressive growth.
Malt segment grew by 149%, Ready to drink inched up 80%, there was 59% increase in premium spirits and mainstream spirit segment expanded by 38% while Guinness stock jumped 33%.
“We believe the strong revenue growth was supported by resilient demand given the reopening of on-trade channels -bars, clubs and event centres.
“In its first half of 2022 earnings call, management attributed the strong sales value to a combination of pricing (+28.00ppts), mix (+10.00ppts), and volume (+13.00ppts).
For full-year, analysts at Cordros Capital said they are expecting this combination to continue to support the momentum in revenue, given the brewer’s overarching strategy – optimising its route-to-consumer, innovating at scale and improved cost control – in addition to increased capacity to produce spirits.
Codros Capital analysts said in the equity note that they are expecting the company’s topline growth at 45.7% year on year to N236.61 billion in the full year of 2022 operation.
“Our expectation is hinged on resilient consumer demand, improved trade outlet coverage as the brewer continues to optimise its route-to-consumer strategies, and further price increases in 2022 to offset the higher costs pressures stemming from inflation, FX illiquidity challenges and the newly introduced N10.00/litre excise duty on carbonated drinks”.
Cordros Capital analysts estimated that Guinness Nigeria earnings before interest tax depreciation and amortisation (EBITDA) growth of 85.6% year on year and forecast that EBITDA margin will moderate to 14.5% by year-end from 16.4% in the first half of 2022.
“In the second half of 2022, we expect pressures on margins to be partly offset by the price increments implemented at the start of the year amid efficiency gains associated with the company’s recent expansion on its spirit’s business’ capacity”.
Following the revisions to estimates, analysts at Cordros Capital target price for Guinness Nigeria increased to N88.54 from N36.57 per share. Based on the upside potential of 36.2%, Cordros analysts lifted the stock from a hold to buy rating.
Guinness Nigeria Plc engages in brewing, packaging, marketing, and selling alcoholic beverages. Its product brands include Harp, Baileys, Smirnoff, Gordon’s, Malta Guinness, Dubic Malt, Orijin, and the Johnnie Walker range. The company was founded on April 29, 1950, and is headquartered in Lagos, Nigeria.
