Guinness Nigeria Stock Cuts to Neutral as Impairment Losses Damage Earnings
After a disappointing show in 2020, a slew of equities analysts have cut down estimates on Guinness Nigeria Plc amidst rising cases of coronavirus pandemic that has affected earnings performance.
It would be recalled that before the outbreak of the virus, the brewery segment of the economy was ridden with increased excise duties, which thus affected major brewers.
Meanwhile, increased competition has also been a pressure point as challengers brought extra capacity to the industry amidst declining disposable income.
For example, Nigerian Breweries continues to maintaining industry leadership while International Breweries encroached into Guinness Nigeria market share.
Worst still, devaluation of the local currency in Nigeria worsen the case for operators with significant imports bills. In 2020, Guinness was unable to liquidate inter-company foreign currency loan due to scarcity of FX.
Now, analysts have remained downbeat on the size of FCY loans in the company’s balance sheet as they agree that naira devaluation could aggravate the exposure, thus the brewer’s may need to pay more in naira term.
Chapel Hill Denham forecasted price target of ₦15.38 per share for Guinness Nigeria’s stock, though the market price has surpassed that region.
“Against our expectation, the company recorded a loss after tax of ₦12.58 billion compare with our forecast of ₦1.24 billion and missed consensus expected profit of ₦256 million”, Chapel Hill explained.
Analysts stated that this loss was largely driven by a PPE (Property Plant & Equipment) revaluation loss of ₦11.72 billion which comprised impairment loss of ₦1.46 billion and write-off of ₦10.26 bn.
ARM Securities shed further light into the brewer’s performance.
According to ARM Securities, Guinness’ Q4:2020 result showed a higher than expected hit to their revenue numbers as it declined 72%.
This led to a steep contraction of 71% in their gross profit to ₦2.53 billion.
Further aggravating the pressure on earnings was the ₦16.5 billion impairment charge booked over the period, resulting in an operating loss of ₦18.05 billion.
However, analysts said tax credit received helped mitigate the loss in the quarter to ₦13.94 billion.
Ex-impairment, ARM Securities explained that Guinness’ loss would have been much lower at about ₦2 billion before the tax credit which points to the impact the impairments had.
“While we expect a swift bounce back for Guinness as economy gradually re-opens the risk from its foreign currency loan and an adjustment to our revenue projections necessitated a cut in our fair value to ₦18.94 from ₦26.63”, ARM Securities stated.
While Chapel Hill Denham stay neutral on Guinness, ARM Securities saw an upside and rated the stock buy.
Chapel Hill explained that Guinness is trading at 2021 price earnings and EV/EBITDA of 25.3x and 2.3x respectively, which it considered to be ahead of consumer sector average of 11.5x and 5.7x.
Analysts said three major factors affected Guinness in the last three years include stiff competition from a reinvigorated International Breweries (IntBrew) and the broader brewing industry in Nigeria.
They also cited difficulty in raising prices (especially on lager), owing to the highly price sensitive consumer, amidst tightening pockets.
This come with the impact of excise duties on the net revenue, given the company’s total beverage portfolio.
“This, in our view, has slowed revenue growth alongside the imposed lockdown and restrictions in human and economic activities in Q2-20 (April to June 2020), due to the Coronavirus Pandemic”, Chapel Hill Denham stated.
However, ARM Securities Limited recognised that aside from the lockdown induced decline in volumes that was felt across the whole industry, revenue was also hit by an implementation of a strict credit policy to minimise their credit risk.
Receivables went as high as ₦31.56 billion at the end of Q220 but following this policy it declined to ₦18.72 billion at the end of Q4.
It was noted that the policy involved call-backs of stocks from distributors they were no longer partnering with which meant a reversal of revenue had to be recorded on their books.
The effect of this was more keenly felt in the premium spirits segment which declined 92%year on year over the second half of 2020.
Additionally, spirits, which makes up a more significant part of total revenue for Guinness compared to the others, has had to face higher excise duties.
Meanwhile, analysts explained that the management disclosed that it is de-emphasizing Lager, and focusing on Spirits which is 3 times more profitable.
“We are tracking 2021 turnover at ₦126.98 billion, above ₦104.38 billion in 2020, but below ₦131.50 billion 2019”, Chapel Hill stated.
The firm’s analysts projected earnings per share (EPS) of N0.56 compare to loss per share of ₦5.74 in 2020.
“In line with our expectation, management did not declare dividends for 2020, but we expect dividend payments to resume in 2021 as the economy rebounds, alongside higher alcohol consumption volumes”, Chapel Hill explained.
On debt, the brewer raised its leverage level significantly in the period amidst cash flow tightening and demand for working capital flow.
Guinness Nigeria’s debt to equity ratio increased to 31.9% in 202 from 22.3% in 2019, which is still below 5-year average of 52.2%.
Recalled that the company issued a ₦5 billion commercial paper in June 2020, currently trading at a yield of 5.57% (Dec 2020) and 5.11% (Mar 21) respectively, compared to the implied yields on similar Nigerian Treasury Bills of 1.11% (Dec 2020) and 1.67% (Mar 21) respectively.
The management however disclosed holding-off from FX dominated debts in 2021, due to naira devaluation risks.
Despite the uninspiring performance, costs of sales declined significantly in Q4-20 and in full year results.
Guinness recorded a steep decline in costs of sales by 72.8% year on year in Q4-20 to ₦5.83 billion, tracking marginally ahead of the 72.2% decline in revenue.
Analysts remarked that the decline is largely due to weaker production in Q4-20 (April to June 2020), a period of economic lockdowns in Nigeria and restrictions in human movements and gatherings.
Going forward, management disclosed that it expects naira devaluation to impact costs of imported raw materials, while noting that it is currently challenging to source FX.
“Thus, we expect an increase in consensus estimate for 2021 cost of sales”, analysts held.
Meanwhile, cash flow moves positively despite the hassles faced or rather helped by economic lockdown in part.
The brewer’s net operating cash flow improved 14.1% to ₦15.29 billion from ₦13.41 billion in the financial year 2019 despite weaker earnings in the period.
This was driven by favourable working capital change as trade & other receivables declined by 28.1% to ₦18.72 billion, while trade & other payables was flat.
The decline in trade & other receivables was largely linked to impairment losses and write-offs, with management disclosing that it ended contracts with some distributors and collected returned inventories, as it embarked on a de-stocking strategy and instituted a strict credit policy in Q4-20.
Analysts major concern about the performance include the fact that Guinness lost market share in Q4-20.
Analysts at Chapel Hill Denham had forecasted that the extended lockdown in Q4 of 2020 (April to June) and the impairment expectation by management, will have a material impact on Guinness’s revenue and profitability.
In line with our expectation, Chapel Hill noted that Guinness Nigeria recorded a steep decline in revenue by 72.2% in Q4-20 to ₦8.36 billion and by -20.6% in FY-20 to ₦104.38 billion against analysts’ estimate of ₦108.64 billion and consensus forecast of ₦115.11 billion.
There was a strong decline in product segment which include Guinness Stouts (-17%), Premium Spirits (-146%), RTDs (-26%), APNADs (-25%), and lager (-45%).
However, mainstream spirits grew by 15% as Diageo (the parent company) indicated that organic volumes in Nigeria were down 10%.
Based on these results, we estimate that Guinness market share has dropped to 14.5% from 21.1% while Nigeria Breweries maintained leadership with a higher revenue market share of 61.1% from 56.3% and International Breweries at 24.4% from 22.7%.
Chapel Hill Denham also noted that Guinness’ exposure to the excise duties, via its total beverage portfolio, implies a lower net revenue for the company.
The phase III of the excise duty programme, which commenced in June 2020, indicates an increase in spirit duty to ₦200/litre from ₦175/litre while duty on beer remains unchanged at ₦35/litre and wine at ₦150/litre.
Operating income turn negative on impairment losses:
Guinness’ operating expenses spiked 9.4% year on year to ₦34.94 billion in 2020, recorded +25.0% hike year on year to ₦8.94 billion in Q4-20.
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After a disappointing show in 2020, a slew of equities analysts have cut down estimates on Guinness Nigeria Plc amidst rising cases of coronavirus pandemic that has affected earnings performance.
The breakdown showed that the spike as largely influenced by increase in administrative expenses which grew by 45.5% to ₦14.34 billon as personnel expenses increased 18.9% to ₦10.43 billion, rental expenses expanded 7.5% to ₦1.20 billion and travel & entertainment rose 283% to ₦1.00 billion, amongst others.
Notably, for the first time in more than a decade, Guinness posted an operating loss of ₦12.83 billion as against ₦8.97 billion in 2020, driven by impairment losses and write-offs necessitated by IAS 36 of the IFRS.
The company recorded an impairment loss on PPE of ₦11.72 billion, impairment loss on financial assets (trade & other receivables) of ₦2.09 billion and impairment loss on export expansion grant receivable of ₦2.33 billion.
Due to increased borrowing, finance costs increased in Q4-20 and for the full year. Guinness’ finance costs rose by 20.6% in Q4-20 to ₦960 million and also increased by 73.8% in 2020 to ₦4.54 billion.
“We link this to the 17.4% increase in total borrowings to ₦23.28 billion, due to the impact of devaluation as well as new borrowings”, analysts said.
The increase in borrowings were basically intercompany loan which grew to ₦8.70 billion from ₦8.1 billion in 2019, trade finance loans also rose to ₦7.4 billion from ₦5.3 billion in financial year 2019.
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Short term loan increased to ₦2.0 billion from zero loan position in 2019 and commercial papers of ₦4.8 billion was also issued.
“We note that Guinness was unable to liquidate the inter-company loan, a FCY loan of US$22.5 million in 2020, due to in-availability of foreign exchange.
“The loan still poses a FX risk, considering the naira devaluation seen so far in 2020”, Chapel Hill Denham explained.
ARM Securities how said Guinness’ stock, down 52% year to date, has been much sold this year but looking ahead the firm sees opportunities that could make this an attractive buy.
Guinness Nigeria Stock Cuts to Neutral as Impairment Losses Damage Earnings
