Guinness Nigeria’s Profit Estimated to Drop by 86%, Downgrade to Sell

Guinness Nigeria’s Profit Estimated to Drop by 86%, Downgrade to Sell

Guinness Nigeria Plc. is facing a very tough time, the brewer’s profit is projected to drop by 86% in 2020 as investment firm advised investors to dump the stock to avoid losing value.

Afrinvest, a leading investment banking firm advised its customers holding the stock to sell after a significantly disappointing 9-month earnings released.

Due to tepid earnings and its bleak performance outlook, equity analysts forecasted 12-month price target for the stock at ₦10.79, though Guinness traded at ₦15.40 kobo yesterday in the local bourse.

Meanwhile, the stock 52-week record shows that Guinness Nigeria share price had peaked at ₦37.30 and its lowest point was ₦13.

Thus, because of uncertainties in the economy, and pressure on household disposable income, analysts have forecasted that sales would drop by 16.3% in 2020.

Guinness Nigeria’s Profit Estimated to Drop by 86%, Downgrade to Sell

However, profit before tax and after tax have been estimated to decline significantly by 85.6% and 84.4% to ₦1 billion and ₦857.2 million respectively in 2020.

Guinness Nigeria Plc has an installed capacity of about 8.6mhl and a market share of 22.1% ranks as the third largest brewer in Nigeria by capacity and revenue as at 2019.

But in 2019, revenue declined by 8% ₦131.5 billion from ₦143.0 billion in 2018, following weaker sales volume and higher excise duties.

Again, in the 9-month of financial year 2020, GUINNESS revenue declined by 5.3% to ₦96.0 billion from ₦101.4 billion in the comparable period.

The slowed down in revenue performance was primarily driven by a 78.6% year on year decline in export volumes.

This signal that the brewer’s would record yet another earning miss in the financial year 2020 due to macroeconomic pressure.

Meanwhile, Afrinvest stated that the reduction in export volumes was due to a halt in the production of Malta Guinness for Guinness Ghana Breweries Limited, following the latter’s investment in canning line which led to a drop in volumes.

Recently, the management announced the need to shut down two of its production sites in Nigeria following the impact of the COVID-19 pandemic.

Due to demand pressure, in June 2020, management issued a profit warning citing the harsh impact of COVID-19 on production and revenue.

Guinness disclosed its intention to carry out a comprehensive review of its asset base which would see to the impairment of certain categories of asset which hitherto had yielded sub-optimal returns.

“We suspect that this impairment could be related to assets used in mainstream and economy lager production which have been a drag on revenue”, Afrinvest said.

For context, analysts stated that growth in the Lager and ready to drink (RTD) segments contracted by 47.0% in 2019 and has remained tepid in 2020.

Guinness runs a July to June calendar year which means its 9M: 2020 operations does not yet capture the impact of COVID-19.

Afrinvest said considering the lockdown and economic restrictions in Q2:2020, the firm believes sales -particularly on-trade channels – were low industry-wide during the quarter.

Due to this, analysts at Afrinvest expect Guinness last quarter earnings to be more reflective of the full impact of the pandemic.

Consequently, the investment firm estimates that topline would drop by 16.3% year on year to ₦110 billion in 2020.

Read Also: NB Plc: Equity Analysts Cut Profit Estimate for 2020 by 57%

On the cost side, the company sustained efforts towards improving efficiency, reflected in the 6.6% moderation in cost of sales to ₦65.2 billion from ₦69.9 billion in 9M:2019.

Hence, cost to sales ratio declined to 67.9% y/y from 68.9% in 9M:2019.

“We anticipate further cost pressures in 2020 and 2021 on FX challenges, with cost to sales ratio forecast to trend higher at 71.8% and 73.0% respectively”, Afrinvest stated.

Meanwhile, operating expenses (OPEX) rose by 4.9% to ₦26.0 billion in 9M:2020 from ₦24.8 billion in the prior period.

This happened following an increased spending on marketing, distribution and administrative overheads.

“We note a significant resurgence in finance costs by 97.1% year on year to ₦3.6 billion relative to ₦1.8 billion in 9M:2019, arising from loss on the re-measurement of foreign currency loans.

“Looking ahead, we expect increased interest payment burden albeit moderate, following the company June 2020 visit to the debt market to access ₦2.5 billion in commercial papers possibly to refinance maturing short term debt”, Afrinvest explained.

Also, analysts said OPEX ratio would slightly moderate to 24.2% while earnings before interest and tax (EBIT) and earnings before interest, tax, depreciation and amortisation (EBITDA) margin is expected to decline to 3.9% and 11.0% respectively.

The company’s PBT trended significantly lower by 68.3% year in 9M:2020 to ₦2.0 billion from ₦6.3 billion in the corresponding period.

Then, profit after tax PAT fell by 67.4% year on year to ₦1.4 billion from ₦4.3 billion in 9M:2019.

“Given the expectations of very weak earnings as well as cost pressures, we estimate that PBT and PAT would plunge by 85.6% and 84.4% to ₦1.0 billion and ₦857.3 million respectively in FY:2020”, Afrinvest projected.

Guinness products portfolio include several well-known brands of alcoholic and non-alcoholic drinks in the Spirits, Stout, Lager, Malt and RTDs categories.

Notably, the adoption of a total beverage alcohol portfolio in 2018 has positioned GUINNESS to better withstand competition in the sector.

Afrinvest explained that in line with industry outlook, GUINNESS faces challenges stemming from fragile consumer spending, excise duty and tax increments as well as its elevated cost profile.

“We see significant margin pressure amid rising cost and declining profitability”, analysts estimated.

In 2019, revenue declined by 8% ₦131.5 billion from ₦143 billion in 2018, following weaker sales volume and higher excise duties.

Cost of sales declined by 3.2% year on year to ₦91.4 billion, driven by a 12.2% moderation in raw materials and consumables costs as well as lower fixed cost absorption.

However, cost to sales ratio remained elevated at 69.5%, up from 66.0% in 2018 and higher than industry average of 65.5% following slower revenue growth.

Additionally, lower marketing and distribution expenses drove a 19.3% decline in OPEX to ₦21.5 billion from ₦26.7 billion in the prior year, taking OPEX ratio lower to 16.4% from 18.7% in 2018.

Furthermore, operating profit dipped 33.0%, dragged by the ₦3.1 billion recognized as Royalties and Technical Service Fees which had accrued between 2017 and 2018.

Meanwhile, the company’s EBITDA settled at ₦19.1 billion with a soft moderation in EBITDA margin to 14.5%.

Finance cost plunged 53.7% y/y to ₦2.6 billion from ₦5.6 billion in 2018, reflecting the full impact of the ₦40 billion rights issue (completed in 2018) utilised to offset foreign currency loans.

Consequently, PBT fell 28.6% y/y to ₦7.1 billion from ₦9.9 billion in 2018, while PAT declined 18.4% year on year to settle at ₦5.5 billion from ₦6.7 billion in the prior year.

Afrinvest remarked that the profit warning by management indicates a harsh operational performance.

“In our view, GUINNESS would have to tame its high cost position to support earnings. We arrived at a fair valuation of GUINNESS using absolute and relative valuation methodologies with weightings of 65.0% and 35.0% respectively”, Afrinvest stated.

Guinness Nigeria’s Profit Estimated to Drop by 86%, Downgrade to Sell