Guinness Plc: High operating cost, weak demand threaten profitability
Guinness Nigeria Plc earnings per share dropped 24.24% from N3.30 in the financial year 2018 to N2.50 in 2019. Meanwhile, at the end of trading on Monday, its market capitalisation closed at N81.044 billion, with a widening year to date loss at 48.61% as the stock price settled at N37:00.
Sales dropped at a faster rate than the associated decline in cost of sales. Revenue dropped by more than 8% but the cost of sales went down 3.16%. In the beer market, competition has become so fierce that yesterday’s strategy or brand affinity is no more sufficient to take enough market shares. Brewers are more on the defensive side now, due to the availability of substitutes
Not just substitute products, however, value brands have always been on top of the game but there is pressure from the demand side. Average household income has nosedived significantly couple seemingly high food inflation and lower purchasing power of Naira.
In its financial year 2019 performance scorecard, Guinness Plc reported double digits decline in the bottom line, though its products demand slide by a single digit. The company revenue dropped by 8.03% as it settled at N131.50 billion against N142.98 billion in 2018.
Analysts noted there is an ongoing beer war that continues to be putting pressure on the industry’s margin. Looking at the numbers from its competitors, no brewer seems to be on the winning side, value brands are largely struggling to defend their market share.
Consumers have become quite sensitive to price, and they are unwilling to trade-off quality taste. It would be recalled that Nigerian Breweries lost sales when it raised the price in recent times.
The leading brewer was forced to reverse this as pressure on consumers’ wallets limit consumption. The fact that beers are everywhere makes it more difficult for brewers to increase prices without losing market share or reduce operating costs without glitches to quality.
Greenwich Research stated that the softer top line was sequel to declining sales volume from both domestic and foreign markets. On the other hand, the company’s cost of sales also inched lower by 3.16% then settled at N91.37 billion from N94.35 billion in 2018.
The brewer’s cost ballooned as cost as a percentage of sales ratio inched higher to 69.48% in 2019 from 65.99% the previous year. This means that Guinness made N30.52 on every N100 sales compare to N34.01 in the comparable period in 2018.
Earnings before interest, tax, depreciation and amortization, EBITDA, dropped to N19.06 billion, which was a 15.76% downside from N22.62 billion in 2018. This landed a heavy blow on the company operating performance.
In the period, operating profit declined significantly by 33.02% to N8.97 billion from N13.39 billion. EBITDA margin dipped to 14.49% from 15.82% in the previous year and operating margin declined to 6.82% from 9.36%. Guinness settled for
lower pretax profit which culminated from drill down decline from the demand side. In relative terms, pretax profit slipped to N7.10 billion from N9.94 billion in 2018 while the company’s profit after tax contracted from N6.72 billion in 2018 to N5.48 billion in 2019.
The balance sheet position however improved as the debt-to-asset ratio inched lower to 8.32% in the financial year 2019 from 8.96% in the comparable year as total assets increased by 4.92% to N160.79 billion from N153.25 billion.
Total debt slipped 2.57% to N13.38 billion from N13.73 billion a year earlier. The company also announced a final dividend of N1.52 per 50 kobo for the year ended June 2019, a 17.39% downside from N1.84 the previous year.
Lower than expected performance affected margin, the company’s net margin inched down to 4.17% in 2019 as against 4.7% in 2018. However, the balance sheet size expanded to N160.792 billion, from N153.254 billion in 2018. The key driver to an expanded statement of financial position of the company was on the back of more than N6 billion added to total current liabilities.
This was in relation to a sum of N6.545 billion overdraft taken by Guinness Plc in 2019 as shown in its book. While non-current liabilities stayed flat between the years at N22 billion, total current liabilities surged from N42.847 billion to N48.856 billion.
On the current assets side, Guinness tied down more cash than it has in current liabilities, which is a good one but for rising inventories.
Given the competitive pressure in the beer market, high inventory put pressure on quick ratio, with as much as N25 billion worth of cash was stacked in inventories. Also, trade and other receivables also surged, both assets classes accounted for about 90% of the current assets in the period.
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Thus, looking at the numbers, increased cash locked down was among other factors that put pressure on the company’s finance in 2019.
Guinness Plc: High operating cost, weak demand threaten profitability
