Guinness: Poor demand, cost pressure douse positive vibes as investors dump stock

Guinness Nigeria Plc  is growth starved but there are positive vibes in its first half of financial year 2020 result.

Analysts observed there was action backed deleveraging agenda, and cash position improved.

In the stock market, traded at N28 per share investors think the company worth N61.33 billion on 2,190,382,819 shares outstanding.

It had peaked at N30.20 in the year, now yield 7% negative return.

The result revealed that demand for the brewer’s products still unimpressive, pressured by heavy rivalry as competitors keep gunning for consumers’ wallets.

Meanwhile, with inflation rising to about 12%, purchasing power remains weak plus high unemployment rate, demand structure has become so tightening.

Guinness Nigeria is however struggling to find value for investors, shareholders are capital gain and dividend starved.

The same time, foreign investors are dumping the stock, EFG Hermes said the stock made it to its sell list due to constraint and limited growth potential.

EFG said in a report that Guinness Nigeria presence in the lager beer segment is now residual, while stout, spirits and malt, have been growing in low single digits.

EFG noted that recent results show a strong deterioration in fundamentals, and we believe the company may book losses in 2020 estimates.

WSTC Securities held that slower than expected revenue growth raise concern about the company’s revenue growth potential in 2020.

The company however has strong cash to play with in the third quarter, as free cash flow surged 80% N10.64 billion in the first half of 2020.

In the second quarter of financial year 2020, the brewer reported a year-on-year profit decline, this followed up from a relatively weak first quarter, analysts at WSTC Securities explained.

Analysts said although revenue grew for the first time in the last five quarters, higher operating expenses and higher finance costs dampened the bottom-line.

“We think that lack of improvements, in the form of increased earnings, will continue to worry the already unconvinced investors as reflected in the drastic decline in stock prices.

“Especially for shareholders who had expected increased profitability owing to the capital raising exercise conducted in 2017”, WSTC held.

Analysts think that a weaker macro demand environment combined with the increase in excise duties, and heightened competition in the industry is taking a toll on Guinness.

Though, analysts recognise that the the current trend is peculiar among its industry peers.

WSTC analysts forecast that by 2020, revenue will grow by 1% to N133.30 billion. Analysts base the forecast on the back of slightly improved sales in the first half of 2020.

The annual increase in excise duties already ended in December 2019; except for spirits, an area where Guinness has a significant presence.

Analysts said they expect the top-line to normalise.

“However, owing to weak demand and the intense battle for market share, we believe that brewing companies will continue to haemorrhage margins, to keep the price-sensitive consumers at bay”, WSTC analysts held.

WSTC Securities estimates EPS of N1.67, which is 33% lower than 2019 actual EPS of N2.50.

“Given our lower estimates, we arrived at a lower fair value estimate of N30.63 from N48.65, or approximately 18times our 2020 estimates”, analysts stated.

For dividend forecast of N1.00, the dividend yield has been estimated to be 3%. However, the estimated return on equity of 4% for 2020 is below analysts estimated cost of equity of about 20% – 22%.

WSTC Securities Limited remains unconvinced about the prospects of Guinness Nigeria Plc, due to the current bottlenecks to growth in the industry where it operates.

“While we expect an overall improvement in sales growth, we believe that margins will continue to be under pressure”, analysts said.

Analysts revealed that the company’s stock currently trades at its fair value estimate. Hence, we recommend a hold for the stock.

The tailwinds for Guinness Nigeria was rebound in revenue growth after 5 consecutive quarters of decline.

The numbers show that revenue grew by 4% in the second quarter of 2020, since fourth quarter of 2018.

Analysts also saw that revenues from both the domestic markets and exports sales grew in second quarter of 2020.

In the first quarter of 2020, exports sales declined by as much as 75% to N692.46 million from N2.79 billion.

That means the rebound in exports sales in the second quarter of 2020 supported revenue growth.

Also, there was an improved cash flows generation.

The numbers show that operating cash flows rose by 22% year-on-year from N14.81 billion in the 6-month of 2019 to N18.38 billion in 6M-2020 due reduced inventories during the period.

Guinness Nigeria free cash flow (FCF) spiked by 80% to N10.44 billion in 6M-2020 from N5.79 billion in 6M-2019.

On the other hand, free cash flow to equity rose by 218% to N13.38 billion in 6M-2020 from N4.20 billion in the comparable period.

The spike in FCFE was due to a higher net borrowings of N5 billion during the period.

Analysts’ position that the company refinanced costly short-term debts (overdrafts), possibly taking advantage of the low-yield environment.

Despite revenue growth in the second quarter of 2020, the Guinness recorded higher cost and operating expense margins, thus it could not fully maximise the higher revenue earned.

Specifically, operating expense margin worsened to 22% in the second quarter of 2020, from 21% in the comparable period in 2019.

On a 6M basis, operating expense margin worsened to 24% in 6M-2020 from 23% in 6M-2019.

The Company, in 2017, raised equity capital of about N40 billion which was used to pay down outstanding loan obligations.

However, resulting from weak revenues and rising costs in the last few quarters, the working capital requirements necessitated a drawdown of overdraft facilities to support operations.

As a result, finance cost grew.

Analysts however noted that the Guinness Nigeria possibly made efforts to pay down debts including overdraft facility, as reflected in the lower finance cost of N626.80 million in the second quarter of 2020 from N934.44 million in the comparable period in 2019.

Guinness Nigeria had earlier recorded a 116% spike in finance cost in the first quarter of 2020 to N1.26 billion from N593.11 million in the first quarter of 2019.

Analysts at WSTC Securities limited stated that the impact of the high finance cost in the first quarter weighed on the overall finance cost in 6M-2020.

“Risks to our estimates include macro-demand slowdown, inconsistent government policies, slower revenue growth, and FX instability”, WSTC Securities analysts held.

Guinness: Poor demand, cost pressure douse positive vibes as investors dump stock