31 August 2018 : Guinness Nigeria released its full year 2018 result ended June 2018 wherein it reported EPS growth of 157% YoY to N3.30 driven by EBIT margin expansion of 127bps to 9.4% – following a moderation in operating expense to sales ratio (-584bps to 25.1%) which offset gross margin contraction of 440bps. Lower finance expense (-42.3% YoY to N5.6 billion) in FY 18 also drove the increase in EPS. Accordingly, Guinness declared a final dividend of N1.84 (+188%), representing a payout ratio of 55.6% and dividend yield of 2% based on last close price.

Weaker revenue and profitability margins in FQ4 18. Focusing on the most recent quarter (FQ4 18), earnings was not impressive as it was down 63.4% YoY to N1.6 billion. It appears the company witnessed a slowdown in volumes particularly for popular mainstream lager beer – Satzenbrau and Dubic – as revenue grew by 4% YoY to N37.5 billion (vs. 11% and 15% in FQ2 18 and FQ3 18 respectively). Analysts believe the company lost volumes due to intense competition in the sector alongside price increases it took over the period – with analyst's checks showing double- digit increase in average prices over the quarter ahead of the new excise duty rates which took effect in June 2018. 

Analysts believe the company lost market share to competitor – International Breweries – who left its prices unchanged for its mainstream lager products (Trophy and Hero) during the period despite price hikes from Guinness Nigeria and Nigerian Breweries. The volume pressure also must have informed the reversal of price increases on Satzenbrau in August. Owing to the slowdown in topline and faster rise in cost of sales, gross margin and EBIT margin was weaker, contracting 10ppts and 9.4ppts to 34.8% and 7.2% respectively.

Balance sheet remains healthy. Guinness’ balance sheet remained healthy with total debt down 67% YoY to N13.7 billion, driving net debt-to-equity to 7.2%, lower than 82% as at FY 17. Analysts recall that the company raised N39.7 billion via rights issue last year with about 70% of the proceeds used to pay down some of its related party and local debts. This reflected in FQ4 18 finance expense which fell 24% YoY to N655 million. On a quarterly basis, net debt-to-equity of 7.2% was slightly higher than 5.9% in 9M 18 due to lower cash (-36.2% QoQ to N7.5 billion) even as total debt declined 18% QoQ to N13.7 billion. 

Precisely, its cash position was depressed due to payments of N5.1 billion for trade & other payables and additional capital expenditure of N8.6 billion in FQ4 18. The additional capital expenditure of N8.6 billion seems a lot for maintenance CAPEX (9M 18 cumulative CAPEX at N8.4 billion; FY 17 CAPEX: N8.5 billion) which might be related to new capacity for its latest product – Royal Kingdom Premium Lager beer that was launched in FQ4 18. Analysts would seek clarity at its investor conference call.

Analyst's last communicated FVE of N88.21 translates to an UNDERWEIGHT rating on the stock. Analysts will revisit analyst's numbers after further analysis and discussion with management. Guinness Nigeria trades at a current P/E of 18.9x relative to Nigerian Breweries of 28.8x and International Breweries of 33.5x.

Guinness Nigeria will be hosting an earnings conference call today where Baker Magunda, MD/CEO Guinness Nigeria and members of the Executive team will discuss in detail the FY 18 results. 

Reporting for EasyKobo on Friday ,31 August 2018 in Lagos, Nigeria

Source: Feyisike Ilemore from ARM Securities Limited

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