Guinness Nigeria Plc Net Profit Hits N2.09 bn From N2.44 bn Loss Last Year

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The Management of Guinness Nigeria Plc released Q2 showing net profit of NGN2.09 billion as against NGN2.44 billion loss last year which is considered driven by three factors:  (1) continued revenue growth, (2) better margin, and (3) lower opex and finance charges. The net profit was equally higher compared to Q1-17/18’s NGN41.4 million, but below our NGN2.70 billion estimate and consensus expectation of NGN2.8 billion.

Going by the results, the company has been able to improve on its revenue by 18.60 percent for the second quarter ended December 31, 2017.  The revenue grew from N59,490.58 billion in 2016 to N70,557.16 billion in 2017.

Revenue grew by 11% y/y and 36% q/q, sustained by festive demand, strong marketing effort, and relatively higher prices. DIAGEO (GUINNESS’ parent company) stated in a press release recently that the group enjoyed positive price in Nigeria, and that mainstream spirits and value beer (Dubic precisely) recorded faster growth during the period. Sales volume was reported to have grown by about 17% y/y over H1-17/18. Value beer (23% y/y), Guinness (14% y/y), Malta Guinness (6% y/y), and main stream spirits (22% y/y) recorded net sales growth in the first half.

Analysis of the half year result shows that profit after tax moved from negative of N4,667.97 billion in 2016 to N2,130.51 billion an improvement of -145.64 percent. Earnings per shares moved from negative -2.13 kobo in 2016 to 0.97 kobo a growth of -145.64 percent.

According to the company the growths are driven by both spirits and beer reflecting the expansion of its portfolio, and improved operating margins with benefits from its productivity initiatives despite sustained cost pressures.  

The results also saw marketing spending increased by 17 percent demonstrating sustained investment behind Guinness Nigeria’s brands. Administrative and distribution expenses declined driven by the company’s continuing focus on productivity.

Commenting on the half year results, Peter Ndegwa, Managing Director/CEO, Guinness Nigeria Plc said: “In a difficult operating environment notwithstanding recent signs of economic recovery, we delivered a strong performance with net sales growth of 19 percent for the half with growth in spirits and benefits of an expanding portfolio and also against the backdrop of lapping inventory reduction from prior year”.

“We believe in the continued execution of our strategy, allowing us to navigate a tough environment characterized by down trading of consumers as disposable income is subjected to additional pressure. We have made significant progress in driving productivity especially in the supply chain and the commercial function, even though cost pressures and inflation takes its toll.” Mr. Ndegwa added: “In this half we have also continued to innovate with increased marketing spend across our portfolio to drive the growth on our core brands and to fund our expanding portfolio and innovation pipeline.”

On successful completion of the rights issue exercise where Guinness Nigeria received approval from its shareholders to raise 40 billion naira from existing shareholders via a rights Issue offering five (5) new shares for every eleven (11) held, at 58 naira each, Mr. Ndegwa said: “The utilization of the rights issue proceeds leading to significant reduction of the Diageo loan and other borrowings, has resulted into a 32 percent reduction in the net finance charges and improved our debt to equity ratio from 82 percent to 2 percent.

While gross margin remained higher relative to the last financial year (+601 bps y/y), we are quite surprised by the 118 bps decline compared to the first quarter. Compared to our estimate, gross margin was lower by c.650 bps, and has weakened consistently since reaching record 55% in Q3-16/17, reflecting, as we stated in the Q1 note, growing contribution of value beer and inflationary pressure on key raw material input prices (Sorghum in this case).

On the positive, opex was lower by 12% y/y and was below our estimate by 25%. Admin and distribution expenses were lower by 25% y/y and 24% y/y respectively while marketing expenses increased (following focused campaigns on Guinness) by 20% y/y. EBITDA margin of 15.4% was reported, significantly higher y/y, but lower by 96 bps q/q.

Also worth highlighting is the 65% y/y decrease in finance charges, comprising NGN583 million loss (NGN857 million in Q2-16/17) on foreign exchange transactions and N374 million (vs. NGN1.9 billion in Q2-16/17) related to interest expense on loans and borrowings and overdraft facilities. Compared to Q1, FX loss and interest expenses were lower by 74% and 77% respectively. Gross debt now stands at NGN12.5 billion post-Rights Issue, and the consequent reduced interest burden will remain supportive of earnings for the rest of 2018.

Continued growth in revenue and the savings on both operating and financing costs bode well for GUINNESS’ earnings in 2018. However, continued weakening margins dampens earnings growth expectation from 2019, as the effect of low revenue and finance cost bases tapers. The stock has gained 20% YtD, and positive reaction to the result is expected.


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