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Guinness Nigeria Plc FQ1 18 - FX losses stifle earnings

 

• Guinness released its unaudited first quarter 2018 results posting a pre-tax profit of N4 million (vs. pre-tax loss of N2.2 billion in FQ1 17) on the back of strong growth in revenue (+30% YoY) mainly due to higher prices. Irrespective higher financing expenses (FX losses) moderated the pass-through from revenue growth to dampen earnings expectation.
• Price and benign cost lend support to margin. As was the case in the last three quarters, Guinness recorded strong double-digit revenue growth in FQ1 18 (+30% YoY) which management attributed to higher prices YoY, continued growth within the spirits business as well as the benefit of an expanding portfolio. Although the company had to adjust prices slightly lower (relative to prior quarter) in response to price competition from NB, pass-through from strong YoY price edge still saw revenue growth outpace that of input cost (+18.8% YoY). The foregoing combined with price increase drove gross margin higher (6.1pps YoY) to 34.7% with related profit of N4 billion (+58% YoY).
• Elevated finance expense ruins rosy performance. However, Guinness’s otherwise rosy performance was derailed by its elevated finance expense (+14% YoY to N9 billion), which was principally driven by FX loss of N2.2 billion on foreign denominated debt^[2]. On a positive note, the company also reported sturdy growth in finance income (+179% YoY to N1.2 billion) which prevented it from reverting to a loss in the quarter with earnings coming in at N41 million.
• Strong sales from diversified portfolio to support to 2018 earnings: For the rest of the year (FY 18), we retain our projection for revenue at N96 billion (+9% YoY) largely underpinned by higher YoY prices and growing demand in Guinness’s growing spirits business. Similarly, against the backdrop of moderate pace of input cost growth relative to expectations and the transitory nature of transport-induced food inflation, we also revise our expectations for COGS lower to N81.4 billion (+5% YoY, prior: N83.8 billion). The foregoing translates to gross profit of N56.6 billion (+17.1% YoY) with related margins at 41%. Similarly, we have revised operating cost lower to N39.7 billion (+2% YoY) in line with FQ1 18 performance to leave EBIT 74% higher YoY at N17.7 billion.
• In addition, we forecast finance expense higher to N7 billion (-11.5% YoY) in recognition of elevated FX losses in FQ1 18. Similarly, we have also revised NB’s finance income higher to ₦3.2 billion (+40% YoY) to capture the impact of the robust interest income earned over FQ1 18 (prior estimate: N1.98 billion, FQ1 18: N1.23 billion). Net impact of revisions to our model translates to PBT and PAT of N12.2 billion (+4.6x YoY) and N8.4 billion (+4.4x YoY) respectively. Also adjusting for higher shares outstanding (2.5 billion vs 2.2 billion previously assumed), our 2018E EPS amounts to N3.83.