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Guinness Stock Note 9M_2022 - Making "Spirited" Strides

Overall Business Improvement ContinuesZ

Guinness continued on the path of profitability in the period ending 31st of March
2022. The firm sustained the trajectory of the Spirit Stock Keeping Unit, while also
optimizing price for other Stock Keeping Units (SKUs). Similarly, we noted improved
Degree of Operating Leverage, amplified by improved contribution from all the
Stock Keeping Units (SKUs). Similarly, the asset turnover of the firm inched higher
(Up to 0.77x in the period) when compared to 9M 2021 figure of 0.68x. We believe
this path bodes significant upside for the firm’s revenue, and the more it sustains
this trajectory while also reining in cost, the better for overall business performance.
In the light of the obvious improvements in performance, and the recent rally on the
stock, we have placed our previous target price of N84 under review.

 

Revenue: Headlined by Spirit Segment Growth and Price Adjustments

Building on the gains reported in its H1 2022 financials, Guinness Nigeria Plc
continued its ascent (Up 38.7% YoY) in 9M 2022 to N159.44bn from N114.95bn in
9M 2021. Previously, we have confirmed the contribution of the Spirit Segment to
overall revenue growth. In addition, we observed that although the recent
performance retained the contribution of the Spirit Segment, it also benefitted from
the overall rise in the price of alcoholic and non-alcoholic beverages in the period.
As the firm continues to penetrate the market with its premium brand and raise price
as and when due to cushion the effect of cost on other product segments, we
envisage sustained topline growth.

 

Guinness Records Double-Digits Growth in Cost of Sale

Cost of Sales (adjusted for depreciation) continued its surge (24.4% YoY) to
N100.33bn from N80.67bn in the corresponding 9M of 2021. Although the
constituent of this line is unclear at the time of making this report, we believe that
the recent trajectory of commodity prices makes for rise in Cost of Input. In terms of
the outlook for FY 2022, we do not expect any significant slow-down in the cost line.
We observed that the improvement in top-line, which was predominantly dictated
by price adjustment was enough to dictate the direction of Gross Profit which rose
72.4% YoY to N59.11bn from N34.27bn in 9M 2021.

 

Broad Based Rise Underscores Increase in Operating Expense

Guinness recorded a significant surge (Up 45.3% YoY) in adjusted Operating Expenses (OPEX) for the 9M ending 31st of March 2020 to N31.14bn. We noted an overarching rise across lines – Distribution and Marketing expenses for instance moved from N9.12bn and N9.33bn to N12.39bn and N15.69bn, respectively. While we still expect Management’s guidance, our observation suggests many factors among which we have rising diesel costs, advertisement expenses, and improved selling activities are believed to have amplified the growth on the expense line. Nonetheless, Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA), supported by the significant improvement in the contribution margin, rose to 117.6% YoY to N27.97bn in the period. We hold that at current levels, the firm is well on course for sustained profitability.

 

Improved Degree of Operating Leverage and Finance Cost Supports Overall Profitability

We observed that Guinness followed the trend observed across the breweries segment by improving (Down 56.9% YoY) its Finance Cost to N1.49bn from N3.46bn in the corresponding period in 2021. Similarly, we recorded a marked rise (Up 282.0% YoY) in Finance Income to N1.07bn. On a balance of the two Finance Items, Net Finance Cost dipped 86.9% YoY to N0.42bn — Further supporting the improved operational efficiency. Adding the effect of these developments to the improved Degree of Operating Leverage – A metric that helps explain how change in revenue affects overall operational profitability (Estimated: 20.66°). We have a 403.4% YoY rise in Profit Before Tax to N22.46bn, and a Net Income growth of 731.2% to N15.28bn.