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Initial View - Guinness Nigeria Plc - Intense competition bite earnings

• The volume erosion which started in Q1 2019, persisted in the third quarter, with Guinness results released yesterday showing decline in revenue by 3.8% YoY. Given the drag that emanated from the Lager and Ready to drink (RTD) volumes over the first six months of its reporting period, we do not rule out the possibility of same occurred over the review period. Similar to NB, Guinness bottom line was further pressured by slower decline in cost of sales and elevated operating expenses. In all, EPS declined 43.5% YoY to N0.76, which is in sync with our estimate (ARM Q3 19F: N0.79). Cumulatively, 9M 19 EPS dipped by 16.4% YoY to N1.94 on account of lower revenues over the period.
• Revenue soften on higher excise duty and competition:  Contrary to trend witnessed by its peer – NB, Guinness reported weaker net revenue of N39.7 billion (-3.8% YoY) over the third quarter. We link this to pass through effect of higher excise duty given its lower base last year and weaker beer volumes. Elsewhere, with cost of sales (-3.2% YoY) falling slower than revenue, gross profit dipped 5% YoY to N14.2 billion with related margin contracting 40bps to 32.8%. The slower moderation in cost of sales in our view mirrors higher barley prices (+9% YoY) and lower fixed cost absorption rate from loss of volume share.
• The company also faced cost pressure, as OPEX rose 9% YoY to N8.5 billion over Q3 19. This was mainly due to higher administrative and distribution spend over the period. To our minds, this reflects marketing and promotional efforts to support volumes. Consequently, EBIT dipped 33.2% YoY to N2.7 billion while related margin contracting 350bps to 8%.
• Further down, despite the lower interest rate environment, interest expense rose 39% YoY to N280 million. We note that the higher interest expense mirrors lower base from last year as interest expense in Q3 19 is ~3x lower than average interest expense of N728.9 million over the last three quarters. Consequently, PBT and PAT fell 43.5% YoY apiece to N2.5 billion and N1.7 billion respectively.
• In our last stock report (), we highlighted that Guinness will have to contend with slower beer volumes due to intense industry competition. However, we painted a soft landing for overall volumes as management resorts to increasing spirits contribution to overall revenue in a bid to support margins. With our views playing out and our earnings estimate largely in line with the company’s Q3 19 earnings (Actual: N0.76 vs N0.79 ARM Forecast) we leave our FVE unchanged at N77.31 which now translates to a BUY rating on the stock. GUINNESS trades at a P/E of 13.73x relative to 25.19x and 18.94x for NB and Bloomberg Mena peers respectively.