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Initial View- Guinness Nigeria Plc - Pick up in local sales, downturn in export sales

• Guinness Nigeria Plc released Q1 20 result this morning, recording loss after tax of N370 million (Q1 19 PAT: N6 million) compared to our estimate of N238.8 million profit after tax. While most line items tallied with our expectation, the deviation emanated from FX translation loss on borrowings, which raised total interest expense ahead of our estimate.
• Lower export sales depress margins. Bucking the trend of weakening local sales which have been under the siege of intense industry rivalry, Guinness reported growth in local revenue (+3.6% YoY N2 billion) in Q1 19. Although, Q1 20 local sales still lags historical average, we view the slight growth as positive for the firm especially given the kick-off of new excise duty hike over the period. However, the sharp drop in export sales (Q1 20: N692 million vs N2.8 billion in Q1 19) kept overall revenue in Q1 20 subdued (-4.3% YoY to N26.9 billion). For us, the sharp decline in export sales is surprising, hence, we will seek further clarity from management.
• On cost, while management adduced the relatively flattish raw material cost (-0.2 YoY to N9 billion) to improved efficiency and productivity initiatives, it linked the lower operating costs (-3.4% YoY to N7.4 billion) to efficient utilisation of fixed cost logistics assets. Consequently, due to faster decline in revenue relative to costs, gross and EBIT margin dipped 290bps and 340bps respectively to 29.5% and 2.5% respectively.
• FX translation loss fuels higher interest expense. Over Q1 20, finance expense more than doubled to N3 billion (from N593 million in Q1 19). This was largely driven by loss on re-measurement of foreign currency balances, reflecting the movement from NIFEX in Q1 19 to the NAFEX rate over the period. Also, mirroring the increase in overdraft takings (+33% YoY to N8.7 billion), interest on overdrafts grew to N340 million (Q1 19: N34.3 million). As at Q1 20, Guinness total debt rose 36% YoY to N27.1 billion following N3 billion short term loan received over the period and a 43% YoY rise in letter of credit. As a result, the split between short- and long-term debt settled at 70:30 (vs 59:49 as at FY 19).
• Guinness trades at a P/E of 13.55x relative to 25.4x and 16.08x for NB and Bloomberg MENA peers respectively. Based on our last communicated report, we have an FVE estimate of N63 and a NEUTRAL rating on the company.