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Initial View - Guinness Nigeria Plc Q2 19 - Heightened competition bites earnings

• Guinness Nigeria Plc (Guinness) posted its second quarter result for the period ended December 2018 wherein it reported moderation in earnings with EPS declining 16.5% YoY to N0.80. The slump in earnings reflects weak top line performance emanating from lower revenue and subsisting cost pressure over the period. However, on its 6M 19 earnings, GUINNESS grew PAT by 23% YoY to N2.58 billion following sharp drop in finance cost (-67.9% YoY to N1.54 billion) after paying down its foreign currency denominated loans with the proceeds of its N40 billion rights issue raised in its 2018 fiscal year.
• Revenue slows on intense industry competition: Over the second quarter, Guinness reported weaker revenue of N39.7 billion (-2.3% YoY) on account of weaker Nigerian sales which reflects weaker volumes and higher excise duty rates, in our view. For clarity, the opening of International Breweries (IB)  Sagamu plant which added ~2.5 million hectoliters to its existing capacity, enabled IB to increase its presence in the country and market share, with the impact being felt on other sector players including Guinness. Further reflecting the industry rivalry, Guinness was unable to pass on the higher excise duty rates (+36% YoY) to customers following IB’s decision to leave prices unchanged, thus imposing further pressure on revenue. In fact, reflecting the ongoing industry rivalry, management linked the mild revenue plunge (-2.5%) to strong support from spirits which grew double digit over the period.
• Profitability margins weaken in Q2: In the review quarter, gross profit declined 16.4% YoY to N11.4 billion while related margin contracted 483bps to 28.7%. Whilst management linked the higher cost of sales (COGs: +4.8% YoY to N28.3 billion) to continued inflationary pressure on raw material costs and lower fixed cost absorption, we think higher barley prices (+11% YoY) and higher cost per unit due to loss of diseconomies of scale following weaker volumes also imposed pressure on cost over the period. As a result, despite lower operating expense (-10.7% YoY to N8.7 billion), Guinness reported weaker EBIT (-25.5% YoY to N2.97 billion) with related margin contracting 230bps to 7.5%.
• Further down, the confluence of lower finance expense and higher finance income drove Net finance expense lower (-17% YoY to N413.8 billion). To buttress, Guinness successfully completed N40 billion rights issue in its 2018 fiscal year. The bulk of the proceeds was used to pay down its foreign currency denominated loans which previously inflicted pressure on finance costs via higher interest expense and FX losses.
• Our last communicated FVE on Guinness Nigeria Plc is N73.96 which translates to an OVERWEIGHT rating on the stock. GUINNESS trades at a P/E of 18.36x relative to NB of 26.1x.
• More analysis to follow.

       Conference call details:

• Thursday, 31 January: 2019 2:00 PM-3:00 PM
• Participant dial in:  +44 (0) 20 3003 2666
• Password:  GuinnessNG