Guinness Nigeria | A drunken stumble

Guinness Nigeria's (Guinness) revenue declined 4% y/y for the quarter ending Sep'19 (Avior: +1% y/y) due to a economic environment and intense competition. We believe a decline in beer volumes (and subsequent loss of market share) contributed to the revenue decline. High cost inflation, together with the increase in the excise tax rate (+16.7% on beer and +20% on spirits) during the quarter negatively impacted Guinness's input costs. Thus, the operating margins declined 3.4pp y/y to 2.5% during the quarter. Guinness's poor profitability and cash flow resulted in the Group increasing borrowings 36% y/y, resulting in our revised FY'20 net debt/EBITDA increasing to 2x. We do not forecast reprieve in the competitive and economic environment in Nigeria for the next three years. We believe Guinness is unsustainable in its current form. ROIC has been below WACC for the past five years. Capex requirements rose 19% since FY'14 to NGN16.6bn in FY'19f. Over the same time, operating cash flow fell by 30% to NGN13.4bn. Considering the rise in debt in FY'19 and Q1'20, we believe Guinness requires a rights issue to de-risk the balance sheet for the second time in three years.