EUR 20.30 For Business Accounts Only

​Moving to Underperform due to weak Q1 results

​Moving to Underperform due to weak Q1 results

• 15% cut to our PT; downgrading to Underperform: Following Guinness Nigeria's (GN) weaker-than-expected Q1 2016 (end-Sep) results, we have cut our EPS forecasts by around 17% on average over the 2016-18E period and our price target by 15% to N115.9. On a relative basis, GN shares are trading on a 2016E (end-June) P/E multiple of 28.1x for 30% EPS growth in 2017E. These compare with the 24.9x (end-Dec) 2015E P/E multiple for 20% EPS growth in 2016E that rival Nigerian Breweries is trading on. Since Diageo - Guinness' parent - announced plans to increase its stake in Guinness Nigeria from 54.3% to a maximum of 70% via a tender offer to minority shareholders, the shares have rallied 14.4%. Given expectations of tender offer, we believe the shares may rally close to the tender offer price of N175.0 in the near term. Our price target implies a potential downside of -19% from current levels. As such, we lower our recommendation to Underperform from Neutral.

• PBT and PAT down by 74% y/y and 76% y/y respectively: Guinness' Q1 2016 results showed that PBT and PAT fell by 74% y/y and 76% y/y to N519m and N364m respectively. Although sales were up marginally by 3% y/y, a severe gross margin contraction of 732bps y/y to 42.8% was the major driver behind the y/y decline in earnings. To a lesser extent, a combination of factors including a 2% y/y rise in opex and a 25% y/y decline on the other income line also contributed to the marked y/y decline in PBT. Sequentially, sales declined by 36% q/q, while PBT and PAT both fell by 86% q/q. Compared with our estimates, the results were weaker on all key headline items. While sales missed by 14%, PBT and PAT missed our forecasts by 72% and 75% respectively, mainly because of the negative surprise (-400bpbs) in gross margin.

• Weak outlook for beer demand: Although “Orijin”, Guinness Nigeria's herbal drink, has helped boost both topline and bottom line growth over the last few quarters, we believe that the recent results are reflective of a slowdown in the brand's growth. In addition, “Ace roots”, a rival product from Nigerian Breweries, may also be chipping away at Orijin's market share. Given the tepid outlook for beer demand, we have cut our 2016E sales and gross margin forecasts by 3% and -220bps respectively. These underpin our 2015E sales and EPS forecasts of N126.8bn and N5.09 respectively.