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GUINNESS NIGERIA PLC Q1'20 Earnings - Revenue decline driven by weaker demand

Revenue decline driven by weak demand                                                  

Guinness Nigeria PLC released its Q1’20 results, posting a loss after tax of ₦0.4 billion, compared to a profit of ₦0.8 billion in Q1’19 (Q4’19: ₦1.2 billion). Notably, this negative result in earnings was down to two factors: weaker revenues and higher finance costs. Revenue fell 4% y/y and 11% q/q to ₦26.9 billion. Aside from the existing competition which has seen lager sales moderate, we believe the drop in revenue may be linked to the implementation of a new round of excise duties in July 2019, taking the rates up from ₦0.30/cl to ₦0.35/cl for beer and from ₦1.25/cl to ₦1.50/cl for spirits. Gross profit fell 13% y/y to ₦7.9 billion, with gross margin shrinking by c.200bps y/y to 30% in Q1. However, gross margin improved by 100bps from Q4’19, albeit still below the 33% margin the Group reported in Q3’19.                                                         

With average consumer spend expected to moderate in 2020 following the proposed VAT increase, we expect to see limited growth in the beer market and even stronger competition in the space. Given the strength of the company’s competitors as well as the track record so far, we see Guinness losing further market share in the beer market and thus forecast a 4% decline in FY’20 non-spirits revenue to ₦112.7 billion. On the other hand, we forecast a c.10% y/y growth in spirits revenue as the beverage giant continues to aggressively push the sector. This raises the expected contribution of spirits business to topline to 19% - closer to GUINESS’ medium term contribution target of 25%. All in, after accounting for higher excise duties, we forecast an FY’20 revenue of ₦126.9 billion, 4% lower y/y.