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Guinness Nigeria PLC FY'20 Earnings - Impairment losses trigger earnings plunge

The lockdown phase of the pandemic in several cities enforced the decline in patronage of bars and lounges for a part of the company’s Q4 period, while the curfew and social distancing measures imposed during and after the lockdown phase continues to impact night-time activity. Additionally, in the last quarter, two of their brewing houses (Benin and Ogba) had been closed for some time and this had affected production and trading activities. This disruption to sales and production severely impacted the company’s capacity to roll out meaningful volumes in the last quarter (with substantial de-stocking across several segments leading to a fall in Revenue). Furthermore, the combined impact of the pandemic and increasing inflation on various sectors of the economy has ensured a decline in consumer disposable income and purchasing power, exacerbating the demand problem. The immediate impact of these headwinds is evident in the drastic 72% decline in Q4’20 Revenue to ₦8.4 billion (Q4’19: ₦30.1 billion, Vetiva: ₦16.2 billion). That’s not all; although exports comprise less than 5% of total revenue, the 72% decline in revenue from exports is another factor that has contributed to the y/y decline, given the strict border controls implemented in the latter part of 2019. The lockdown phase of the pandemic in several cities enforced the decline in patronage of bars and lounges for a part of the company’s Q4 period, while the curfew and social distancing measures imposed during and after the lockdown phase continues to impact night-time activity. Additionally, in the last quarter, two of their brewing houses (Benin and Ogba) had been closed for some time and this had affected production and trading activities. This disruption to sales and production severely impacted the company’s capacity to roll out meaningful volumes in the last quarter (with substantial de-stocking across several segments leading to a fall in Revenue). Furthermore, the combined impact of the pandemic and increasing inflation on various sectors of the economy has ensured a decline in consumer disposable income and purchasing power, exacerbating the demand problem. The immediate impact of these headwinds is evident in the drastic 72% decline in Q4’20 Revenue to ₦8.4 billion (Q4’19: ₦30.1 billion, Vetiva: ₦16.2 billion). That’s not all; although exports comprise less than 5% of total revenue, the 72% decline in revenue from exports is another factor that has contributed to the y/y decline, given the strict border controls implemented in the latter part of 2019.

With the worsening performance of its Lager segment, the company has decided to concentrate on its Guinness, malt, and Spirits brands in the coming year. Given that the major headwinds to Sales have been somewhat mollified, with the prospective re-opening of major alcohol sales outlets, we are slightly optimistic of a rebound in Revenue. However, a challenge we see, is the further 14% increase in excise duties to ₦20/l for Spirits that was set to take effect in July. Furthermore, we expect the pressure on consumer wallets to keep beer consumption repressed (ex-festive quarters) and impede Revenue growth. Also, we expect that the company’s tighter credit policy stance may have a further sobering effect on Sales. That said, we project Revenue for FY’21 to print at ₦112.7 billion (+8% y/y), given the weak 2020 base. Based on this figure, we expect gross profit to jump 15% y/y to ₦38.3 billion (Gross margin: +2ppts to 34%) buoyed by the focus on Spirits, a high margin segment. Taking into consideration the firm’s recent “own-a-bar” route to market strategy with the use of its employees, we foresee distribution expenses maintaining its current momentum while maintaining the run rate for admin expenses. We project a 7% decline in total operating expenses to ₦30.4 billion for FY’21.