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GUINNESS NIGERIA PLC - Q3'17 earnings recover on margin improvement

After reporting losses for four consecutive quarters, GUINNESS recorded an impressive rebound in Q3’17 with profit after tax coming in at ₦2.1 billion, beating Vetiva and Bloomberg consensus of another loss. This performance was driven by a significant expansion in gross margin within the quarter to 55% vs. Q2’17: 25% and our 26% estimate. Coupled with a better than expected revenue figure of ₦30 billion (Vetiva estimate: ₦26 billion), Q3’17 gross profit rose to its highest level since Q2’13, up 87% y/y. Whilst operating expenses (as a % of sales) in Q3’17 improved y/y to 41% (Q3’16: 44%), we highlight the huge 952bps jump reported q/q. Furthermore, elevated interest expenses also remained a sour spot for the highly leveraged brewer. Net interest charges rose 207% y/y to ₦2.1 billion (50% of operating profit).

Cumulative earnings for the year however remained repressed by the huge losses recorded in the earlier quarters with 9M’17 PBT coming in at a ₦2.5 billion loss, albeit better than Consensus estimate of ₦4.9 billion loss. Whilst the company is in the process of raising equity capital in tune of ₦40 billion via Rights Issue to unladen earnings and reduce FX exposure, the entire capital raise process is expected to be completed by the beginning of its FY’18 financial year. Given the improvement recorded in Q3’17 we are more optimistic for FY’17 earnings and forecast a mild loss after tax of ₦219 million for the period. We also revise our Target Price higher to ₦72.92 (Previous: ₦67.14). Pending further approvals, our forecasts do not take into account the Rights Issue yet.