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GUINNESS NIGERIA PLC - Weak start to FY’17, reports ?2 billion loss

• Missing our expectation of modest earnings recovery by a large variance, GUINNESS reported a loss after tax of ₦2.2 billion in Q1’17, lower than the ₦2.9 billion loss recorded in the previous quarter. This performance was partly driven by a 14.2 percentage points (ppts) rise in cost of goods sold (as a percentage of sales) to 71% amidst higher prices of both imported inputs (stemming from the currency depreciation) and locally sourced raw materials (cost inflation impacting key materials like sorghum, maize, sugar). Given this, EBIT margin in the quarter moderated to 3% (Q1’16: 7%) despite aggressive cost savings agenda in the quarter (OPEX to sales down 10.8 ppts y/y). The second major knock-back for earnings came from a 207% y/y spike in finance expense following a ₦2.2 billion loss on foreign exchange transactions amidst sustained naira weakness. Stripping off the FX loss, GUINNESS would have recorded a lower ₦13 million loss before tax.
• We think GUINNESS will continue to struggle to grow volumes in FY’17 given our tepid consumer demand outlook and the brewer’s modest offerings in the value segment. Nonetheless, following this result, we have raised our FY’16/17 revenue forecast slightly to ₦108 billion (Previous: ₦106 billion) majorly supported by pricing. However, given the possibility of a further rise in FX losses and upward revision to our production cost estimates, our EPS forecast is revised to ₦0.11 (Previous: ₦0.39). Our 12-month target price (TP) is also revised lower to ₦75.06 (Previous: ₦76.81). GUINNESS has come off the 7-year low of ₦76.00 it traded at in October after parent company, Diageo announced it would no longer increase its stake in Guinness Nigeria PLC. The stock currently trades at ₦90.00, providing a potential downside of 17% to our TP, as such we maintain a SELL rating.