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GUINNESS NIGERIA PLC H1'23 EARNINGS RELEASE - Topline growth hits sustainability challenges

GUINNESS NIGERIA PLC
Topline growth hits sustainability challenges
Guinness Nigeria’s Revenue performance for the H1’23 period was quite stellar. At ₦65.6 billion, topline surpassed our Q2 projection of ₦54.8 billion by 20%, albeit substantially driven by price increments across subsegments. While this would appear impressive, Guinness volumes seem to have hit a sustainability problem, as consumers increasingly reduce volumes in reaction to stronger pricing. More so, the malt segment which had been quite instrumental to sales growth in the previous quarters, weakened by 9% in this quarter, a direct result of the company’s decision to pull out of the pet-packaged malt segment. Although this quarter was strong, the Q1’23 period was more instrumental to the 9% y/y growth in Revenue witnessed in the H1’23 period, especially as volumes have slowed. On the other hand, while the performance was impressive, the increased excise duty on alcohol was detrimental to Revenue given that remittances to the government reportedly increased by 97% y/y to ₦22 billion.
Operating margin target is still a long way off Guinness Nigeria has bucked the industry trend so far, with cost of sales growing by a slower 7% y/y compared to the 11% y/y growth in Revenue. Consequently, gross profit increased to ₦18.2 billion (+20% y/y), with gross margin improving by 2ppts y/y to 35%. We believe that this has been driven by the company’s steady price increments across its product segments. However, operating margin has not been as buoyant as it contracted by 300bps y/y to 11% (in the opposite direction from their 20% target by FY’23), and EBIT declined 9% y/y to ₦5.9 billion.
Looking ahead, we expect that operating margin would remain challenged, especially in the last quarter of the company’s financial year. Assuming the likely scenario of a PMS subsidy-removal, distribution expenses would rise significantly, in addition to already high operating expenses. On the other hand, the removal of the subsidy should be positive for the naira and could result in a gain for re-measured FX-denominated liability balances. Based on these, we estimate a FY’23 bottomline figure of ₦10.0 billion (-36% y/y).