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GUINNESS NIGERIA PLC - Losses persist in Q2’17 despite revenue lift

GUINNESS Nigeria reported a loss after tax (LAT) of ₦2.4 billion for the three month period ended 31 December 2016 – translating to a cumulative ₦4.7 billion LAT for H1’17, a large deviation from Vetiva’s ₦2.2 billion LAT estimate. Earnings pressure persisted within the quarter as margins contracted further, reflecting the impact of currency weakness on cost of sales. Although we highlight the lower unrealized FX losses on dollar denominated liabilities recorded in the quarter (Q2’17: ₦806 million vs. Q1’17: ₦2.2 billion), this financing cost pressure continued to suppress earnings. Treading a totally different path from bottom line, GUINNESS posted an impressive 30% y/y and 58% q/q revenue growth in its seasonally stronger second quarter, outperforming Vetiva’s estimated growth of 16% and 41% respectively. Though revenue growth was largely supported by price increases across several brands, Diageo (GUINNESS’ parent company) had earlier reported a 7% y/y volume growth for the Nigerian brewer in H1’17. Increased foreign patronage of Nigerian products contributed to this, as export sales grew 105% y/y (partly supported by naira devaluation). Additionally, volumes were propelled by an expansion in Spirits and sizeable growth in value priced beer, Satzenbrau.

Given the rise in debt to equity ratio rise from 0.87 in H1’16 to the 1.30 in H1’17, GUINNESS announced its intention to reduce its financial leverage through a ₦40 billion Rights Issue. We are optimistic about revenue growth in the coming quarters, driven by the ramp up in Spirits segment, increasing exports and growing participation in the value segment amidst strong pricing. Thus, we forecast a 3-year revenue CAGR of 13%, with Spirits contribution rising to 15% by 2020E. We revise our FY’17 revenue estimate to ₦116 billion (Previous: ₦108 billion). However, with cost growth outpacing our revenue growth forecast, we believe margins will remain constrained in the near term. Thus, our FY’17 EPS estimate is revised significantly lower to -₦4.82 (Previous: ₦0.11). We revise our Target Price to ₦70.81 (Previous: ₦75.06), a HOLD rating (Previous: SELL). Guinness recorded a negative 31% price return in 2016 and has lost 22% of its value so far this year.