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GUINNESS NIGERIA PLC Q2'20 Earnings - Stronger margins lift Guinness to profit

Stronger margins lift Guinness to profit

GUINNESS showed a stronger performance in its Q2’20 results, coming off a loss position in Q1’20. The brewery giant reported significant growth in topline as Reveune increased 54% q/q to ₦41.4 billion, translating to a 1% y/y growth in half-year topline (H1’20: ₦68.3 billion, H1’19: ₦67.8 billion).

 

While we recognize that Q2 is usually their strongest quarter, given the festivities in the period, we specifically note management’s continued drive to strategically shift volume focus to the Spirit segment of the business which is a high margin segment and now contributes over 19% to revenue (+1% y/y) as at H1’20. Despite this, Gross margin declined 1% y/y, dragged by lower margins in Q1’20. In addition to this, the company reported that they had increased prices across Lager, Beer and Mainstream Spirits. These increments are following another round of excise duty increases in the Beer and spirit segments (Beer: ₦0.30/cl to ₦0.35/cl, Spirits ₦1.50/cl to ₦1.75/cl). We recall that management had back-pedaled on price increases - when excise duties were first increased – to maintain competitive pricing and market share. However, even with the price increases across board, the company reported 56% y/y volume growth in the Mainstream Spirits segment for H1’20.

 

Spirits to remain the support system

Although we have seen quite an impressive Q2’20 performance, we slightly adjust our FY’20 PAT forecasts downward to ₦4.7 billion. Whilst we have increased our Revenue forecast based on the expected price increases across the spirit and beer segments - adjusted for a balancing effect on volumes - we make slight revisions to forecasted Cost of sales, given the H1’20 run rate and expect Cost of sales to decline only 1% y/y (previous: 6% y/y). That said, Spirits remain the favoured child as we still expect its contribution to Revenue to hover above 19% for the period amidst still strong competition in the beer segment. Meanwhile, given our outlook for increased inflation in the first half of the year, we made slight adjustments to our expectation for FY’20 operating expenses to ₦30.62 billion (-3.1% y/y, previous: -7% y/y). Despite this, we expect operating profit to grow slightly by 2% y/y to ₦8.3 billion.