Guinness Plc: Analysts Dump Stock as Cost Pressure Dampens Earnings

Guinness Plc: Analysts Dump Stock as Cost Pressure Dampens Earnings.
Guinness Nigeria

Guinness Plc: Analysts Dump Stock as Cost Pressure Dampens Earnings

Guinness Nigeria Plc stock has been downgraded to sell rating by a slew of equity analysts following what they called an underwhelming outing.

In the period, Guinness Nigeria loss 14 kobo on each trading shares following ₦317.42 million loss sustained.

Meanwhile, in the comparable period in 2019, the brewer had pocketed ₦1.315 billion as profit for the year, reported 60 kobo earnings per share.

Gross profit had plunged to N18.585 billion at the end of first half 2021 from ₦19.851 billion in the comparable year.

But operating profit compensated for the drop as it rose to ₦3.715 billion from ₦3.559 billion a year earlier.

This happened as Guinness Nigeria recorded a decline in marketing and distribution expenses, plunged from ₦11.711 billion to ₦10.698 billion.

Due to lower upside potential following weak earnings performance, Meristem Securities and CSL Stockbrokers affirmed advised investors to dump the stock.

The sell rating on Guinness Nigeria hinged on its earnings outlook following weak performance profile as competition begins to get tough –again.

In its recently released first half 2021 financials, the brewer reported a 5.9% year on year increase in revenue to ₦72.35 billion.

Analysts said this performance coupled with a 41.0% quarter on quarter growth in top line showed the impact of lifting the ban on social gatherings and the festivities that characterized December 2020.

In 2020, the outbreak of coronavirus pandemic hurt demand for beers, as distributions channels were lockdown.

Meristem Securities said in a note that for most investors, GUINNESS’ second quarter results still leaves a lot to be desired from the brewer.

“Particularly after the underwhelming end to the last financial year”, analysts added.

Meristem Securities said increased revenue in H1-2021 builds on the recovery recorded in the prior quarter when its revenue grew 11.62% as restrictions on on-trade sales channels were lifted.

On a standalone basis however, analysts think Q2 numbers look less encouraging, considering that support came from price upward adjustments on selected Spirits brands to cope with higher excise duties and the effect of festivity associated demand.

It was noted that period between October–December are historically GUINNESS’ strongest sales period.

“Adjusting for both factors leaves us with a clearer picture of the brewer’s relatively inferior performance”.

Meristem said management has reiterated commitment to its strategy of focusing investments around its high margin spirits portfolio which now jointly accounts for about 25% of overall revenue from 15% as at 2018.

Its spirit portfolio include International premium spirits and mainstream spirits.

With the exception of Brand Guinness, sales growth was positive across the brewers’ product categories.

Brand Guinness fell 1%, Mainstream spirits rose 46%, Premium Spirits increased +12%, Malts: +5% and ready to drink (RTDs) surged 1%.

“Although we remain concerned about topline growth sustainability, over H2:2021 we foresee slightly better numbers due to a lower base from H1:2020”, analysts stated.

Thus, analysts at Meristem Securities reviewed the brewer’s revenue forecast upwards to ₦109.59 billion, translating to 5% growth from 2020 levels.

Margin as thinned down with cost to sales standing at 74.31%, meaning that for every ₦100 sales, ₦74.31 was direct cost.

Guinness Nigeria’s production costs increased by ₦30.75 billion in Q2:2021, pushing overall costs to ₦53.77 billion and cost to sales jerked up to 74.31%.

This came in stark contrast to 70.95% reported in H1:2020 and much higher than its 6-year historical average of 62.97%.

As a result of rising cost profile, analysts stated that the brewer’s gross margins bore the brunt of a faster rise in costs relative to sales, tumbling by 337bps year on year to 25.69%.

Although operating expenses provided some respite, thanks to lower marketing which dropped-4.14% and 13.17% slide in distribution expenses.

Also, net finance charges and a higher tax bill which includes a one-off tax charge dragged profit after lower.

While finance income was up 16.34% to ₦335.28 million, the 1.49x year on year hike in net finance costs to ₦2.42 billion was driven largely by a 44.09% jump in finance costs to ₦2.76 billion.

But this was owing to re-measurement of foreign currency balances.

Meristem stated that following retirement of Letters of credit and short-term loans in the prior quarter, total interest-bearing liabilities dropped even further to ₦11.65 billion.

This is against ₦13.28 billion reported in Q1:2021 and ₦22.80 billion in 2020.

Analysts added that these interest-bearing liabilities are now made up of related party loans of ₦8.99 billion (maturing in May 2021) and ₦2.66 billion worth of commercial papers.

Though the brewer ended the quarter with ₦524.22 million in profits, losses from the preceding quarter dragged profit after tax for H1:2021 to negative ₦317.42 million.

This is against ₦1.32 billion in profits in H1:2020.

“For 2021, we forecast bottom-line would settle at negative ₦795.48 million”, Meristem Securities stated.

In terms of liquidity, there still appears to be pressure around short term finance.

Specifically, GUINNESS Nigeria working capital position remained weak at the end of the period, with short-term liabilities outweighing liquid assets by ₦4.82 billion.

However, current and quick ratios improved from previous levels, ticking up to 0.93x and 0.61x as against 0.89x and 0.40x respectively.

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Analysts think this is a reflection slightly stronger growth in current assets over current liabilities and improved cover for its short term obligations.

This came as the management continues to pursue tighter credit terms and improved receivables collection.

For 2021, Meristem Securities is forecasting earnings before interest tax depreciation and amortisation (EBITDA) would come in at ₦14.25 billion.

As such, analysts also indicated that they are maintaining a target enterprise value to EBITDA (EV/EBITDA) of 1.24x.

Thus, the investment firm arrived at a price target of ₦16.99, which implied downside of 10.58% to reference day closing price.

Thus, analysts at Meristem Securities dumped Guinness Nigeria share for lack of upside in a largely overbought stock market.

Commenting about the brewer’s revenue, analysts at CSL Stockbrokers said they are expecting more demand from on-trading channels for the rest of the year, which would make for improved sales.

As a result, analysts said they have done an upward revision of our revenue forecast.

CSL Stockbrokers added that nonetheless, the burden of input cost following the heightened exchange rate concerns and rising consumer prices is expected to weigh on gross margin in the period.

“In the same light, we expect operating expenses to trend upward, especially the marketing and distribution line which declined in H1-2020”, analysts stated.

Consequently, it will dampen net income performance.

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“We have reviewed our target price for Guinness Nigeria to ₦15.42 from ₦15.08 previously which implies a 24.18% downside to reference closing price of ₦19.15.

Guinness Plc: Analysts Dump Stock as Cost Pressure Dampens Earnings.