Guinness Nigeria: Rating Downgrade on Downward Revision to Estimates

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November 10, 2017/Cordros Research

Despite higher y/y EBITDA and net profit in Q1-18, we revise 2018 forecasts for GUINNESS lower by 15% and 26% respectively, on negative surprises on gross margin and finance cost lines, which more than offset better-than-expected revenue. The realized net profit in Q1 was below consensus by 97%. Estimates for 2019-2020 were also revised lower by 3% and 5% average. On net, we cut our TP for the stock by 16% to NGN76.70/share and downgrade rating to SELL.

We cut gross margin estimate for 2018 by 405 bps to 39% and by 200 bps average to 41%, for 2019-2020. Compared to Q4-17, GUINNESS’ Q1-18 gross margin was lower by 1,000 bps, and the margin has declined consistently since the surprise surge to record 55% in Q3-17. The gains from stable FX, efficiency measures (via productivity saving programs and ZBB), and product mix strategy, aimed to mitigate margin headwinds, are being offset by consumers growing preference for value beer (estimated to currently represent more than 50% of market volume). In addition, key raw material input prices (Sorghum in this case) were higher m/m in key markets in July and August, although September data show some moderation.

Our forecast for finance cost was increased by 68% to NGN5.9 billion, following the sharp spike (249% q/q) at the beginning of the year. Although proceeds from the recently concluded Rights Issue have been applied to significantly reduce borrowings (-67% q/q), it is unlikely that GUINNESS will be completely unlevered going forward. However, we retained our lower finance cost forecasts for 2019-2020, reflecting the significantly (1) deleveraged balance sheet and (2) reduced FX headwinds from repaying large portion of FCY loans (-61% q/q).

We raise revenue growth estimate to 20% (previously 5%), after realized Q1 sales came ahead of our estimate by 20%. Whilst noting the continued subdued beer consumer market, with competition remaining intense, we would also mention tailwinds from the increasing visibility of GUINNESS’ newly launched mainstream spirits and premium scotch, amidst continued strong growth of the value beer segment – driven by Satzenbrau and Dubic.

Net impact of the above changes is for EBITDA and net profit growth of 23% (previously 45%) and 260% (previously 384%) respectively in 2018F, and 2019-2023 CAGR of 8% and 8.6% respectively. GUINNESS’ share price has gained 7% QtD and 30% YtD, and we estimate the stock is trading on 2018F P/E of 32.2x, a significant premium when compared with its five-year historical P/E of 13.7x (31.7x excluding 2016FY).

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