February 8, 2018/FBNQuest Research
Increase to earnings estimates; PT unchanged
Guinness Nigeria’s (Guinness) Q2 2018 (end-Dec) results were stronger than we expected. Although sales were in line and gross margin was softer, these were offset by interest expense and operating expenses surprising positively. As such, we have increased our earnings estimates by 11% on average over the 2018-19E period.
However, we have left our price target unchanged at N91.3 because our long term view of the company has not changed significantly. Having underperformed the broad index by 23% last year, the shares are up 17% this year (NSEASI: 14%). Guinness shares are trading on a 2018E P/E multiple of 31.4x for EPS growth of 57.5% y/y in 2019E. From current levels, the shares show a -17% downside potential to our price target. We have maintained our Underperform rating on the stock.
Positives on major key P&L items in Q2 2018
Q2 2018 sales grew by 12% y/y to N40.7bn. PBT and PAT advanced to N3.5bn and N2.1bn compared with pre-tax and after-tax losses of -N2.4bn in the corresponding period of 2017. The strong y/y growth in earnings was driven by a gross margin expansion of 601bps y/y to 33.5% and a 70% y/y reduction in interest expense.
While we attribute the marked y/y expansion in gross margin to lower input costs due to the improvement in fx liquidity, we believe that the significant reduction in interest expense is likely related to the deleveraging of the firm’s balance sheet, with the proceeds of its N40bn rights issue. On a sequential basis, sales grew by 36% q/q, largely driven by seasonally stronger sales in the final quarter of the year. Thanks also to the clean-up of the firm’s balance sheet, PBT and PAT accelerated by 50-85x.
Our outlook for the sector remains broadly positive. We continue to expect topline growth to be driven by the value segment. During its last conference call, management alluded to the fact that the value segment is now the largest segment and accounts for c.67% of total volumes.
We also expect the company’s focus on the spirits business to bode well, even if modestly. We see topline growing by 15% y/y in 2018E. The completion of Guinness’ rights issue has also helped to improve earnings. Net interest expense declined by -70% y/y following a -64% y/y reduction in total debt (including overdrafts). Consequently, for 2018E, we see strong PBT growth of 250% y/y.