Q2 2019 result highlight: Operating Efficiency And Lower Finance Cost Buoyed PBT Performance

February 4, 2019/InvestmentOne Report

·         Pressured gross profit margin: down 375bps q/q, 483bps y/y

·         Lower opex/sales ratio: down 530bps q/q, 204bps y/y.

·         Mixed PBT margin performance: up 208bps q/q, down 215bps y/y.

Guinness Nigeria Plc (GN) published its Q2 2019 scorecard last week. The result was weighed down by lower gross profit margin which offset the improvement in operating efficiency and reduced net finance cost forcing bottomline to remain uninspiring.  

As a result, PBT margin declined by 215bps y/y to 6.5%, following the 483bps y/y drop in gross profit margin which outweighed the 204bps y/y reduction in opex/sales ratio,16.8% y/y decrease in net finance cost and 170.6% y/y rise in other income. 

Topline Remained Volume Driven 

Similar to Q1 2019, year-on-year topline growth for GN remained weak in Q2 2019. The reported decline in topline may have been driven by heightened competition in the brewery space. Furthermore, the implemented excise tax which has seen brewers raise prices on some of their brands, may have also negatively impacted volume performance. While GN recorded growth in its malt and spirit segments, growth in larger brands, a major part of GN’s product portfolio, remained challenged. This combined with higher cost of sales, which management alluded to inflationary pressure, may have contributed to the 16.4% y/y decline in gross profit recorded in the quarter.  

However, on a quarter-on-quarter basis, gross profit rose by 25.0% to N11.39billion amidst pressured margin performance as volume continued to be the main driver of topline. The improvement in gross profit was driven by the 41.3% q/q rise in topline, which we suspect may have been due to seasonality. 

Sustained Operating Efficiency

Opex/sales ratio recorded in the quarter declined both q/q and y/y. The improvement in operating expenses demonstrated management’s commitment to keep cost within limits so as to remain competitive as well as buffer bottomline performance.  

On a q/q basis, the decline in opex/sales ratio, despite the 18.3% q/q increase in marketing and distribution expenses and the 13.8% q/q rise in administrative expenses, was majorly due to higher topline performance. However, despite lower y/y topline performance, opex/sales ratio declined by 204bps y/y to 21.9%, the lowest in recent times.  

Furthermore, GN recorded higher other income, which grew by 170.6% y/y in Q2 2019. This was on the back of higher operating lease income, income from the sale of by-products as well as the gain on the disposal of property, plant and equipment.  

Re-measurement Of FX Balance Supported PBT

GN’s net finance cost declined by 4.1% q/q and 16.8% y/y to N414million, largely supported by higher finance income. The increase in finance income was driven by GN’s re-measurement of its foreign currency balances, which rose by 423.7% q/q and 25.8% y/y amidst lower finance cost following the deleveraging exercise undertaken by the firm in 2017.  

Moving down to its cash flow statement, GN reported a net cash from operating activities of N11.83billion in Q2 2019 compared to N1.04billion in Q2 2018. The improvement in cash from operating activities was largely driven by higher trade and other payables which outweighed the comparative increase in inventory in the quarter. We suspect the increase in inventory may be an indication of higher expectation of volume growth in the near term. 

Going forward, we are of the view that top line growth may be supported by the implementation of the potential increase in minimum wage, the execution of FG’s expansionary fiscal budget as well as election spending. However, the growth in topline may be limited by the intensified competition in the Brewery space as well as the continued excise duty levied on alcoholic and non-alcoholic beverages. We consider management’s plan to grow its premium core products as well as improve its cost management strategy as positive for margin performance in the medium to long term. This combined with the moderated finance charges and efficient operating cost management observed in the quarter may bode well for bottomline performance if sustained. 

Our pricing model is under review. 

Guinness Nigeria Plc Q2 2019/ H1 2019 figures. YE: JUNE (N’ millions)

Q2 2019

Q/Q

Y/Y

H1 2019

Y/Y

Sales

39,702

41.3%

 

-2.3%

 

67,796

-3.9%

 

Cost of Sales

-28,317

49.2%

 

4.8%

 

-47,302

1.6%

 

Gross Profit

11,385

25.0%

 

-16.4%

 

20,494

-14.6%

 

Gross margin

28.7%

-375bps

 

-483bps

 

30.2%

-378bps

 

OPEX

-8,689

13.8%

 

-10.7%

 

-16,328

-7.3%

 

Opex/Sales

21.9%

-530bps

 

-204bps

 

24.1%

-89bps

 

Net finance cost

-414

-4.1%

 

-16.8%

 

-845

-72.8%

 

PBT

2,564

108.6%

 

-26.7%

 

3,793

7.10%

 

PBT margin

6.5%

208bps

 

-215bps

 

5.6%

58bps

 

Tax

-820

108.6%

 

-41.9%

 

-1,214

-14.0%

 

Tax rate

32.0%

0bps

 

-831bps

 

32.0%

-784bps

 

PAT

1,744

108.6%

 

-16.5%

 

2,579

21.1%

 

PAT margin

4.39%

142bps

 

-75bps

 

3.80%

78bps

 

Source: Company financials, Investment One Research

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