February 5, 2019/FBNQuest Research
11% cut to our 2019-21E EPS forecasts
Guinness Nigeria’s (Guinness) Q2 2019 (end-Dec) earnings were behind our forecasts primarily due to a disappointing (-432bps) gross margin. As such, PBT surprised negatively by -34%. Guinness’s performance in our view was reflective of inflationary cost pressures – that could not be passed on – and an unfavourable excise tax regime. The results also suggest that Guinness was hit hardest by competitive headwinds in the lager market (70% of the beer market).
Management cited a -13% y/y loss of volumes in H1 2019, driven by the lager segment. To provide some context, ex-lager, volumes grew by mid-single digits. Other key segments delivered flattish-to-modest sales growth in naira terms, with the fastest growth coming from spirits. The other key positives from the Q2 performance were opex and net interest expense declines of -11% and -17% y/y respectively.
These were however not strong enough to drive earnings growth. Beyond H1, we see Guinness pushing ahead with moves aimed at solidifying its position in the spirits market. We also expect brands such as Dubic malt (priced competitively) and Orijin Zero (on the back of a rising trend of “healthification”) to drive volumes in the non-alcoholic business. That said, trading conditions are likely to remain tough in the beer category (c.40% of total sales) in the face of cut-throat competition.
We therefore expect gross margins to be subdued. On top of these challenges, another round of excise tax increase this year will keep the pressure on topline growth. Consequently, we have cut our EPS forecasts by around -11% on average over the 2019-21E period. Our new price target of N60.3 is around 4% higher because we have rolled over our valuation to 2020E. From current levels, our new price target implies a potential downside of -7%. Despite this modest downside, we retain our Underperform rating, given a weak earnings outlook over the near-to-medium term.
27% y/y decline in Q2 PBT
Guinness posted PBT and PAT declines of -27% y/y and -17% y/y to N2.6bn and N1.7bn respectively in Q2 2019. The key driver behind these was a gross margin contraction of -483bps y/y to 29%. This contraction more than offset a significant increase in other income, and declines in opex (-10% y/y to 8.7bn) and net interest expense (-17% y/y to N413.8m).
Sequentially, sales grew 41% q/q, while both PBT and PAT more than doubled. Compared with our forecasts, sales missed by 7% while gross margin was 432bps narrower. Consequently, PBT and PAT missed by 34% and 36% respectively.