May 13, 2019
By FBNQuest Research
10% cut to our 2020-22E EPS forecasts
Guinness Nigeria (Guinness) missed our earnings forecasts for Q3 2019 (end-Mar) largely because of worse-than-expected sales (-9%) and opex (+4%). PBT for the quarter was behind our forecast by 15%. On a y/y basis, PBT declined by -44% on the back of a deterioration in key line items. Guinness’ negative topline growth for Q3 (-4% y/y) was reflective of higher excise taxes and a restrained unit volume growth. Indeed, competitive headwinds compounded by increased beer volumes coming from International Breweries’ Sagamu plant continue to weigh on Guinness’ sales.
That said, going by our last discussions with management, the company’s spirits business appears to be facing less competitive pressure than beer. We however do not expect future beer volume weaknesses to be fully compensated by spirits volumes, given that spirits only accounts for 18-20% of sales. On the excise regime, Nigerian Breweries (NB) recently made clear that it will have to raise prices to make up for both the planned tax increase in June and cost inflation.
This potentially adds tailwinds to topline for Guinness, a price taker in the beer market. Despite NB’s statement, we have not yet modelled price increases as drivers in forecast years. We have made changes to line items, with the net effect being an average 2020-22E EPS cut of -10%., and a target price cut of -11% to N53.4. Year to date, Guinness shares have shed -29%, underperforming the broad index by -20%. The shares are currently trading on a 2020 P/E multiple of 12.5x for 2020-22E average EPS growth of 17%. From current levels, our new price target implies a potential upside of 4%. We retain our Underperform rating given the weak beer industry outlook over the near-to-medium term.
-44% y/y decline in Q3 PBT
Guinness posted PBT and PAT declines of -44% y/y each to N2.5bn and N1.7bn respectively in Q3 2019. The key driver behind these were a gross margin contraction of -42bps y/y to 33%, and a 9% increase in opex to N8.5bn. These negatives more than offset a swing from an income to a net interest expense of –N235m.
Sequentially, sales declined by -50% q/q, while both PBT and PAT both declined by -35%. Compared with our forecasts, sales missed by 9%, gross margin was 90bps narrower and opex was 4% ahead. Consequently, PBT and PAT missed by 15% and 18% respectively.