February 1, 2023/Cordros Report
In this update, we review our estimates and update our view on GUINNESS for 2023FY. This is coming off the brewer’s weak performance in H1-23, reflective of the heightened cost pressures. Though we expect the brewer to maintain decent topline growth in 2023FY, we believe the challenging operating conditions FX illiquidity, devaluation, and high inflation will continue to pressure the brewer’s costs and, thus, drag margins. Following our forecasts’ adjustments, we revised our target price downwards to NGN79.26/s (previously: NGN93.25/s) and downgraded our rating to a “HOLD”. The new target price implies an upside potential of 13.2% relative to the stock’s current price (NGN70.00/s). Accordingly, on our 2023E EPS of NGN5.47 (2022FY: NGN7.15), we estimate a DPS of NGN3.83, implying a dividend yield of 5.5% based on the current price.
Higher Finance Costs Inhibits Profitability: The brewer delivered slower revenue growth of 8.5% y/y in H1-23 (H1-22: +50.8% y/y), attributable to lower volume outturn (-6.0% y/y), with the most significant declines stemming from premium Spirits (-10.0% y/y) and Malts (-9.0% y/y) categories as consumers continued to trade off against volumes in response to higher pricing amid low disposable income. On the other hand, the gross profit margin increased by 225bps to 35.7%, benefitting from improved product mix and higher pricing. Elsewhere, the higher OPEX (+24.6% y/y) in the period offset some of the gains from gross margin resulting in EBIT and EBITDA margins of 10.6% (-186bps) and 14.5% (-195bps), respectively. Further down, GUINNESS recorded a higher net finance cost of NGN5.31 billion in H1-23 (H1-22: NGN619.65 million), comprising a 435.9% y/y growth in finance cost and a 120.8% y/y increase in finance income. Consequently, EPS printed NGN1.84 in H1-23 (H1-22: NGN4.03).
Operating and EBITDA Margins Continue to Feel the Squeeze: In 2023E, though we expect the brewer to maintain decent topline growth (+11.6% y/y), we believe the challenging operating conditions, FX illiquidity, devaluation, and high inflation will continue to pressure the brewer’s costs, and thus, drag margins. Consequently, we estimate a 40bps y/y contraction in gross margin to 34.7% on the back of slower volume growth amid weak consumer spending. In addition, we expect elevated marketing and administrative expenses (+19.7% y/y) to constrain margin expansion as management reiterated continued investment behind strategic brands to support the topline. Thus, we estimate EBIT and EBITDA margins of 9.7% (-187bps y/y) and 14.0% (-172bps y/y), respectively. From our previous estimate of NGN6.27/s, we now forecast EPS to settle at NGN5.47 (2022FY: NGN7.15) in 2023E, underpinned by topline growth amid higher cost pressures.
Valuation: The net impact of the changes to our model is a downward adjustment in our target price to NGN79.26/s (previously: NGN93.25/s), implying a 13.2% potential upside and a total return of 18.7% after factoring in our expected dividend yield of 5.5%. On our revised estimates, the stock is currently trading on a 2023E P/E of 12.8x, relative to its five-year historical P/E average of 18.7x and MEA peer average of 14.8x.
