Culled—Proshare

November 28, 2016/FBNQuest Research

Further downward revision to estimates

Q(GN)’s Q1 2017 (end-Sep) results were disappointing. Consequently, we have cut our earnings estimate for FY 2017E significantly. Regardless of the near term challenges, we expect to see modest signs of recovery on the back of its import substitution strategies and enhanced focus on the spirits business.

In view of this, our outlook on the company remains relatively positive in the medium to long term. As such, we have cut our EPS forecast by around 11% on average over the 2018-19E period and our price target by 9% to N72.68. GN shares have shed -26.1% (NSEASI: -11.6%) this year.

However, since the announcement of its Q1 2017 results, they have gained +11.3% (NSEASI: -6.4%). We struggle to justify the recent rally and continue to find the shares expensive. From current levels, they show a downside potential of -18.3% to our price target. As such, we retain our Underperform rating.
Pre-tax and post-tax losses recorded again

GN reported Q1 2017 (end-Sep) sales growth of 6% y/y to N23bn and a pre-tax loss of -N2.2bn. The pre-tax loss compares with PBT of N518m reported in Q1 2016.

Despite the y/y sales growth and a -25% y/y decline in opex, a gross margin contraction (-1,424bps y/y to 28.6%) and an increase in net finance costs (+212% y/y) were significant, and drove the losses reported.

Further down the P&L, the company reported a post-tax loss of -N2.2bn which compares with PAT of N362m reported in Q1 2016. On a sequential basis, sales declined by -29% q/q which we attribute to seasonality – the end-Sep quarter is one the brewers’ weaker quarters.

The pretax loss compares with –N3.6bn in Q4 2016 while the post-tax loss compares with –N2.9bn in Q4 2016.

Outlook: elevated finance charges expected

Although GN was able to grow sales y/y during the quarter, the ongoing fx challenges weighed on its results. Firstly, gross margins contracted by over -1,000bps y/y largely because a significant portion of its raw materials are sourced externally. Also, the company booked an fx translation loss of –N2.2bn.

We recall that GN took on a US$26m loan in the end-Jun 2016 quarter.  While the CBN’s intervention to maintain fx stability has seen some modest results, the naira may still see a mild depreciation by the end of the year.

We expect finance charges to remain elevated until the company is able to refinance its US$ denominated debt. For these reasons, we forecast pre and post-tax losses of –N995bn and –N696bn respectively in FY 2017E.