Culled—-Proshare

January 26, 2017/FBNQuest Research

Event: Guinness Nigeria reports Q2 2017 (end-Dec) results

Implications: Marked downward revisions to consensus 2017 PBT forecast expected; market likely to react negatively

Positives:  Sales grew 30% y/y; 23% ahead of our estimates

Negatives: Guinness reported pre-tax and post-tax losses of –N2.4bn

This morning, the NSE published Guinness Nigeria’s (Guinness) Q2 2017 (end-Dec) results. The only positive in the results was a sales growth of 30% y/y to N36bn. The company reported pre-tax and post-tax losses of –N2.4bn. These losses compare with the PBT and PAT of N1.1bn and N810m reported in the corresponding quarter of 2016 respectively.

The strong y/y sales growth was significantly offset by a -1,843bp y/y gross margin contraction to 25% and a 112% y/y rise in net interest expense and led to the weak bottom line. Operating expenses were down slightly, by -2% y/y. On a sequential basis, sales advanced by 58% q/q, which we attribute to seasonality. The end-Dec quarter is usually one of the strongest quarters for the brewers.

However, the pre-tax and post-tax losses were worse, by around 10% q/q on average. Despite the strong q/q sales growth and a -42% q/q decline in net interest expense, a gross margin contraction of -394bps q/q and a +67% q/q rise in operating expenses were more significant and led to the weaker quarter.

Similar to most consumer goods names, Guinness continues to suffer from the unfavourable macroeconomic conditions. The fx pressures the company faces is being reflected in the gross margin line. We estimate that the company imports over 65% of its raw materials. In addition, Guinness continues to report fx translation losses (c.-N850m) on the back of a US$26m loan on its books. However, the fx loss is less than the loss of –N2.2bn reported in the prior quarter. We believe the fx loss is less due to the slowdown in the deterioration of the currency. On Tuesday (January 24, 2017), the company’s shareholders approved its plan to raise N40bn via a rights issue. Guinness is trying to deleverage.

On a half year basis, H1 2017 sales grew by 19% y/y to N59bn. The company reported pre-tax and post-tax losses of -N4.7bn. These compare with the PBT and PAT of N1.7bn and N1.2bn reported in H1 2016.

Compared with our estimates, Q2 sales came in ahead, by 23%. The pre and post-tax losses were significantly behind our estimates. The reason for the variance was the negative surprise on the gross margin and net interest charge lines.

Given the weak set of numbers, we expect to see marked downward revisions to consensus FY 2017 (end-Jun) PBT and PAT estimates of N605m and N624m respectively.

Year to date, Guinness shares have shed -15.7% and have underperformed the broad index which is down -2.4% this year. This comes after the shares shed -31.0% in 2016 (NSEASI: -6.2%).

We expect the market to react negatively to these numbers.

We rate Guinness Nigeria shares Neutral. Our estimates are under review.

Guinness Nigeria Q2 2017 (end-Dec) results: actual vs. FBNQuest Research estimates (N millions)