Please click to download a copy of our Guinness Nigeria Q4 2017 Earnings Review

·         Guinness Nigeria Plc (GN) recently released its Q4 2017 results which saw the company deliver consecutive quarters of profit after tax following five successive quarters of pre-tax loss. We highlight that the previous loss position was on weak volumes and FX related devaluation losses.

·         While the company has in recent years focused on innovation led competitive strategy, the recent Nigerian macro challenges has seen the effect of higher inflationary environment and related-party FCY denominated loan weigh negatively on financial performance.

·         Similar to other broad consumer goods players, the company is restructuring its capital structure via rights issue in order to reduce its FX-related debt burden. In our opinion, this should lead to significant improvement in earnings. While there are valid concerns of earnings dilution, our model showed EPS growth on lower base effect.

·         We have forecast an average 197% y/y growth in earnings through 2019. This is driven by our 15% y/y average growth in sales; 700bps expansion in pre-tax margin; which consequently drove our forecast 230% rise in PBT over 2018-19. We would like to emphasize the significant impact of a lower base effect from a loss position.

·         Our estimates derived from our positive view on the potential impact on both volume and margins from the International Premium Spirit (IPS) portfolio; expected improved efficiency from the sales force and distributor management system; and improved FX liquidity. While consumer demand still remains fragile, we believe the company’s broad offering in the value category should help mitigate the potential downside.

·         We have revised upward our target price (TP) by c.45%; however, recent trading sessions has seen GN shares rally following its better-than-expected Q4 2017 numbers; as such our new TP of N89.9 still gives a downside potential of c.-7.0% from current levels. Nonetheless, we see the shares of GN as a core holding given our cautiously positive macro outlook and GN attainment of total beverage product positioning on its N2.5bn acquisition of the distribution rights of the high-margin IPS brands.

·         Valuation: Our N89.9 price target is derived using a discounted cash flow (DCF) model over the 2018-2028 period. We assume that sales growth reaches a terminal value of 10% in 2028 while EBIT margin declines to 12.5% by 2028 from our 2018 estimates. Our WACC is 16.8%, assuming 13.0% risk free rate, 0.81 beta, 10.7% after-tax cost of debt and 5.5% equity risk premium.

Please click to download a copy of our Guinness Nigeria Q4 2017 Earnings Review