Culled—Proshare

January 22, 2018/FBNQuest Research

EPS and PT upgrade; downgrading to Underperform
Late last year, Guinness Nigeria (GN) successfully raised N40bn via a rights issue, adding 648m shares to its existing 1.5bn shares. The company used much of the proceeds from the rights issue to deleverage its balance sheet and to reduce its foreign currency debt exposure.

Due to the macroeconomic headwinds which persisted between 2014 and 2016, GN struggled to grow its earnings and reported pre-tax losses for four consecutive quarters between Jan and Dec 2016. However, over the last three quarters, GN has reported an average PBT of N2.5bn – gradually reaching pre-2014 levels. We attribute the recent recovery in earnings to the steady-pick up in the economy and government policies which have made FX sourcing more favorable.

These have resulted in more consistent topline growth and reduced FX-related losses. In the latter part of 2015, GN acquired distribution rights for international premium spirits from Diageo, its parent company. In addition, the company launched five spirit brands recently. On its most recent conference call, management stated that the spirits segment has recorded strong growth and contributed about 13% to its topline in FY 2017. As such,

We expect to see y/y topline growth in the mid-teens range in FY 2018. We also see PBT growth of 200% y/y over the same period, underpinned by anticipated marked reductions in finance charges and FX-related losses.

Consequently, we have raised our earnings estimate over the 2018-19E period significantly and our price target by 26% to N91.3. Our PT increase also reflects our decision to reduce our risk free rate assumption by 150bps to 14% and our equity risk premium by 50bps to 6%. GN shares are trading on a 2018E P/E of 40.0x for a 2019E EPS growth of 74% y/y. From current levels, the shares show a downside potential of -24%. As such, we are downgrading the shares to underperform. 

Profits recorded in Q1 2018 vs. losses in Q1 2017
GN’s Q1 2018 (end-Sep) results showed that sales of N29.9bn grew by 30% y/y. PBT and PAT of N41m compare with pre-tax and post-tax losses of – N2.2bn in Q1 2017. Although gross margins contracted by -153bps y/y to 34.7%, this was not strong enough to offset the strong sales growth and a -10% y/y decline in net finance costs, leading to the company still reporting a profit. Q4 2017 (end-Jun) results showed that PBT grew to N5.1bn from a pre-tax loss of –N3.6bn in Q4 2016.

The strong recovery seen on the PBT line was driven by an 11% y/y expansion in sales, a gross margin expansion of 910bps to 44.8%, a 5% y/y reduction in opex and an 80% y/y decline in net interest expense. Further down the P&L, PAT grew to N4.5bn from an after tax loss of –N2.9bn in Q4 2016.