March 5, 2018/Cordros Capital

Verdict 
At our revised TP of NGN68.59 (35% downside), we find the shares of GUINNESS expensive at current market price of NGN104.90. On our estimate, the stock is trading at 2018F P/E (35.2x) and EV/EBITDA (10.1x) multiples that are at premium to both the company’s 5-year (11% and 3% respectively) and Middle East and Africa (73% and 9% respectively) F12-M peer averages.

Though at H1 run rate, the 2018 results show significant performance improvement compared with the last three years, they have thus far lagged broad expectations. And after the savings from significant reduction of financing costs have propelled earnings in 2018F (we estimate 239% growth) and 2019F (we estimate 44% growth), we see growth moderating to modest levels from 2020F, on more conservative sales revenue growth and unassuming gross margins. 

Sales growth to moderate
Sales revenue grew 19% in H1, representing 25% pricing and 75% volume. We estimate that volume grew 17% during the period. The 23% sales growth achieved in 2017FY was 33% and 67% price and volume related, respectively. We expect revenue growth to moderate to 11% in H2, as the contribution of pricing tapers. And on volume, the strong growth previously experienced in the value and mainstream spirits segment is moderating, according to management, and pressure in the beer category, where the group is weaker in competition (given relatively fewer offerings), is getting intense. 

Dour margin outlook
Although H1 gross margin of 34% was higher relative to the last financial year, we are unimpressed by the declining trend we have been seeing since Q3-16/17. Management is of the view that achieving gross margin of 40% (which is below the group’s 44% historical average) will be challenging going forward, and pointed to inflationary uncertainty and pricing difficulty.

While noting some support from the productivity saving programmes that management is implementing, we should also add that margin growth expectation is constrained by resilient down trading, which is now spreading to the malt drink segment. We have reset our gross margin estimate for 2018F to 35% (from 40%) and for 2019-2020F to 37% average (previously 41%). Management expects “competitive margins” (with no specific guidance) will return in the next three to five years period.

Relief on the balance sheet
Gross debt has reduced to NGN12.5 billion from end-2017FY NGN42 billion, following the completion of the rights issue (RI). Trade payables also reduced visibly, using proceeds from the RI, and supported by significantly improved domestic FX liquidity condition. But about USD22 million of Diageo loan is retained and somewhat exposes the P&L to FX volatility risks.

Broadly, we see the repayment of debt (1) impact on earnings through sizeable reduction of interest expenses (we estimate will contribute up to 36% and 59% to 2018F and 2019F earnings respectively and (2) free up cash for the group to pursue innovation.