30/4/2018/Cordros Capital

Update: GUINNESS reported 40% y/y increase in Q3-18 net profit (EPS: -4% y/y), coming off better-than-expected revenue growth, and relatively lower operating expenses and finance charges. Both masked a disappointing gross margin, which has now weakened for four quarters in a row. Compared to consensus, the reported net profit was head by 131%, and beat our estimate by 47%.

Estimates and valuation changes: Following the Q3 and 9M-18 results, we raise our 2018E EPS estimate to NGN3.85 (previously NGN2.98), and for 2019E and 2020E to NGN4.71 (previously NGN4.30) and NGN5.14 (previously NGN5.12) respectively. The assumptions driving the single-digit increase in our 2019-2020E EPS estimates are the (1) increase in revenue growth forecast to 9% average (previously c.8% average) and (2) 400 bps downward revision of opex-to-revenue ratio estimate, offsetting the (3) 300 bps downward revision of gross margin estimate. On our revised estimates, and with valuation rolled-forward to 2019E, we have a TP of NGN73.75/share (previously NGN68.59/share) and maintain SELL rating. The stock is trading on 2019F P/E and EV/EBITDA multiples of 21.8x and 8.6x respectively, which compares with SSA peers (20.6x and 9.5x respectively) – though we acknowledge that GUINNESS’ multiples are at considerable discounts relative to 5-year historical average (excluding 2016).

Also discussed in the report:

• Revenue has impressed consistently

• We are better off conservative on gross margin expectation

• Opex to support EBIT margin

• Balance sheet

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