October 29, 2018/InvestmentOne report 

·         Lower topline performance: down 25.1% q/q, 6.1% y/y.

·         Contracted gross profit margin: down 236bps q/q, 226bps y/yy

·         Mixed opex/sales ratio: down 95bps q/q, up 80bps y/y..

·         Mixed PBT margin performance: down 110bps q/q, up 424bps y/y. 

Guinness Nigeria Plc (GN), last week, published its Q1 2019 results. The result was largely boosted by lower finance charges, which supported bottom line performance amidst weak operating performance driven by heightened competition, the negative impact of the recently implemented excise tax and weak consumer spending. 

As a result, PBT margin grew by 424bps y/y to 4.4%, as the 83.5% y/y decline in net finance cost offset the 226bps y/y contraction in gross profit margin amidst relatively flat opex to sales ratio. 

Volume Decline Pressures Topline Performance 

Similar to Nigerian Breweries Plc, which recorded a decline in its Q3 2018 performance, GN’s topline shed 6.1% y/y to N28.1billion. The reported decline in topline may have been driven by heightened competition in the brewery space. Furthermore, the recently implemented excise tax which has seen brewers raise prices on some of their brands, may have also negatively impacted volume performance. Although we await management clarification on this, we suspect the volume decline may have been more on its beer brands as GN’s previous performances have mostly been driven by attractive price points. Also, management in its FY 2018 conference call was largely optimistic on its spirit brands, which was said to have contributed about 15% to FY 2018 topline, thus, further supporting our view that beer brands are the laggards in this quarter’s topline performance. 

In the same vein, on a q/q basis, topline contracted by 25.1%, mainly due to the same reasons highlighted for its y/y performance. 

Sustained Operating Efficiency 

Unlike Nigerian Breweries whose opex/sales ratio jumped up to 35% due to weak topline performance, GN continues to keep its operating expenses under check, as Q1 2019 opex/sales ratio came in relatively flat at 27.2% both on a q/q and y/y basis. 

Notwithstanding, operating margin was down 131bps q/q and 295bps y/y to 6%; the lowest in the last six quarters. The decline in operating margin may be due to cost pressures, which we suspect could have been largely driven by the implemented excise duty, given the inability of the company to pass it on in full to final consumers in order to remain competitive.  

The Benefit of Deleveraging Persists

GN’s net finance cost declined by 83.5% y/y to N432million as the benefit of the N40billion right issue launched by the firm in 2017 continues to support moderation in its finance cost. Consequently, finance cost declined to N593million in Q1 2019 from N3.84billion in Q1 2018. The reduction in net finance cost more than offset the 295bps y/y decline in operating margin thereby supporting the 424bps y/y improvement in PBT margin to 4.4%.

Moving down to its cash flow statement, GN reported a net cash from operating activities of N119.9million in Q1 2019 compared to a negative cash from operating activities of N5.82billion in Q1 2018. The improvement in cash from operating activities was largely driven by lower inventory. Compared to Q2 2018, we observed an increase in its inventory position, up 13.6% to N21.62 billion. We suspect the increase in inventory may be an indication of higher expectation of volume growth in the near term.

Going forward, we are of the view that top line growth may be limited due to the inability to take price increases as a result of growing competition in the sector as well as the implementation of the increase in excise duties. Although revenue growth may see support from election spending, expected acceleration in the implementation of the 2018 budget as well as potential upward review in the minimum wage, we highlight that the drive to absorb part of excise cost to grow volume may be negative for gross margin performance. However, we expect the company’s operating efficiency to be supportive of bottom line performance in the near term.

Our pricing model is under review.