Event: GUINNESS published Q2/H1-20 results yesterday, reporting a 3.3% decline in EPS in Q2, on the back of higher operating expenditure and finance costs. The achieved EPS missed our estimates for the quarter by 53.4% due to negative surprises on the OPEX and net finance cost lines. The H1-19 EPS, when annualised, is 27.4% behind consensus estimate for 2020E.
 
Revenue grew 4.3% y/y (H1-20: 0.8% y/y), in line with our estimates (variance: +0.9%), and halted five consecutive quarters of y/y declines.  According to management, both the Guinness brand and the spirits portfolio grew at strong double-digit levels in H1, with solid performance in local malts reinforcing the increased revenue. In our view, the improved performance was underpinned by (1) frontloading by distributors ahead of the price increase on Guinness which was undertaken in the quarter, and (2) stronger volume outturn in the traditionally strong festive period. Sequentially, top-line growth was much better, with revenue growing by an unsurprising 54.0% q/q, the highest sequential growth since Q2-17.
 
Noteworthy, however, is that after four successive quarters of declines following the seizure of Malta Guinness exports to Ghana, export revenue grew by 15.6% y/y. We await feedback from management on the driver of the stronger exports.
 
Gross profit margin (+6bps y/y) was relatively flat at 28.7%, and slightly lower than the 29.3% we estimated for the quarter, as COGS (+4.3%) grew in line with revenue. Management attributed the weaker margin to cost pressures from the double-digit inflationary environment, as well as the higher excise duty expense.

OPEX rose 5.8% y/y in Q2-20, resulting in an operating expense ratio (OER) of 22.2%, both higher than our estimates. This combined with a sharp decline in other income (-42.5%) and the weak gross margin, weighed down EBIT, which declined by 3.3% y/y, with the associated margin coming in at 6.9% (-55 bps). Elsewhere, net finance cost grew by 38.6% y/y, as finance income (-89.9% y/y) declined faster than finance costs (-33.6% y/y) in Q2-20.

Compared to Q1-20, the company recorded a PAT of NGN1.69 billion (vs loss after tax of NGN370.41 million), buoyed by higher revenue (+54.0%) and lower net finance costs (-45.5%).   Effective tax rate in the quarter was 26.9%.
 
Management conference call at 3.00pm (WAT): Dial in: +442030032666; Password: Guinness Nigeria
 
Comment: GUINNESS’ Q2 performance was unimpressive in our view as the company recorded a y/y EPS decline for the fifth consecutive quarter. We remain concerned around the company’s suboptimal production cost efficiency and poor product mix, as evidenced by the consistently weak gross margin outturn. The stock is down 53.5% over the last one year (YTD: +0.5%). Our estimates are under review.