Culled—Proshare

September 8, 2020

By FBNQuest Research

Marked cuts to earnings and price target

Guinness Nigeria (Guinness) declared a record pretax loss of -N17.1bn for FY 2020 (end-Jun), largely driven by c.N14bn in write-offs of fixed assets and receivables. Still, stripping out these one-off provisions, earnings were in negative territory with an adjusted pretax loss of -N3.2bn (vs. FY 2019 PBT of N7.1bn and our forecast of N960m). The results suggest that Guinness was hit harder by the pandemic-induced restrictions than peers, and that volumes declined by high double digits, led by the premium spirits business. Indeed, net sales in Q4 slumped -72% y/y and was -66% behind our forecast. For the full year, all the businesses suffered double-digit declines in sales except for mainstream spirits which grew 15% y/y.

Looking past the pandemic phase, management during its recent call communicated that its medium-term strategy is to leverage on its spirits, ready-to-drink, and premium beer businesses to drive profitability. We also highlight Guinness’ leadership and pricing power in these markets. Effectively, the product portfolio will lean further away from the beer value segment (c.65-70% of the beer market). However, we see a potential threat to Guinness’ strategy: consumer disposable incomes are likely to be squeezed further by the recent currency devaluation, fuel subsidy removal and electricity tariff hike.

Essentially, we forecast that earnings will remain negative in 2021E, and have cut our 2022-23E EPS forecasts by an average of -38%. The chief driver behind these cuts are a downward adjustment to our sales forecasts. The forecast changes translate to a -35% reduction in our price target to N13.0. Guinness shares have sold off by -52% year-to-date, underperforming the broad market index by -48%. From current levels, our new price target implies a downside potential of -10%. We retain our Underperform rating on the stock.

Loss primarily driven by impairments

Besides the -72% y/y decline in sales and the impairments, net interest expense increased by 32% y/y. Other loss of -N13.7bn – driven by the impairments – was 80x higher y/y. This was the primary driver behind Guinness’ Q4 loss. On a sequential basis, net sales were down -70% q/q while gross margin contracted by -931bps y/y. Other loss for Q4 compares with other income of N140m in Q3.

The Q4 pretax loss also compares with Q3 PBT of N71m. Relative to our forecasts, the pretax loss was much worse than our forecast on the back of the negative surprises in net sales and other income.