Culled—-Proshare

November 3, 2020

by FBNQuest Research

Moderate increases to 2021-23E earnings

Guinness Nigeria’s (Guinness) Q1 2021 results (end-Sep) suggest that volumes grew by double digits y/y and topline recovered quickly from the lockdown (3.6x q/q) in Q4 despite the 14% increase in excise taxes on spirits (c.18% of sales). Sales increased by 12% y/y and were 86% ahead of our forecast. However, the company posted a pretax loss of -N317bn because topline strength was eroded by higher fx costs. Gross margin contracted by -619bps and was -765bps narrower than forecast. To guard against rising fx headwinds, we understand that management’s growth strategy is to direct more working capital and marketing investments towards categories where it commands market leadership and pricing power, namely spirits, ready-to-drink and premium beer. Effectively, the product portfolio will lean further away from the beer value segment (c.65-70% of the beer market).

That said, considering the weaker exchange rate combined with hikes in petrol prices and electricity tariffs this year, sustained pressure on disposable incomes is likely to pose a major obstacle to Guinness’ strategy. Essentially, our upward adjustments to the topline appear conservative relative to the positive surprise because we did not anticipate a recovery until Q2. As such, the Q1 run rate was still not significantly above our 2021E forecast. Our earnings forecast for 2021E remains in negative territory but we have raised our 2022-23E EPS forecasts by an average of 11%. The higher EPS forecasts are largely supported by upward adjustments to sales.

The forecast changes translate to a 9% increase to our price target to N14.2. Guinness shares have sold off by -43% year-to-date, underperforming the broad market index by -57%. From current levels, our new price target implies a downside potential of -16%. We retain our Underperform rating on the stock.

-N317m pretax loss in Q1, but better than our forecast

The -619bp gross margin contraction was the chief driver behind Guinness’ loss in Q1. This more than offset -10% y/y and -14% y/y decreases in opex and net interest expense, and a 73% increase in other income. On a sequential basis, gross margin contracted by -689bps q/q while other income declined by -50% q/q. These offset -3% q/q and -72% q/q declines in opex and net interest expense respectively. As such, Q1 pretax loss compares with a PBT of N851m in Q4 2020. Relative to our forecasts, the pretax loss beat our forecast by -25%, driven largely by the higher-than-forecast sales.