October 30, 2023/United Capital

Guinness Nigeria Plc (“the Brewer” or “the company”) recorded a decent top line in its financial period Q1-2024 (July to September 2023) despite the challenging macroeconomic environment, which was further impacted negatively by the policy shifts of the Federal Government (FG). The lower purchasing power of consumers stifled the company’s turnover rate, as consumers tilted more toward spending the larger part of their limited resources on essential products and services. In the advent of the Unification of the exchange rate, the Naira averaged N764.60/$ and N895.20/$ at the official market and parallel market respectively (between July and September 2023). Given the exposure of Guinness Nigeria Plc to exchange rate volatility, on the back of the importation of a key raw material (wheat) and Diageo international premium spirits products, the blue-chip Brewer posted foreign exchange losses for the period. Consequently, despite the company recording a profit in Q1-2024, it was lower than the profit earned in the same period of the previous year (Q1-2023, spanning July to September 2022).

Operational Efficiency: Balancing Cost Escalation with Expense Optimisation

The elevated cost of purchasing raw materials, and energy costs (petrol and diesel) associated with production, reflected in the 19.5% y/y climb of the Brewer’s cost of sales (CoS) for Q1-2024 (from N34.6bn in Q1-2023 to N41.4bn). US wheat futures quarterly average remained volatile above $600.0/bushel, recording at an average of $621.6/bushel between July and September 2023. Relative to energy costs, global oil prices climbed between July and September 2023, on the back of the voluntary supply cuts by Russia and Saudi Arabia. Average price of Brent crude oil climbed by 10.6% in the period under review, from $77.7/bbl (between April and June 2023) to $85.9/bbl. The higher oil prices amid petrol subsidy removal led to a constant climb in the monthly average of the price of Diesel and Petrol (between July and September 2023). For context, according to data from National Bureau of Statistics (NBS), Diesel prices printed at N794.4/litre, N854.3/litre, and N890.8/litre, in July, August and September 2023 respectively. On the other hand, average Petrol prices for the months of July, August and September printed at N600.4/litre, N626.7/litre and N626.2/litre in that order. In its strategy to mitigate the impact of elevated costs on its bottomline, Guinness Nigeria Plc resulted to operational expense (OPEX) optimization in Q1-2024, with the Brewer’s OPEX declining by 10.3% y/y to print at (N11.7bn) in Q1-2024 compared to (N13.0bn) recorded in Q1-2023. The company’s operational efficiency was able to relatively neutralise the faster growth impact from CoS.

Currency Headwinds: Operational Gains Faceoff Against Forex Losses

Riding on the impact from the Unification of exchange rates, Guinness Nigeria Plc recorded losses on remeasurement of foreign currency balances in Q1-2024 which climbed by 163.6% y/y to print at N2.9bn from N1.1bn in Q1-2023 (i.e., July to September 2022). As a result, the Brewer recorded a significant 117.8% y/y increase in its finance cost for the financial period Q1-2024, from (N1.9bn) in Q1-2023 to (N4.1bn), with Forex losses accounting for 70.7%. However, the Brewer’s bottom-line remained resilient, recording profit of N2.6bn, albeit 5.6% y/y lower than the profit of N2.75bn recorded in Q1-2023.

Steady Asset Growth Outpaces Marginal Increase in Liabilities: A Balanced Financial Performance Snapshot

Guinness Nigeria Plc’s cash and cash equivalents position declined by 17.2% y/y in the financial period Q1-2024, driven by a 41.8% y/y reduction in its bank balance. However, a significant 126.8% y/y climb in the Brewer’s trade and other receivables shored up its overall asset position for the period (The Brewer’s total assets rose by 1.1% y/y from N241.8bn in Q1-2023 to N244.34bn). The increase in trade and other receivables implies that Guinness Nigeria Plc extended more credit to its customers which may be due to customers’ dampened purchasing power in the period under review. We can broadly posit that economic hardship was one of the drivers for the increase in the Brewer’s account for trade and receivables in Q1-2024 (July to September).  Overall, the company recorded a 1.1% climb in its total asset position in Q1-2024, from N241.7bn in Q1-2023 to N244.4bn. On the flip side, Guinness Nigeria Plc’s total liabilities up ticked marginally by 0.01% y/y, from N185.32bn in Q1-2023 to N185.34bn.

Other Information:

Changes to Guinness Nigeria Plc’s Distribution Model for Imported Spirits, Mitigating FX Risk Exposure

Guinness Nigeria announced that, with effect from April 2024, it will no longer import or distribute certain Diageo international premium spirits products, including Johnnie Walker, Singleton, and Baileys and others, imported under its 2016 Sale & Distribution Agreement with Diageo plc. Furthermore, it was disclosed that the move is in line with the company’s long-term growth strategy. The Brewer also revealed that as of the financial year ended 30 June 2023, the revenue related to Guinness Nigeria’s portfolio of imported Diageo international premium spirit products was NGN14.0bn, constituting approximately 6.0% of Guinness Nigeria’s total revenues.

Outlook and Investment Recommendation (BUY: Target Price N104.40/share)

Looking ahead, we expect the Brewer’s revenue to continue to improve, growing by a Compound Annual Growth Rate (CAGR) of 13.8% in the next five years. A significant downside to the company’s bottom-line remains its significant exposure to Forex volatility, which was evaluated upon, with a decision reached to quit importation of some of its International Premium Spirits. Guinness Nigeria Plc’s revenue for FY-2024 is expected to print at an estimated N252.4bn (up by 10.0% y/y). Hinging on the company’s expense optimization strategy, we see some room for a significant improvement in the Brewer’s operating profit in FY-2024, projected to grow by an estimate of 22.8% y/y to print at N28.7bn. As for the company’s bottom-line, we expect lesser finance cost in FY-2024 compared to FY-2023, particularly hinged on the company’s move to cut down foreign exchange exposure. Also, FG and CBN’s moves to douse the pressure on the Naira via improving local supply of the Dollar, will continue to stand as an upside for manufacturers of discretionary goods, whose turnover rates are subject to a volatile economic environment.

That said, using the DCF valuation technique, we deduced that GUINNESS is currently undervalued at N65.0/share as of 30 October 2023. Consequently, based on earnings forecasts and valuation multiples, we project a target price of N104.40/share. Meanwhile, it is expedient to note that our investment outlook for GUINNESS is for the mid-long term (at least 12 – 14 months).