November 15, 2023/CSL Research

Guinness Nigeria Plc’s (GUINNESS) Q1 2024 numbers showed resilience across key performance metrics. The renowned foreign extra stout brewer recorded double-digit Revenue growth of 12.7% y/y to N59.54bn (Q1 2024) amidst the nation’s high inflation which has weakened consumer purchasing power. Sales volumes remained pressured in the face of stiff competition, and as consumers persist in adapting their spending preferences towards essentials. However, we believe the company’s performance will improve in the next quarter (Q2) as holiday season demand drives sales.

That said, as part of the company’s Environmental Social Governance (ESG) efforts to mitigate environmental pollution, production of its sachet mainstream spirit has been stopped. This, in addition to the lingering effects of the fuel subsidy removal and the FX unification policy on demand, may result in a minimal decline in Revenue in the short term especially as there is little room for price increases without a dent to volumes. On the cost side, we expect a minimal rise in cost of sales and operating expenses in coming quarters. Management’s efforts at cost cutting seems to be yielding positive results and Barley (a key input for beer) prices have moderated in recent months, down 34.8% y/y.

We maintain a positive long-term outlook on GUINNESS Nigeria Plc, given its market share size – c.24%, its widely accepted products, improved production efficiency, market strategies and plans by the company’s management to stop importation of some of Diageo’s premium spirits and to pay up dollar-denominated loans to reduce exposure to FX fluctuations. We expect the business to return to profitability in FY 2024e with projected net earnings of N18.4bn. We retain a Buy recommendation on Guinness, with a price target of N93.01/s. We derive our price target using a 60/40 blend of DCF valuation and sector relative valuation estimates.

Sturdy top-line

Revenue growth of 12.7% in the first quarter of the company’s new financial year 2024 shows the company’s resilience amidst recent economic headwinds like inflation, insecurity, Q3 cash crunch & fuel scarcity, elections, and FX scarcity. Although Volume was down by 3.7% in the previous year, due to insecurity in the eastern part of Nigeria (major market) causing incessant “sit at home” orders. The situation appears to be under control now and we expect growth in volumes in coming quarters, especially in the yuletide season. We have a revised Revenue growth forecast of +17.2% for FY 2024e (N268.9bn), and of Revenue by product contribution: Brand Guinness +18%, Mainstream Spirit +40% vs FY23, Malt & Ready to Drink (RTDs) +15% vs FY22, Premium spirits +2%.

Management strategy; to reduce cost.

Cost of Sales (adjusted for depreciation) grew by 19.6% y/y to N41.4bn while Gross Margin marginally declined to 33.7% from 37.5% y/y. We believe the management’s plans to reduce overdependence on imported raw materials for production, stop importation and distribution of certain Diageo international premium spirits products, including Johnnie Walker, Baileys, and other brands will save the business sizable FX cost and improve its Gross Margin. We expect little impact on Revenue considering that for FY 2023 result, the imported Premium spirits contributed <1% to Revenue. The company also plans to further increase domestic sourcing of raw materials up to c.85%, leaving majorly machineries to be imported.

Operating Expenses declined 12.4% y/y to N10.8bn from N12.3bn (Q1 2023) and was down 17.5% q/q. In our view, this is a pointer to the consistent effort of the company’s management to maintain a considerably cost-effective operation as shown in their productivity savings: +114% FY 2023 and logistics efficiencies despite hike in diesel price.

Business Liquidity.

The business has a stable cash conversion cycle of (123) days, which has optimally improved its cash and cash equivalent balance, up 19.4% to N76.3bn from N63.9bn y/y. With this, management believes dollar-denominated debts can be paid from the cashflow.

Outlook

The company’s strategy appears quite clear. It aims to enhance operational efficiency by divesting from businesses that have become challenging to manage. The creation of a new subsidiary dedicated to handling the importation of international spirits is a clear signal that this decision is intended to relieve Guinness of that aspect of the business and ultimately create added value for its shareholders. While this strategic shift is expected to result in a 1-3% reduction in Revenue for Guinness Nigeria, it is designed to mitigate the associated challenges related to foreign exchange (FX) devaluation and scarcity. The business has stopped producing its sachet mainstream spirit (MSS), implying Revenue may also take a minimal hit. Factoring fuel subsidy removal and FX unification policy and with no clear direction of possible price increase from the management, we readjust our Revenue growth forecast for 2024e down to 17.5% (N269.5bn), from 20.2%. We expect the business to return to profitability in FY 2024e with projected net earnings of N18.4bn.

Valuation

We retain a Buy recommendation on Guinness with a price target of N93.01/s derived from 60/40 blend of a DCF valuation and sector relative valuation estimates (EV/EBITDA). On EV/EBITDA, we utilised Bloomberg’s 2023e Middle East & African peer average (11.1x) and derived a fair value (FV) estimate of N164/s. Our DCF FV was N45.69/s assuming a 17.2% WACC and 3% terminal growth rate.3.54/s assuming a 18.8% WACC and 3% terminal growth rate.

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