March 15, 2024/Cordros Report
In this report, we review our estimates and update our views on Guinness Nigeria Plc (GUINNESS) for 2024E, following the release of its Q2-24 earnings. The challenging economic environment, naira devaluation and FX paucity affected the brewer’s performance in Q2-24, as the brewer reported a loss per share of NGN3.57 (vs EPS of NGN0.58 in Q2-23). Looking ahead, we expect strong revenue growth driven by inflation-driven price hikes and ongoing innovation in the Spirits portfolio. Nonetheless, we believe the high inflationary environment and consistent depreciation of the naira will keep squeezing the company’s profitability. After revising our forecasts, we lowered our target price by 8.5% to NGN65.98/s (previously: NGN72.08/s), resulting in a “BUY” recommendation based on the current market pricing. These revisions reflect the weak performance in H1-24 and heightened cost pressures. In the medium to long term, we maintain a positive outlook for GUINNESS, citing its strong brand presence especially in the Spirits market, improving route-to-market and continuous product innovations. On our estimates, GUINNESS trades on a 2024E EV/EBITDA multiple of 1.6x, relative to its Middle East and African (MEA) peers’ average of 6.6x.
Earnings to remain under pressure from FX loss: We anticipate GUINNESS’ revenue growth to be supported by higher product prices, expanded distribution, and innovation in its Spirits portfolio. Our projections include an 18.8% y/y increase in revenue for 2024E and a 14.0% CAGR from 2025-2028E. However, we anticipate a decline (-60bps y/y) in gross margin to 33.5%, driven by elevated cost pressures. We forecast an EBITDA margin print of 14.5% (+14bps y/y) driven by robust revenue growth. Further down, we forecast a FX loss of NGN34.46 billion in 2024E (H1-24: NGN17.32 billion), as we expect the downward trend in FX loss from letters of credit (-99.5% y/y) observed in H1-24 to continue throughout the year as the company reduces reliance on suppliers requiring letters of credit. Thus, following a net finance cost of NGN35.46 billion (H1-24: NGN20.83 billion), our 2024E loss per share forecast is NGN1.69 (2023FY: loss per share of NGN8.29).
Working capital and net cash position to remain sturdy: We expect GUINNESS’ working capital to remain strong, underpinned by its favourable terms of trade with suppliers. Thus, we forecast trade payables to grow by 20.8% y/y to NGN134.35 billion. Also, with over 50.0% of customers paying in cash, we anticipate aggressive cash collection efforts supported by GUINNESS’ Distributor Finance Scheme (DFS), which often requires bank guarantees. Overall, we project a 2024E net cash position of NGN90.00 billion (prev.: NGN79.47 billion) after accounting for potential capacity expansion in the Mainstream Spirits category in H2-24.
Valuation: Our year-end target price is NGN65.98/s, derived from a 60/40 blend of DCF and sector relative valuation estimates. Our DCF FV is derived from an equal blend of FCFF (NGN60.43/s) and FCFE (NGN87.05/s) estimates, assuming a 21.6% WACC and 4.0% terminal growth rate. Similarly, our multiple-based FV was derived from a blend of EV/EBITDA (NGN130.18/s) multiple, utilising Bloomberg’s MEA peer average of 6.6x as a multiplier.
