May 28, 2024/Cordros Report
We review our estimates and update our views on Guinness Nigeria Plc (GUINNESS) over the rest of 2024E. In Q3-24, GUINNESS showcased resilience in its topline performance (+43.8% y/y) driven by higher selling prices, improved product offerings, and a sustained focus on premium segments amid subdued consumer spending. However, challenges persisted, notably marked by the substantial decline in gross margin (-554bps y/y) and unrealised FX losses (Q3-24: NGN65.72 billion | Q3-23: NGN411.79 million) due to the naira devaluation. We expect sustained revenue growth fueled by premiumisation, higher prices, and an improved route-to-market. Nevertheless, we lower our target price to NGN53.13/s (previously NGN69.58/s) and downgrade our rating to “HOLD” (previously: “BUY”). This adjustment reflects the weak performance in the period, elevated cost pressures, and the impact of naira devaluation. Despite these challenges, we maintain a positive medium-term outlook for GUINNESS, supported by improvements in its Total Beverage Alcohol Strategy. Based on our estimates, GUINNESS trades at a 2024E EV/EBITDA multiple of 2.2x.
Margins to be further constrained on cost pressures: Following the impressive Q3-24 revenue run-rate, we have revised our revenue forecast upward to 23.5% y/y (previously: 18.8% y/y), underpinned by sustained higher selling prices and an optimised product mix, driven by premiumisation. The brewer’s enhanced distribution channel efficiency through digital channels has also contributed to this increase. Over the medium term (2025-2028E), we project an average revenue growth of 14.4%. However, we anticipate gross margin will decline by 140bps y/y to 32.7% (previously: 33.5%) due to elevated cost pressures, resulting in an estimated EBITDA margin of 12.9% (previously: 14.5%). Further down, our FX loss estimate of NGN51.39 billion in 2024E, after factoring in an FX rate of NGN1,400.00/USD, estimated foreign loan of USD30.84 million and trade payables of USD64.09 million, leads us to forecast a 2024E loss per share of NGN6.33 (9M-24: loss per share of NGN28.15).
Slight improvement in leverage ratios on lower borrowings: We anticipate the brewer’s debt-capital ratio to remain stable at 0.5x in 2024E (2023FY: 0.5x) and the debt-to-equity ratio to improve slightly, declining to 1.0x in 2024E (203FY: 1.1x). This improvement is driven by a projected 40.2% decrease in short-term borrowings to NGN38.13 billion. However, the equities balance is expected to decline by 32.6% y/y to NGN42.55 billion (2023FY: NGN56.43 billion), due to negative retained earnings resulting from foreign exchange losses on foreign currency-denominated trade payables and intercompany loans. Consequently, interest coverage is projected at 0.5x (2023FY: 0.4x) amid an expected 9.4% y/y increase in finance costs (2024E: NGN58.30 billion | 2023FY: NGN53.29 billion).
Valuation: Our target price is NGN53.13/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 (NGN57.25/s) and FCFE (NGN64.08/s) estimates, assuming a 23.8% WACC and 4.0% terminal growth rate. Similarly, our multiple-based FV was derived from a blend of EV/EBITDA (NGN83.65/s) multiple, utilising Bloomberg’s MEA peer average of 4.3x as a multiplier.
