August  14, 2024/United Capital Research

Guinness Nigeria Plc (“the Brewer” or “the company”), a subsidiary of Diageo Plc, recorded a decent top line performance (up by 30.5% y/y, from N229.4bn to N299.5bn) in the financial period full year (FY) 2024 (July 2023 to June 2024) despite the challenging macroeconomic environment, which was underpinned by lower consumers’ purchasing power. The resilient topline performance was particularly influenced by the transfer of cost burden to consumers in the form of price hikes, amid elevated interest rate & inflationary environment, and the depreciated Naira. Within the same period under review, the company’s foreign currency (FCY) liabilities (loans and other payables) due to related parties (the parent and ultimate controlling Company Diageo plc and other Diageo group entities, “Diageo”) remained elevated, surging by 87.3% y/y (from N80.3bn in FY 2023, to N150.4bn), particularly powered by exchange rate differences and elevated cost of capital. Unfortunately, these liabilities translated into further losses in the books of the Diageo subsidiary, in the aftermath of the shift in government policies in May-2023. For context, Guinness Nigeria Plc recorded 126.8% y/y surge in its finance cost (per income statement) from N53.3bn in FY 2023 (July 2022 to June 2023) to N120.85bn which eroded the profitability of the company, as it rounded up the period under review (July 2023 to June 2024) with a loss after tax of (N54.8bn). Despite bottom-line position of Guinness Nigeria as of the financial period ended 30 June 2023/24, a Singaporean Conglomerate, “Tolaram”, penned down an agreement (11 June 2024) to acquire Guinness Nigeria Plc from Diageo Plc.

… a steadied focus on operational efficiency

During the financial period ended 30 June 2024, Guinness Nigeria Plc recorded a 32.7% y/y climb in its total costs, from N209.6bn in the financial period ended 30 June 2023, to N277.3bn. This increase was driven by a 39.8% y/y climb in the company’s costs of raw materials and consummables, from N106.6bn to N149.0bn. The decent climb in the company’s total costs for the period was mainly a feature of a steadied focus on operational efficiency. Guinness Nigeria Plc’s operational expenses for the period only climbed by 18.7% y/y, from N58.3bn to N69.2bn, with headline Inflation rate in Nigeria printing at 34.21% y/y as of June 2024, and at an average of 29.81% y/y in the financial period ended 30 June 2024 (July 2023 to June 2024).

… recovery of EBITDA in the financial period, 30 June 2024

Given the company’s steadied focus on operational efficiency in the financial period (July 2023 to June 2024) under review, there was a recovery in the trajectory of the company’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), which took a knock in the financial period ended 30 June 2023 (down by 9.7% y/y from N15.3bn to N13.8bn). For context, during the financial period ended 30 June 2023, Guinness Nigeria’s EBITDA suffered impacts from the CBN’s redesign policy (which introduced the infamous cash crunch situation of Q1-2023), as well as impacts emanating from the initial shock following the shift in government policies in May 2023. Helped by the company’s ability to transfer cost burden to final consumers, and the industry wide price reviews within the period (amid the intensifying inflationary environment), Guinness Nigeria Plc’s EBITDA rebounded with a 11.0% y/y increase, from N13.8bn, to N15.3bn as of the financial period ended 30 June 2024.

Exposure to FCY Liabilities Muted the Decent Topline Performance

In the financial period ended 30 June 2024, Guinness Nigeria Plc recorded liabilities to the parent and ultimate controlling Company Diageo plc and other Diageo group entities, given the ownership structure of the Brewer. As of the period under review, Guinness Overseas Limited and Atalantaf Limited (Subsidiaries of Diageo Plc) owned 50.18% and 7.84% respectively of the issued share capital of the Company. The remaining 41.98% is held by a diverse group of Nigerian individuals and institutional shareholders. Guinness Overseas Limited and Atalantaf Limited have their official jurisdiction in England and Bermuda, respectively. This brings to fore Guinness Nigeria Plc’s exposure to foreign currency obligations in British Pounds (GBP) and Bermuda Dollar (BD$). Notably, these FCY liabilities were skewed toward the company’s Purchases from Diageo, all promotional supports as well as other services rendered by Diageo. As of the financial period 30 June 2024, Guinness Nigeria Plc still had outstanding balances (N18.2bn) due to Diageo in the form of dividends, royalties and other technical services fees. The company eventually wrapped up the financial period ended 30 June 2024 in a loss position (N54.8bn).

…efficient Working Capital management was undermined by the outstanding FCY obligations to Diageo

During the financial year ended 30 June 2024, Guinness Nigeria Plc employed a very healthy working capital management strategy, which helped it defer cash outflows thus improving liquidity prospects for the period. Examining the company’s cash-to-debt ratio (1.14x), Guinness Nigeria Plc had the adequate cash position (N45.8bn) required to service its short-term loans and borrowings (N40.1bn). The company’s strong cash-to-debt ratio for the period under review was helped by a 47.4% y/y climb in trade payables, from N34.4bn to N50.7bn. In the period ended 30 June 2024, Guinness Nigeria Plc recorded N175.9bn as trade and other payables, up by 58.2% y/y, out of which N111.0bn (63.1%) accounted for total amount due to related parties. Looking from a broader perspective, the surge in FCY financial obligations to Diageo Plc and other Diageo group entities, owing to revaluation, looked to significantly weigh on other key liquidity metrics, while enhancing the financial leverage (104.6x), Net debt-to-equity (82.4x) and debt-to-capital (0.9x) ratios. Other liquidity ratios like current ratio (0.5x), quick ratio (0.3x), and cash ratio (0.2x), all recorded subpar, weighed by the company’s FCY obligations to the parent and ultimate controlling company. Consequently, Shareholder’s equity was significantly eroded to record at N2.2bn, down by 96.2% y/y from N56.4bn in the financial year ended 30 June 2023.

Diageo Exit to Usher New Ownership by Singaporean Conglomerate, Tolaram; “the Silver Lining”

On 11 June 2024, Tolaram signed an agreement to acquire Diageo’s 58.02% shareholding in Guinness Nigeria, with the conglomerate also entering into a long-term license and royalty agreements, for the continued production of the Guinness brand and its locally manufactured Diageo ready-to-drink and mainstream spirits brands. This will ensure steady production of Guinness brands despite the change in ownership. Following the completion of the transaction in 2025 fiscal year, Tolaram will become the controlling shareholder, which could lead to shifts in corporate governance, strategic direction, and management decisions. Notably, Tolaram intends to launch a mandatory takeover offer, in compliance with local law requirements, subject to regulatory approvals. However, the company’s disclosure on subject revealed that Guinness Nigeria will remain listed on the Nigerian Exchange Ltd. Given the fact that it is Guinness Nigeria Plc’s FCY obligations to Diageo Plc and other Diageo group entities that resulted in the loss position recorded for the financial period ended 30 June 2024, Tolaram’s acquisition of Diageo’s shareholding will completely eradicate the FX liability component weighing on Guinness Nigeria Plc’s profitability, as the company will become liable to the new owner, Tolaram. Subsequently, Guinness Nigeria’s equity position, which significantly declined by 96.2% y/y to N2.2bn from N56.4bn, will be significantly renewed, subject to the overall cost of the transaction. Additionally, the integration will allow Guinness Nigeria Plc to enjoy economies of scale, ad the acquiring entity, Tolaram, already has a very strong footprint in Nigeria, with one of the largest manufacturing, marketing, and distribution networks for consumer goods in Africa. This is expected to invariably underpin the company’s objective of ensuring steady operational efficiency amid the torrid inflationary and monetary policy environment. Ultimately, the acquisition (which is expected to eliminate the FX liability component) will represent a silver lining for the company’s recovery and future profitability going forward, resulting in significant improvement in key solvency (financial leverage, Net debt-to-equity and debt-to-capital) and liquidity (current, quick and cash) ratios of Guinness Nigeria Plc.

Outlook and Investment Recommendation (BUY: Target Price N112.10/share)

Looking ahead, we expect the Brewer’s revenue to continue to improve, growing at a Compound Annual Growth Rate (CAGR) of 16.8% in the next five years. The company’s efficient working capital management in the period ended 30 June 2024, resulted in a significant surge in its free cash flow for the period (recording at N73.9bn from N28.1bn from antecedent financial period 2023), ensuring its operational efficiency was well maximized, while optimizing cash flow. This allowed Guinness Nigeria Plc to generate more cash from its core business activity. Hence, it becomes obvious that the icing on the cake for Tolaram’s acquisition is an industry leader with strong FCF, capable of contributing positively to its future cash flow and future growth. For further context, Guinness Nigeria Plc recorded inventory and cash turnover ratio of 5.5x and 4.3x, an improvement from 4.6x and 2.8x, respectively. This comes despite the prevailing dampening of consumer spending in the period under review. Ultimately, the acquisition by Tolaram is a “beacon of hope” for the rejuvenation of Guinness Nigeria Plc’s future bottom-line performances.

Shifting to a broader perspective, we expect the anticipated high base effect on headline inflation in Nigeria to encourage the CBN’s tilt to neutral monetary policy stance in September 2024. Also, with the US Fed likely to ease monetary policy in September 2024, we expect the company’s cost of debt to reduce significantly in the last two (2) quarters of the fiscal year 2025. This will provide extra room for the new (Tolaram)/existing (Diageo) management of the company to source capital for expansion plans/ CAPEX, at cheaper cost, further improving its bottom-line performance.

That said, using the DCF valuation technique, we deduce that GUINNESS is currently undervalued at N63.50/share as of 13 August 2024. Consequently, based on earnings forecasts and valuation multiples, we project a target price of N112.10/share. Meanwhile, it is expedient to note that our investment outlook for GUINNESS is for the mid-long term (at least 6 – 12 months).