August 22, 2024/CSL Research

Guinness Nigeria Plc reported a 30.5%y/y growth in revenue for the fiscal year 2024 (July–June), rising to N299.49bn from N229.44bn in FY 2023. The company’s top-line performance improved slightly q/q, up 1.9%. The y/y growth in Revenue was largely driven by a price increase of approximately 35% across all product segments implemented in the third quarter. This strong performance was even more pronounced in the second half of the year, with revenue growth accelerating to 41%, up from 20% in the first half. This is notable, amid challenging macroeconomic headwinds characterized by declining consumer disposable income due to all-time high inflation, currency devaluation, and PMS subsidy removal.

In June, Guinness Plc notified the Nigeria Exchange Group (NGX) of the Tolaram Group’s acquisition of Diageo Plc’s stake in the company. Diageo, Guinness Plc’s parent company, has been a major stakeholder in the company since 1997 and is a global leader in beverage alcohol with a collection of brands across spirits and beer, including the iconic Guinness brand. And through its subsidiaries Guinness Overseas Ltd and Atalantaf Ltd, owned a combined total of 58.02% controlling stake in Guinness Nigeria Plc, which will be transferred to Tolaram Group. According to the management, the transaction is expected to be completed during fiscal year 2025.

We maintain a positive long-term outlook on GUINNESS Nigeria Plc, given its market share size (c.22.3%), its innovative products offering, market strategies and plans by the company’s management to stop importation of some of Diageo’s international premium spirits and to pay up dollar-denominated loans to reduce exposure to FX fluctuations. We retain a Buy recommendation on Guinness, with a downward adjustment of our price target to N76.42/s, from N93.01/s. Current price: N63.5/s. We derive our price target using a 60/40 blend of DCF valuation and sector relative valuation estimates

Resilient top-line.

Guinness Nigeria Plc reported a 30.5% year-on-year increase in revenue for the fiscal year 2024 (July–June), rising to N299.49bn from N229.44bn in FY 2023. The company’s top-line performance improved slightly q/q, up 1.9%. This strong performance was even more pronounced in the second half of the year, with revenue growth accelerating to 41%, up from 20% in the first half. This is notable, amid challenging macroeconomic headwinds characterized by declining consumer disposable income due to all-time high inflation, currency devaluation, and PMS subsidy removal.

The y/y growth in Revenue was largely driven by a price increase of approximately 35% across all product segments implemented in the third quarter, hence the Revenue exceeded our FY 2024 forecast of N268.9bn by 11.4%. The upward price adjustment was necessary to offset the significant rise in costs of raw materials, and to cushion margin pressures. And with the expectation of price and volumes to support topline in the fiscal year 2025, we forecast a Revenue growth of 36.5%y/y to N408.8bn.

Inflationary and FX pressures drive business costs.

The cost of raw materials for the business increased significantly over the year, largely due to the company’s reliance on imported materials and the worsening foreign exchange situation. As a result, the Cost of Sales (excluding depreciation) grew at a faster rate than Revenue, rising by 38.9% y/y to N201.99bn, up from N144.73bn in FY 2023. However, there was a marginal decline q/q. This led to a decrease in the Gross Margin, which fell to 32.9% from 36.9% in FY 2023. Despite this, Gross Profit increased by 16.2% y/y to N98.41bn and by 8.9% q/q to N25.57bn Despite a 19.3% y/y increase in Operating Expenses (OPEX), reaching N66.08bn, the company’s EBITDA improved by 10.3% y/y, rising to N32.33bn from N29.32bn. However, the EBITDA margin slightly decreased by 2 percentage points to 10.8%. Meanwhile, Other Income declined by 10% y/y to N3.18bn. Nevertheless, the company saw an 8.8% y/y increase in Earnings Before Interest and Tax (EBIT), which grew to N25.42bn.

The business liquidity shrank as Cash and Cash Equivalents decreased significantly by 50.28%, falling to N45.8bn from N92.12bn in FY 2023. This decline was primarily due to the company’s decision to pay down some of its current borrowings, which were reduced by 37% to N40.13bn from N63.7bn in the previous year. Despite this, Finance Income saw a substantial increase of 179%, rising to N21.76bn from N7.79bn in FY 2023, mainly due to remeasurement gains on foreign currency balances. However, this positive impact was overshadowed by soaring Finance Costs, which amounted to N120.85bn, with foreign exchange losses accounting for 92.9% of these costs. As a result, Net Finance Cost rose to N99.09bn, up from N45.49bn in FY 2023. Overall, the business reported a Loss Before Tax of N73.66bn, from the Loss Before Tax of N22.13bn in FY 2023. In anticipation of the fiscal year 2025, with persist of inflationary pressure we forecast Cost of sales to grow in tandem with Revenue by 36.6%y/y to N273.9bn. For Operating Expenses (OPEX), we forecast a 41.2%y/y growth to N94.02bn for fiscal year 2025

Business structure & management strategy.

In June, Guinness Plc notified the Nigeria Exchange Group (NGX) of the Tolaram Group’s acquisition of Diageo Plc’s stake in the company. Diageo, Guinness Plc’s parent company, has been a major stakeholder in the company since 1997 and is a global leader in beverage alcohol with a collection of brands across spirits and beer, including the iconic Guinness brand. And through its subsidiaries Guinness Overseas Ltd and Atalantaf Ltd, owned a combined total of 58.02% controlling stake in Guinness Nigeria Plc, which will be transferred to Tolaram Group, with the latter stepping into a well-established position without altering the fundamental capital structure of Guinness Nigeria Plc. This continuity suggests stability for the company’s operations and its stakeholders. According to the management, the transaction is expected to be completed during fiscal year (July-June) 2025, subject to obtaining the requisite regulatory approvals in Nigeria. Following completion of this transaction, Guinness Nigeria will remain listed on the Nigerian Stock Exchange and, subject to regulatory approvals, Tolaram intends to launch a mandatory takeover offer in compliance with local law requirements.

In addition, we believe the management’s plans to stop importation and distribution of Diageo international premium spirits products (IPS), including Johnnie Walker, Baileys, and other brands will save the business sizable FX cost and improve its Gross Margin. This plan was scheduled to complete in April 2024, howbeit extension has been granted till fiscal year 2025. The separation of the IPS brands is part of Guinness Nigeria’s long-term growth strategy and aligns with Diageo plc’s decision to establish a new, wholly owned spirits-focused business to manage the importation and distribution of its international premium spirits portfolio in West and Central Africa.

Outlook

The company’s strategy is clear: it aims to enhance operational efficiency by divesting from challenging-to-manage businesses. Establishing a new subsidiary to oversee the importation of international spirits signals a move to offload this responsibility from Guinness, thereby creating added value for shareholders. This strategic pivot is designed to alleviate challenges related to foreign exchange (FX) devaluation and scarcity. We anticipate a net FX loss of N44.6bn, compared to N92.9bn in FY24, and a Loss After Tax of N14.7bn, down from N73.7bn in FY24. Encouragingly, should the country’s overall macroeconomic situation improve, coupled with minimal FX loss, this could spur the business’s recovery to profitability in FY 2025. And coupled with Tolaram’s acquisition of Diageo’s stake, this posits great potentials for the business.

Valuation:

We retain a Buy recommendation on Guinness, with a downward adjustment of our price target to N76.07/s, from N93.01/s. Current price: N63.5/s. We derive our price target using a 60/40 blend of DCF valuation and sector-relative valuation estimates.

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​​​​​Guinness Nig Plc – FY 2024 Company Update.pdf​​​​​​​​​