January 31, 2025/United Capital Research

Guinness Nigeria Plc (“the Brewer” or “the company”), a subsidiary of Diageo Plc (pending the announcement of the completion of Tolaram’s acquisition of Diageo’s 58.02% shareholding in fiscal year 2025, which is expected to end as of 30 June 2025), recorded a decent top line performance (up by 82.05% y/y, from N142.60bn to N259.60bn) in the financial period HY-2025 (01-July-2024 to 31-December-2024). This positive performance comes 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, heightened inflationary environment, and the elevated exchange rate (US$/NGN).

… Direct Cost of Sales (CoS) Surged, Reflective of the Torrid Macroeconomic Environment in H2-2024

During the financial period ended 31-December-2024, Guinness Nigeria Plc recorded a 107.45% y/y climb in its direct cost of sales, from N96.66bn in the financial period ended 31-December-2023, to N200.60bn. Interestingly, the surge came on the back of dynamics across two key variables in H2-2024. Firstly, petrol (PMS) pump prices spiked on two (2) occasions (reflecting a complete deregulation of petrol pricing by the Federal Government), with the total increase settling around c.84.00%, from around N579.50 – 625.00/litre to N1,050.00 – N1,150.00/litre. Secondly, the Nigerian Naira underwent substantial devaluation in 2024, following the crystallisation of CBN/FG reforms. In H2-2024, the Naira depreciated by 17.4% to record an average of N1,598.28/$ compared to the average of N1,361.64/$ in H1-2024. Also, during H2-2024, the Naira depreciated by 99.39% y/y, compared to the H2-2023 average of N801.61/$.

“Ultimately, the spike in petrol pump price placed significant pressure on direct distribution/logistics costs. Meanwhile, the devaluation of the Naira placed significant upward pressure on the brewer’s cost of raw materials & ingredients, packaging materials, machinery and spare parts.”

… Strong Topline Performance Shielded Gross Profit Amid Surge in CoS

Interestingly, Guinness Nigeria Plc’s strong topline performance in HY-2025 created the necessary buffer required to shield it from any adverse impact from the intense inflationary and exchange rate environment. Ultimately, the brewer recorded gross profit of N59.01bn in HY-2025, up by a decent 28.45% y/y from N45.94bn in HY-2024 (01-July-2023 to 31-December-2023).

…PMS Pump Price Hike and Intense Inflationary Pressure Dampened EBITDA & Operating Profit

Guinness Nigeria Plc’s operational efficiency was also threatened by the torrid macroeconomic environment. For further background, the brewer’s operational expenses (OPEX) for the period climbed by 49.46% y/y, from N32.06bn (in HY-2024) to N47.91bn, with headline Inflation rate in Nigeria printing at 34.80% y/y as of December 2024 and recording an average of 33.59% y/y in the financial period July 2024 to December 2024. Notably, the key driver of the surge in Guinness Nigeria Plc’s OPEX in the financial period ended 31-December-2024 was the sharp c.84.00% climb in PMS pump price. Consequently, the brewer’s EBITDA dampened by 21.39% y/y to print at N16.81bn from N21.38bn. In the same vein, its operating profit tapered by 31.35% y/y to record at N11.26bn from N16.40bn.

…FCY Balance Sheet Optimisation Strategy Offset FCY-related Finance Costs Rescuing PBT

In the financial period ended 31-December-2024, Guinness Nigeria Plc adopted a foreign exchange (FX) balance sheet optimization strategy to mitigate the impact of significant finance expenses arising from exchange rate fluctuations. The approach essentially focused on increasing FX-denominated assets, which generated gains on exchange differences, thereby offsetting FX-related finance costs. In the financial year ended 30-June-2024, Guinness faced substantial finance expenses due to losses from foreign exchange differences, which arose from the brewer’s heightened FX denominated liabilities (loans and other payables) due to related parties (the parent and ultimate controlling Company Diageo plc and other Diageo group entities, “Diageo”).

That said, Guinness Nigeria Plc recorded finance expense to the tune of N71.12bn (up by 197.82% y/y from N23.88bn in HY-2024), mainly driven by losses on remeasurement of FCY balances (N61.93bn, 87.08% of finance expense). Notably, as of HY-2025, Guinness Nigeria Plc’s realised FX losses amounted to the tune of N57.63bn, 90.52% of total FCY losses incurred. In the same period, the brewer recorded finance income to the tune of N63.97bn (up by 1,997.38% y/y from N3.05bn in HY-2024), powered by gains on remeasurement of FCY balances (N63.66bn, 99.52% of finance income). Noteworthy is, as of HY-2025, Guinness Nigeria Plc’s realised FX gains amounted to the tune of N15.14bn, 23.78% of total FCY losses incurred. Overall, the management’s Foreign Exchange (FX) balance sheet optimisation efforts/strategy during the period yield positive results, as reflected in the brewer’s net finance costs for the period, which amounted to N7.15bn, down by 65.67% y/y from N20.83bn in HY-2024. Ultimately, the brewer recorded profit before tax (PBT) to the tune of N4.11bn from a loss position of N4.43bn in HY-2024.

…Transition from Related-Party Transactions to Third-Party Transactions Protected Guinness Nigeria Plc’s  Bottom-line Performance

As of FY-2024, FX losses incurred by Guinness Nigeria Plc emanated primarily from the repricing of FCY obligations due to related parties (the parent and ultimate controlling Company Diageo plc and other Diageo group entities, “Diageo”). For further background, prior the acquisition agreement signed between Tolaram and Diageo in June-2024, Guinness Nigeria Plc primarily sourced raw materials, goods, or services from its parent company, Diageo, or other affiliated entities, leading to the recognition of “Trade and Other Payables Due to Related Parties.”

However, with the acquisition in progress, scheduled to be completed in FY-2025, Guinness Nigeria Plc managed to strategically shift procurement away (in HY-2025) from Diageo-affiliated entities in preparation for the new ownership. This resulted in the elimination of FCY denominated payables.  In HY-2025, the brewer already started dealing more with third-party suppliers, hence the retention of trade payables but the disappearance of related-party payables in its balance sheet. For context, Guinness Nigeria Plc’s trade and other payables “due to related party” was completely eradicated in HY-2025 from N111.04bn in HY-2024. Meanwhile, the brewer recorded a substantial 210.39% y/y increase in the value of its trade payables from N50.72bn in HY-2024 to N157.43bn, indicating the brewer’s efforts to eliminate reliance on Diageo’s supply chain before the full transition to Tolaram. Noteworthy is, Tolaram already has a very strong footprint in Nigeria, with one of the largest manufacturing, marketing, and distribution networks for consumer goods in Africa. Ultimately, the process of transition significantly helped Guinness Nigeria Plc’s financial structure, profitability, and operational efficiency, as most FCY obligations (due to Diageo) were eliminated, resulting in FX cost savings, which translated into gains.

…Guinness Nigeria Plc’s FCY Balance Sheet Optimisation Strategy Helped its Total Equity Position

As of the financial period ended 30 June 2024 (FY-2024), Guinness Nigeria Plc’s total equity position was threatened by losses which emanated from the revaluation of FCY liabilities. For context, as of FY-2024, the brewer’s equity position recorded at N2.16bn (previously, N56.42bn as of financial period ended 30-June-2023), particularly weighed by the N54.77bn loss for the period, which wiped out the company’s retained earnings, and a significant chunk of its share capital & share premium, at the time. Interestingly, the brewer’s FCY balance sheet optimisation strategy in HY-2025 contracted the potential loss from FCY liabilities settlement/revaluation. For context, in HY 2025, Guinness Nigeria Plc recorded loss on remeasurement of FCY balances to the tune of N61.93bn, up by 258.39% from N17.28bn in HY-2024. Meanwhile, in the same period, the brewer reported gains on remeasurement of FCY balances to the tune of N63.66bn, up by a whopping 3,181.44% y/y from N1.94bn in HY-2024. Ultimately, the management’s strategic efforts helped the company’s equity position to stay afloat, although it dropped by 13.89% y/y on account of the N302.76mn (previously N5.23bn loss in HY-2024) loss incurred for the period ended 31-December-2024 (HY-2025).

Outlook and Investment Recommendation (BUY: Target Price N132.95/share)

Looking ahead, we expect the Brewer’s revenue to continue to improve, growing at a Compound Annual Growth Rate (CAGR) of 11.37% in the next five years. Noteworthy is, Tolaram’s strong FMCG distribution network in West Africa, which is expected to serve as a pedestal to broaden the reach of Guinness products, especially in Nigeria’s mass market as well as for regional exports. Notably, Guinness Nigeria Plc’s revenue from exports improved significantly in HY-2025, up by +194.03% y/y from N1.34bn to N3.94bn. Ultimately, Guinness Nigeria Plc’s revenue is expected to grow by an est. +95.04% y/y in FY 2025 to record at an est. N584.11bn from N299.49bn in FY-2024. This performance will be underpinned by factors including the recent price hikes, deeper market reach, increased regional exports, and sustained improvement in consumer spending. The company’s strategies of operational efficiency and FCY balance sheet optimisation will continue to create the required buffer for sustained growth of its EBITDA and overall profitability, also recreating a truer picture of the brewer’s efficiency and profitability from core operations. That said, Guinness Nigeria Plc is projected to return to profits in FY 2025, with Profits after Tax (PAT) projected to record at N14.39bn in FY-2025, from a loss position of N54.77bn. This improves the prospects of increased value for shareholders, in terms of dividend payment. For context, Guinness Nigeria Plc boasts a decent dividend payout ratio (one of the best among the brewers) which averaged around 90.10% between FY 2021 and FY 2023, reflecting of the company’s dedication to providing superb value for shareholders.

Shifting to a broader perspective, Nigerian equities are projected to have a positive year in 2025, helped by factors including: the rebasing of the country’s inflation and GDP (with base year changed to 2019 from 2014) in Jan-2025, neutral/dovish monetary policy stance in H1-2025, normalisation of the yield curve, lower inflationary pressures in local/global economy, positive local economic growth prospects, and the ongoing global monetary policy normalisation. Investors’ sentiment is projected to be mainly skewed toward corporates with positive/strong financial performances and ongoing/pending corporate actions.

That said, using the DCF valuation technique, we deduce that GUINNESS is currently undervalued at N77.00/share as of 30-January-2025. Consequently, based on earnings forecasts and valuation multiples, we project a target price of N132.95/share. Meanwhile, it is expedient to note that our investment outlook for GUINNESS is for the short-mid-term (at least 3 – 6 months).