Stiff competition, among other factors, saw leading brewer, Guinness Nigeria Plc recording a loss for the first time in 30 years for the year ended June 30, 2016, writes Goddy Egene
Investors in the Nigerian stock market who invest for dividend cannot ignore Guinness Nigeria Plc. The brewing giant is one of the regular dividend payers in the market, delighting shareholders with dividend payment. However, the challenging operating environment has recently affected the level of dividend received by the shareholders as a result of declining profitability. Since 2010, the dividend received by shareholders of Guinness Nigeria has maintained a steady decline.
The shareholders are set to receive the lowest dividend of 50 kobo per share for the year ended June 30, 2016, following a loss recorded by the company for the first time in 30 years.
Financial results
Guinness Nigeria Plc last week reported a loss before tax of N2.347 billion and loss after tax of N2.0 billion, compared with profit before tax of N10.795 billion and profit after tax of N7.79 billion in respectively in 2015.
Details of the audited results of the company indicated that turnover fell by 14 per cent from N118.49 billion in 2015 to N101.973 billion in 2016. The company was able to reduce cost of sale from N63.5 billion to N60.1 billion. Similarly, marketing and distribution expenses was reduced from N27.1 billion to N24.88 billion despite the high inflation that characterised the period.
Administrative expenses rose marginally from N12.9 billion to N13billion. The company ended the year with an operating profit of N4.415 billion, down from N15.667 billion. Net financing cost rose by 38 per cent from N4.872 billion to N6.763 billion.
Consequently, Guinness Nigeria posted loss before tax of N2.347 billion and loss after tax of N2.0 billion.
Company explains performance
Speaking on the results, Managing Director/Chief Executive Officer, Guinness Nigeria Plc, Mr. Peter Ndegwa, said that the combination of a tough economic environment and challenges with naira devaluation had a significant impact on Guinness Nigeria’s overall performance. “Our performance this year was impacted by two major factors, one being the very tough economic challenges around consumer spending, driving consumer preferences towards value brands across the sector, the other, and more significant factor being the effect of foreign exchange policy and the devaluation of the Naira. When you take out the impact of the latter, our underlying performance for the year was broadly in line with the prior year in spite of the pressure on the top line,” he said.
Speaking in the same vein, Chairman, Guinness Nigeria Plc, Mr. Babatunde Savage, said: “Despite the continued deterioration in the operating environment, the Board is pleased to note that our core brands of Guinness Foreign Extra Stout and Malta Guinness are in growth and we now have a strong participation in the growing value segment of the market through Satzenbrau and Dubic. We have also started to see early signs that our decisions to acquire the distribution rights in Nigeria to the International Premium Spirits brands of Diageo and to invest in local capacity for spirits manufacturing are the right ones for the business.”
In January 2016, Guinness Nigeria acquired the distribution rights for Diageo, its parent company’s International Premium Spirits (IPS) like Johnnie Walker, Ciroc and Baileys in Nigeria. Also in the course of the financial year, the company acquired the rights to distribute brands from India’s United Spirits Ltd (USL) for brands like McDowell’s whisky.
Explaining further, Ndegwa said: “Following the acquisition of distribution rights for IPS and USL brands, we are the first and only total beverage alcohol (TBA) business in Nigeria offering the widest range of drinks – from adult premium non-alcoholic drinks (APNADS) to lager, stout, mainstream spirits and IPS. This puts us in a great position to continue to offer consumers quality brands, giving them a choice at every category and price point.
According to him, innovation continues to be a strong platform for the company.
“We have a highly successful track record with about 60 per cent of our beer and non-alcoholic business now comprised of innovation products launched in the past four years. So innovation continues to be one of our competitive advantages in this market and we have a strong innovation pipeline into full of 2018. Despite the economic headwinds, we continue to be deeply committed to doing business the right way being guided by our Code of Business Conduct ensuring that we engage, in the right way, with everyone that comes into contact with our company,” he said.
Analysts’ assessment
Looking at the fourth quarter (Q4) numbers of the company, analysts at FBN Quest said the losses were significantly worse than their expectations.
“As such, we have cut our earnings estimates over the next two years by 88 per cent on average. However, beyond 2019E, we believe that the company should start to show some signs of recovery on the back of its import substitution strategies and enhanced focus on the spirits business.
As such, despite increasing our risk free rate assumption by 200 basis points to 14.5 per cent, we have trimmed our price target by -8 per cent to N80.12. Despite the recent sell-off, we still find the shares relatively expensive. From current levels, they show a downside potential of -14 per cent to our N80.12 price target. As such, we retain our underperform rating,” they said.
According to the analysts, the results were weak across all key headline items. Although a combination of factors including a -4 per cent decline in sales to N32.4 billion, a gross margin contraction of -939bps to 35.7 per cent and a six per cent rise in operation expenditure all contributed to the pre-tax loss, a 3.1x spike in net interest expense was the major driver.
“Owing to a tax rebate, the after-tax loss narrowed to -N2.9billion. Sequentially, sales grew by 64 per cent q/q due to seasonality. The pretax and post-tax losses compare with the -N449 million and –N309 million delivered in Q3 2016,” they said.
FX challenges to weigh on outlook
FBN Quest explained that Guinness’ Q4 2016 numbers were weighed down by gross margin contractions and a significant rise in finance charges, adding that both negatives resulted from forex challenges.
“We estimate that the company imports over 60 per cent of its raw materials. Guinness reported a forex translation loss of N3.5 billion in 2016. We believe the bulk of the loss was due to the company’s decision to take a loan of $26 million in the last quarter. Given the company’s significant reliance on imported raw materials and the naira having weakened further since June, we have been conservative on both the gross margin and interest expense lines in the very near term. We see a glimmer of hope in the company’s strategy to increase its focus on the spirits business, which ordinarily should attract higher margins than the mainstream beer segment,” they said.
