Guinness Nigeria in Dire Need of Equity Financing

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Given Guinness Nigeria’s huge financing cost arising from foreign borrowing, there is urgent need for the firm to consider equity financing, writes Goddy Egene

When Guinness Nigeria Plc recorded a loss of N2.347 billion for the year ended June 30, 2016 for the first time in 30 years, the Managing Director/CEO of the company, Mr. Peter Ndegwa, had attributed the loss to tough economic environment and challenges with naira devaluation.

“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.

No doubt the above challenges are still prevalent in the system and although the board and management of Guinness Nigeria are striving to ensure a better performance, the reliance of the company on debt financing is posing a big challenge. This was obvious in the first quarter (Q1) result ended September 30, 2016, which showed a loss of N2.226 billion, as against a profit of N362 million in the corresponding period of the previous year.

First quarter financial result

According to the performance of Guinness Nigeria for the Q1, revenue was N23 billion in 2017 up from N21.7 billion in 2016. Cost of sale rose from N12.4 billion to N16.4 billion, leading to gross profit of N6.572 billion compared to N9.304 billion. Guinness Nigeria strived to reduce marketing and distribution expenses from N5.527 billion to N6.572 billion, while administrative expenses fell from N2.473 billion to N2.327 billion. As a result, operating profit stood at N685 million, down from N1.447 billion in 2016.

However, a spike in finance cost led to the company ending the quarter with a loss. Specifically, Guinness Nigeria recorded finance cost of N2.226 billion in 2017, up by 212 per cent from N929 million recorded in the corresponding period of 2016. Of the finance cost, N906 million was interest expenses on loans and borrowings, as against N699 million in 2016.

But N2.203 billion was incurred as loss on foreign exchange transactions, due to impact of the devaluation of the naira on the company’s foreign loans.
Consequently, the company ended with a loss of N2.226 billion, compared with a profit of N362 million in 2016.

Commenting on the Q1 result, Ndegwa said the revenue growth was in spite of continuing challenges in the operating environment.
“The environment remains tough but we have seen contributions from our mainstream and international premium spirits brands as well as continuing growth of our value brands. These were the key drivers of the 6% revenue growth recorded for the quarter. Our cost of sales was impacted by the high inflationary environment and continuing currency devaluation leading to a reduction in operating profit. The higher finance cost in the quarter is due to the impact of unrealised foreign exchange losses as a result of the currency devaluation.”

He noted that going innovation will continue to be a big part of the company’s strategy as it looks to deepen its participation in the mainstream and value segments.
“We will also continue to invest behind our brands with a key focus on building the right portfolio for future growth and re-shaping our organisation to take advantage of what is likely to continue to be a challenging market in the short to medium term,” he added.

Analysts’ comments
Assessing the results, analysts at FBN Quest said results were disappointing.
“Consequently, we have cut our earnings estimate for full year (FY) 2017E significantly. Regardless of the near term challenges, we expect to see modest signs of recovery on the back of its import substitution strategies and enhanced focus on the spirits business. In view of this, our outlook on the company remains relatively positive in the medium to long term. As such, we have cut our earnings per share (EPS) forecast by around 11 per cent on average over the 2018-19E period and our price target by nine per cent to N72.68.

The analysts said the despite the y/y sales growth and a 25 per cent decline in opex, a gross margin contraction (-1,424bps to 28.6 per cent) and an increase in net finance costs (+212 per cent y) were significant, and drove the losses reported.

“Further down the profit & loss, the company reported a post-tax loss of N2.2 billion which compares with PAT of N362 million reported in Q1 2016. On a sequential basis, sales declined by -29 per cent q/q which we attribute to seasonality – the end-Sep quarter is one the brewers’ weaker quarters. The pretax loss compares with N3.6 billion in Q4 2016 while the post-tax loss compares with –N2.9 billion in Q4 2016,” they said.

Looking ahead, the analysts said they expect elevated finance charges.
Although Guinness Nigeria was able to grow sales during the quarter, the ongoing fx challenges weighed on its results. Firstly, gross margins contracted by over -1,000bps largely because a significant portion of its raw materials are sourced externally.

Also, the company booked an fx translation loss of N2.2 billion. We recall that Guinness Nigeria took on a $26 million loan in the end-Jun 2016 quarter. While the CBN’s intervention to maintain fx stability has seen some modest results, the naira may still see a mild depreciation by the end of the year. We expect finance charges to remain elevated until the company is able to refinance its US$ denominated debt,” they said.

New Spirits brewing lines
In a move to boost to the company’s ambition to source 75 per cent of its production raw materials locally in the next two years, Guinness Nigeria recently inaugurated spirits production lines in Benin City, Edo State.

Some of the brands to be manufactured locally include Smirnoff X1, intense chocolate vodka, Smirnoff Extra Smooth Vodka, Gordon’s Dry Gin, Moringa Citrus Blend, McDowell’s No. 1 Reserved Whisky, McDowell’s VSOP and Royal Challenge Finest Premium Whisky.
Speaking on the development, Chairman of Guinness Nigeria, Mr. Tunde Savage said.
Guinness Nigeria has a strong heritage in Nigeria and in Benin the company built its brewery there in 1974 with a robust portfolio of brands.

“Today, we add to that strong heritage with the commissioning of our spirits production line in Nigeria – a first for Guinness Nigeria. With this line, we are now able to produce previously imported spirits locally and we are able to offer a wider variety of products to our consumers at a more affordable price point,” Savage said.
He reiterated the company’s commitment to making a marked and positive difference in the lives of Nigerians via strategic social interventions.

“As a responsible corporate citizen, Guinness Nigeria is interested in more than running a profitable business, we are also enriching our communities with investments in the areas of provision of water, health facilities and education scholarships to mention a few. As an example, in the water sector to date, we have impacted over 1.5million people in Nigeria through the provision of potable water to 25 communities in 14 States across Nigeria,” Savage said.

Also speaking, President, Diageo Africa, John O’Keffe, noted that the inauguration of the spirits line, reinforces Guinness Nigeria’s position as the first and only Total Beverage Alcohol (TBA) company in Nigeria.

“Guinness Nigeria is now able to offer a truly broad portfolio of beer, spirits and non-alcoholic drinks to consumers at every category and price point. Innovation is a competitive advantage for us in this market and we have a strong innovation pipeline with plans to introduce some exciting new products for our consumers to enjoy.

Also our commitment to local sourcing is further strengthened by the commissioning of this plant that will produce preciously imported spirits, using locally supplied raw materials. As part of our broader local raw materials (LRM) sourcing, we are looking to increase our locally sourced production inputs to 70 in the coming years,” O’Keffe stated.