Guinness Nigeria: Saved by Rights Issue

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The N40billion capital injection through a rights issue contributed significantly in Guinness Nigeria’s return to profitability for the half year ended December 31, 2017, writes Goddy Egene

When Guinness Nigeria Plc recorded a loss of over N2 billion for the year ended June 30, 2016, it was the first in 30 years of the company’s operations. But the loss did not come to many stakeholders as a surprise because the high cost of servicing its borrowings from bank was the major cause of the loss.

While Guinness Nigeria is one of the leading brewing firms that boast of leading brands, its reliance on debt to finance its operations has been having a negative impact on its bottom-line. Market analysts had said the way out for Guinness Nigeria was to inject equity and reduce the level of debts.

In fact, as at half year ended December 31, 2016, Guinness Nigeria’s net debt to equity ratio stood at 103.9 per cent, indicating that the company was highly leveraged and needed urgent equity injection to reduce the erosion of its earnings through high interest charges.
Hence the company approached the shareholders for their approval to float a Rights Issue of N39.9 billion. That decision has started yielding fruits going by the result of the company for the half year ended December 31, 2017.

Half year performance
Guinness Nigeria Plc recorded a revenue of N70.6 billion, up 19 per cent from N59.5 billion in the corresponding period of 2016. Cost of sales went up by 13 per cent to N46.56 billion, compared with N41.1 billion, while market expenses rose by 17 per cent to N6.462 billion, from N5.54 billion.

However, distribution expenses fell by 11 per cent to N6.421 billion, from 7.217 billion, just as administrative expenses went down by 22 per cent from N6.1 billion to N4.7 billion. Guinness Nigeria closed the period with an operating profit of N6.64 billion, compared with a loss of N84.66 million. The company was able to reduce its net finance cost by 32 per cent from N4.578 billion to N3.106 billion. This lifted the company’s profit before tax to N3.542 billion as against a loss of N4.663 billion in the corresponding period of 2016. Profit after tax stood at N2.131 billion compared with a loss of N4.667 billion in 2016.

According to the company, the top-line growth was driven by both spirits and beer, reflecting the expansion of the company’s portfolio, and improved operating margins with benefits from productivity initiatives despite sustained cost pressures.

However, one factor that contributed to the positive performance was the rights issue raised by the company last year, which assisted it to reduce finance costs from N4.578 billion to N3.106 billion in 2017.
Also, marketing spend increase by 17 per cent demonstrating sustained investment behind Guinness Nigeria’s brands, administrative and distribution expenses declined, driven by the company’s continuing focus on productivity.

Commenting on the results, Managing Director/CEO, Guinness Nigeria Plc, Peter Ndegwa, said: “In a difficult operating environment, notwithstanding recent signs of economic recovery, we delivered a strong performance with net sales growth of 19 per cent for the half year with growth in spirits and benefits of an expanding portfolio and also against the backdrop of lapping inventory reduction from prior year.”

According to him, they believe in the continued execution of their strategy, allowing them to navigate a tough environment characterised by down trading of consumers as disposable income is subjected to additional pressure.

“We have made significant progress in driving productivity especially in the supply chain and the commercial function, even though cost pressures and inflation takes its toll. In this half we have also continued to innovate with increased marketing spend across our portfolio to drive the growth on our core brands and to fund our expanding portfolio and innovation pipeline,” he added.

Impact of the Rights Issue
Ndegwa said: “The utilisation of the rights issue proceeds leading to significant reduction of the Diageo loan and other borrowings, has resulted into a 32 per cent reduction in the net finance charges and improved our debt to equity ratio from 82 per cent to two per cent.”

Guinness Nigeria offered 684,494,631 ordinary shares of 50 kobo each at N58 per share to existing shareholders to raise about N39.7 billion. The offer opened on Monday, July 24 and will close on August 30, 2017. To many market operators, the equity capital injection was overdue for Guinness considering the fact the high cost of finance that stemmed from reliance on debt financing pushed the company into a loss position.

During the offer, Ndegwa had said it would deleverage the company’s balance sheet and reduce finance costs.
He noted that the company obtained a loan from Diageo in 2016 to manage foreign exchange related obligations, saying that between 2015 and 2016 obtained loan facilities from various financial institutions to fund working capital requirements and business expansion operations.

Ndegwa said: “This rights issue will allow the company to deliver on its strategic objectives and give all our shareholders a unique opportunity to increase their shareholding in the company. Our expectation is that funds raised will help mitigate the impact of increasing finance costs, optimise our balance sheet and improve the company’s financial flexibility.”
Similarly, the Chairman of Guinness Nigeria, Mr. Babatunde Savage, has told shareholders why they should exercise their rights fully.

“The company’s unique competitive advantage in terms of total beverage alcohol portfolio, consistent strong support from Diageo, world class local production assets, scalable beer operating model and strong corporate governance standards within its board and management, sets it apart as an excellent investment opportunity,” Savage said.
According to him, the devaluation of the Nigerian currency, foreign exchange scarcity and volatility, higher interest rates, a decline in real gross domestic product(GDP), weak financial markets and increase in cost of imported raw materials impacted on the company’s performance, over recent years.

“We have embarked on a number of restructuring initiatives in order to return the company to profitability. For example we have increased sourcing of our raw materials locally, deepened our partnerships with local distributors, reduced prices to grow volumes and gain market share, enhanced operational efficiencies and broadened our product portfolio to meet consumer preferences amongst others. We believe the capital injection rights issue will help the company to deliver on our strategic objectives and give all shareholders a unique opportunity to increase their shareholding,” he stated.

The shareholders fully exercised their rights which led to a successful offer for the company. It is believed that if the H1 performance is sustained for the second half of the year, shareholders would receive improved dividend at the end the year ending June 30, 2018.

Analysts’ comments
Assessing the second quarter (Q2) performance, analysts at FBN Quest said results were stronger than they expected. According to them, although sales were in line and gross margin was softer, these were offset by interest expense and operating expenses surprising positively. “As such, we have increased our earnings estimates by 11 per cent on average over the 2018-19E period. However, we have left our price target unchanged at N91.3 because our long term view of the company has not changed significantly.

They said sales grew by 12 per cent to N40.7 billion in Q2, while PBT and PAT advanced to N3.5 billion and N2.1 billion compared with pre-tax and after-tax losses of N2.4 billion in the corresponding period of 2017.
“The strong growth in earnings was driven by a gross margin expansion of 601 basis points (bps) to 33.5 per cent and a 70 per cent reduction in interest expense. While we attribute the marked expansion in gross margin to lower input costs due to the improvement in FX liquidity, we believe that the significant reduction in interest expense is likely related to the deleveraging of the firm’s balance sheet, with the proceeds of its N40 billion rights issue,” they said.

Looking ahead, FBN Quest said: “Our outlook for the sector remains broadly positive. We continue to expect top-line growth to be driven by the value segment. During its last conference call, management alluded to the fact that the value segment is now the largest segment and accounts for 67 per cent of total volumes. We also expect the company’s focus on the spirits business to bode well, even if modestly. We see top-line growing by 15 per cent in 2018E. The completion of Guinness’ rights issue has also helped to improve earnings. Net interest expense declined by 70 per cent following a 64 per cent reduction in total debt (including overdrafts). Consequently, for 2018E, we see strong PBT growth of 250 per cent.”