GUINNESS NIGERIA PLC – Portfolio focus obscures volume losses – Volume gains

What shaped the past week?

Global: Trading in Global markets was shaped majorly by earnings releases and economic developments. Throughout the week, major stock indexes in the Asia-Pacific region closed up, as investors reacted to the bank of Japan’s decision to keep rates unchanged. The Nikkei 225 surged 1.12% w/w, while the Hang Seng index rose 0,64% w/w

Similarly, European stock markets showed positive performances throughout the week, with major indexes closing higher as investors digested the latest economic data, as well as corporate releases. Germany’s inflation was reported to have eased to 7.2% in April and the Eurozone economic growth grew by 0.1% in the first quarter of the year. At the time of print, the CAC 40 was up 0.10%, while the German Dax jumped 0.77% w/w.

The week in review saw the major US stock indexes experiencing positive performances, as investors reacted to various economic and corporate news. Investors eagerly awaited the latest data releases that could guide the Federal Reserve’s monetary policy. Also, a better than expected performance from big corporate majors helped buoy positive sentiment. Some highlights included Meta stocks rallying, after a better than expected earnings report. As at the time of print, the Dow jones was up 0.67% w/w, while the S&P posted a 0.65% gain w/w

Domestic Economy: The finance minister recently announced a possible extension of the removal of fuel subsidies, which was previously scheduled for June and might no longer be implemented by the outgoing administration. An extension is being considered to allow for the implementation of other economic buffers to mitigate the impact of subsidy removal. The government recently received $800 million from the World Bank for cash transfers to the most vulnerable population. A subsidy extension will also necessitate a supplementary budget, as the 2023 budget only provides for subsidies until June 2023. While we note that continued retention may continue to deplete oil earnings and tighten fiscal space, the removal of fuel subsidies will raise consumer prices even further in the near term.

Equities: Nigerian equities had a positive run this week with the All-Share Index (ASI) rising by 2.04% w/w. The consumer goods sector finished as the best performer, rising 5.18% w/w. Gains in HONYFLOUR (+3491bps) and CARDBURY (+3235bps) help offset losses in NB (-114bps). Similarly, the banking space saw moderate buy activity, with the sector returning +1.70% w/w. Also, as investors snapped up PZ (+882bps), the industrial goods sector posted a marginal gain of 0.24%. On the other hand, Oil&gas sector witnessed minor losses, declining by -0.14% w/w.

Fixed Income: Buoyant liquidity levels bolstered activity in the secondary market this week. Starting in the bonds space, yields declined 12bps amid pockets of buy activity during the week. Similarly, it was a positive trading week for the NTB space, as investors digested this week’s NTB auction results. At the NTB auction, the CBN offered N131.46 billion across the 91DTM, 182DTM and 365DTM at stop rates of 5.30%, 8.00% and 10.00% respectively. As such, investors reacted positively to this and as such yields eased 132bps w/w.

Currency: The Naira appreciated ₦1.00 w/w at the I&E FX Window to close the week at ₦463.00.

What will shape markets in the coming week?

Equity market: As expected, we have started to see moderation in the bullish run, as market breadth closed negative for the first time this week. We expect this to filter into the next trading session as investors continue to take profit.

Fixed Income: To open the week, we anticipate another bullish session in the bonds market, given the buoyant liquidity levels. Similarly, the NTB segment is expected to trade in line with liquidity levels.

GUINNESS NIGERIA PLC – Portfolio focus obscures volume losses – Volume gains   In Q3, Guinness Nigeria PLC’s earrings results showed a 7% rise in Revenue to N54.0 billion. This was a different story from the decline in Revenue seen from peer-brewer Nigerian Breweries, where a volume slump saw Revenue decline by 10%. We expect this volume decline to be an industry-wide phenomenon underlined by a natural response to the consistent industry-wide pricing increases and the impact of the cash crunch in the middle part of the quarter. That said, we note that Guinness’ strategy to overcome the cash crunch may have been a looser credit policy, reflecting in the 51% jump in receivables in this quarter, which is out-of-trend, as Receivables have historically declined q/q in comparable periods. We also believe that Guinness’ exposure to the Spirits segment and the de-focus from the Lager space may have been an insulating factor for volumes and revenue growth in the quarter, especially given the market structure (with respect to consumers) synonymous with these markets.

Gross profit improved by 7% y/y to  N18.1 billion; meanwhile, gross margin declined by 4ppts to 33%. On the other hand, operating expenses increased by 45% y/y, driven by sub-50% increases in both marketing and distribution expenses, with operating margin declining by 2ppts to 9%. On top of that, and as has been prevalent across other FMCGs, finance expense remains challenging, as the company reported a 12x increase in the line item to N2.6 billion, mostly driven by exchange differences on letters of credit and exchange losses on foreign-denominated debt balances. With lower reported interest income (-10% y/y to N0.4 billion), PBT was dragged 71% lower to N2.7 billion. After accounting for an expected 129% decline in tax expense, Guinness’ bottom-line printed at N1.8 billion (-71% y/y).

For the 9M period, this performance combined with a H1 growth rate of 9%, delivered revenue growth of 8% to N172.5 billion. However, the quarter’s performance could not preserve margins as 9M gross margin and operating margin declined by 1ppt apiece to 35% and 10% respectively, while operating profit declined by a more significant 26% y/y to N16.0 billion. Net finance costs jumped 17x to N7.5 billion, dragging PBT 74% lower y/y to N9.9 billion and PAT 62% lower to  N5.9 billion.

Outlook:  We expect the volume problem to persist (at least with Malt) albeit only marginally with Spirits. That said, we expect the current pricing strategy will still provide a cushion in the next quarter. A risk to this expectation, however, is a possible roll-back in prices by competing brewers, which could significantly hinder volumes. Nonetheless, we are cautiously optimistic on Revenue prospects and project an 8% y/y growth in Revenue to ₦223.4 billion for the full year. Considering our expectations for input costs and operating expenses (largely driven by inflation), our earnings projection for Guinness in the full year comes to ₦7.6 billion. Similarly, based on our projections, we arrive at a target price of ₦73.44 per share (5% upside to current market value) and reiterate the HOLD recommendation on the stock..