Guinness Nigeria Plc is a company we have been tracking over the last few weeks, since it released its 2013/2014 Q1 results. The results failed to meet expectations as top line revenue growth fell 5% and earnings per share 3.5%. This followed a poor 2013 FY results to June that saw Operating Profits drop 6.4% and earnings per share 16.5%. Despite these factors the company share price continues to be resilient and has basically remained flat at N240 since then. In fact for every losses it incurred it basically gained it back in subsequent trading sessions. In the last 1 year Guinness has lost just 5% in value compared to a market that is in the upward of 35%.
Despite this we still feel the stock is highly over valued and should be trading in the region of N160 and not the N240 you find today. Why do we think so? Well here are our reasons;
- At the current price of N240 TTM P.E Ratio is a whopping 30x, 2.2x the NSE All Share Index average P.E Ratio. This is a stock that has trailed in the All Share Index all year.
- Based on the above, we do not expect the share price to rise above N250 in the coming months as that will put it at a very high premium above the NSE All Share Index.
- The current TTM dividend yield is paltry 2.9%, therefore the only other form of returns a shareholder can get is via capital gains. As we pointed out, Capital Gains have dropped 5% in the last 1 year.
- Earnings Yield based on this price is as low as 3.1% and based on our future projected EPS for the company we do not see this improving significantly
- The company is also currently facing massive competition from the likes of International Breweries, the wine market and other distillers locally and internationally. Their once revered dominance is very well under threat as such, topline revenue growth may continue to be in single digits
- The company’s huge debt of about N28billion (Q 1 results) we project will cost them an average N4billion every year in interest cost (capitalized or not). This will continue to weigh down on earnings per share.
- The alternative to the debt is also not very nourishing as raising fresh equity will dilue EPS further thus increasing P.E ratio
- The current TTM ROE of 28% is good indication of how good the business is. However, that returns is for the shareholders who bought at N30 years ago and not for shareholders who buy at N240. The current price is about 7.8x book value. PEG ratio is also a massive 31x showing P.E ratio is growing at a much faster rate than EPS growth. Dangote Cement for example trades at a P.E ratio of 23x but has a PEG ratio of 0.47 by our estimates because it is growing its EPS at a faster rate of 53%.
These are just some of the reasons we have and there actually could be many more. This is a stock we actually want to own so do not see this analysis as a condemnation. We love you Guinness but at this current price, its a SELL for us.