Guinness Nigeria (GUINNESS) has released FY18 results showing a 14% increase in net sales and EPS growth of 140% y/y, following additional shares post the rights issue concluded in September. Revenue came in directly in line with SBGS and consensus estimates while EPS was behind SBGS and consensus estimates by 8% and 11% respectively. The Board has declared DPS of N1.84, 188% higher than last years with an implied payout ratio and a dividend yield of 60% and 2% respectively.
Volume growth supported by Dubic, spirits and Guinness:
Parent company, Diageo, in its FY18 results reported 10% organic volume growth for Nigeria across beer and spirits. Reported net sales growth for Guinness and Spirits was 24% and 28% respectively. We continue to reiterate our concerns on the sustainability of beer brands. We recall that FY17 growth was largely driven by then discount brand, Satzenbrau, which in FY18 was in a steep 28% decline.
In the same vein, Dubic, which drove volumes in FY18, largely on discount pricing in our view, could likely fall into decline in FY19 after a recent price increase. It may be too early to get a sense of the success of recently introduced lager brand, Royal Kingdom. Regardless, spirits, which grew 28% compared to 13% for beer, will likely continue to grow at a faster pace over the medium term.
EPS growth supported by margin expansion, lower interest charges:
EBIT margins expanded to 9.4% from 8.1% in FY17 but fell shy of our 10.6% estimates. This was largely due to a 440bps contraction in gross margins, which wiped out gains from a 580bps improvement in operating expense (opex) to sales ratio.
Noting little improvement in gross margin through the year and a spike in opex/sales ratio in 4Q18, we see little upsides to margins in the near term amid ongoing price wars. Sustained growth in premium brand, Guinness, could however, support margins. Earnings were also lifted by the 54% decline interest charges, following the repayment of shareholder loans post rights issue. Debt to equity ratio improved to 16% from 98% in FY17, within management guidance of 20% to 50%.
Valuation:
We have a SELL recommendation at a target price of N103, which implies a 14% upside from current price. On our numbers, GUINNESS is trading on a FY19E P/E multiple of 20x compared to NB at 17.7x and International Breweries at 54x. Management will be hosting a call on this results later today at 2pm local time.
Key risk:
Largely stem from our view on GUINNESS’s relatively weaker positioning in beer. Nonetheless, increased contribution from spirits amid relatively faster growth in the segment could be a catalyst. An improvement in consumer disposable incomes remains the most significant catalyst for the sector.
By Stanbic IBTC Stockers
