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Blurb

Faltering Guinness pays bumper dividends but Diageo rakes in billions in royalties

Whilst shareholders about 42% of them will have to make do with only 4.8% dividend yield, the same cannot be said of Diageo, the parent company with 58% ownership of Guinness

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Shareholders of Guinness Nigeria Plc recently received positive news when the company reported a profit after tax of N5.4 billion for the financial year ended June 2019, down from N6.7 billion same period last year.  Despite the drop-in profits, they will be receiving N1.54 per share in dividends as against N0.64 the year before. The dividend payment is back in naira per share after two torrid years of being paid in kobos. If only they knew. 

Guinness surprised investors three years ago when it posted its first-ever full-year loss. The beer maker has been grappling with declining sales and shrinking margins as Nigerians shift taste to cheaper value alcoholic brands. Fierce competition in this space has also not helped matters at all forcing the company to relook its strategy.  

Behind the veil: Guinness Nigeria’s latest results show it still has many challenges to confront before it achieves its desired turnaround. 

  • Revenues were N131 billion, 8% down from the N142.9 billion it posted a year earlier. It risks losing second place to International Breweries in terms of market share. 
  • Gross Profit margin was also lower as it spent N70 for every N100 in sales on direct costs. This compares to N66 a year earlier. 
  • Guinness spent about N10.1 billion on advertising and promo to generate sales of N131 billion (12.9x) compared to N12 billion last year to generate sales of N142.9 billion (11.9x).
  • Nigeria Breweries spent N23.7 billion on advert and sales promo to generate N324.3 billion in sales (13.6x) a better return when compared to Guinness. International Breweries generated spent N7.8 billion on same to generate N120.6 billion in revenues (15.8x).
  • Even though interest payment dropped by over 45% (thanks to its capital raise and subsequent debt repayment) it wasn’t enough to boost profitability 
  • Declining sales and rising operating expenses meant Guinness performed poorly in terms of margins and efficiency. 
  • Guinness return on equity, the most important ratio for shareholders, fell to 6.2% down from 10.3% last year.  
  • Based on this, Shareholders are better off keeping their money in a fixed deposit than holding Guinness Stock. And by the way, its dividend yield is a mere 4.8%. 
  • Its share price of N35 is 14x its earnings despite being 59% down from its N90 share price a year ago. It was N185 5 years ago. Expensive by market standards.

Who is winning? Whilst shareholders about 42% of them will have to make do with a only 4.8% dividend yield, the same cannot be said of Diageo, the parent company with 58% ownership of Guinness.  

  • Two years ago, a capital raise of N40 billion was used to pay down its dollar-denominated debt to its parent company, Diageo. 
  • This payment has helped unlocked a very important milestone payment to Diageo, Franchise fees and royalties. 
  • This year alone Guinness paid Diageo N3.6 billion in Royalties and Technical services fees. This compares to just N503.8 million a year earlier and N1.37 billion in 2017. 
  • In addition, they also get another N2.3 billion out of the N4 billion it declared as dividends. 

Corporate Governance: When a company has about 15 top-notch directors made on its board things can hardly go wrong. Guinness Nigeria Plc, Nigeria’s third-largest brewer by revenue boast of some of the most experienced board any quoted company in Nigeria can wish for.

6 out of its 15 directors are Independent Non-executive directors while 7 others are non-executive (including the Chairman and his Vice). The remaining 2 are executive and oversee the day to day operations at the company.

It’s CEO Magunda, a Ugandan was appointed June last year while Njoroge his deputy is Kenyan. Under Seni Adetu its last Nigerian CEO, Guinness recorded some of the worst results in its history. 

Surely, it has the right people and corporate governance to help turn things around. They will need to hasten up because a beer war is a zero-sum game. There can only be winners and losers.  

Update: Guinness Explained in its Investor Earnings Call transcript that the payment in Royalties and Technical Services Fee covered 2018 and 2019 results respectively.

So we had two years of [un-accrued] royalties and technical service fees which we hadn’t accrued for in their respective periods. We called this out in the previous financial statement as contingent liabilities. Now that the ruling has changed and the FRC has also revoked the notice we have taken that into account. So in this year’s financial there is about ₦3.1 billion which relates to expenses which would have otherwise have fallen in F17 and F18. I’ve

Blurb articles are succinctly written opinions editorials from content contributors expressing their views on financial reports, macroeconomic data, and economic policies. Blurb is recommended for readers seeking 'straight to the point' information and viewpoints that can help shape better investment decisions.

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Blurb

Dangote Sugar, sweet in more ways than one

Significant growth in gross revenue was driven largely by sale to Nigerian Bottling Company Limited and Seven-Up Bottling Company Limited.

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Quick take: Sustained cost pressure weighs on profit, Dangote Sugar Refinery: Revenue recovers but cost pressures remain

By refining capacity, Dangote Sugar Refinery Plc (DSR Plc) is acknowledged as the largest Sugar Refinery in sub-Saharan Africa and one of the largest in the world. With up to 60 percent market share, it is also clearly, the most dominant player in the Nigerian sugar market.

DSR Plc recently released its audited Financial Statements for the year ended December 31, 2020 and overall and year-on-year group performance results were very good.

Despite the impact of the Covid-19 induced lockdown which curtailed distribution across the country and resulted in decreased revenues from income generated from freights, gross revenues increased by over 33 percent year-on-year to ₦ 214.3 billion. The significant growth in gross revenue was driven largely by a rise in revenue from the sale of its 50kg sugar, with the two main customers being the Nigerian Bottling Company Limited and Seven-Up Bottling Company Limited who operate principally from Lagos.

READ: Dangote Sugar completes acquisition with Savannah Sugar Company Limited 

Year-on-year, gross profit increased by over 40 per cent to ₦ 53.75 billion, Profit before tax increased by almost 53 per cent to ₦ 45.62 billion, and Profit after tax increased by 33 per cent to ₦ 29.78 billion.

Notwithstanding the good result, the group operating results showed some issues and headwinds. First, during the year, DSR Plc wound up Dangote Niger Sugar Limited (one of four companies that had been set up to acquire large expanse of land and locally grow sugarcane as part of its concerted backward integration project). The winding-up was sequel to continued community dispute over land acquired in Niger State for this purpose. This winding-up event cost DSR Plc approximately ₦ 100 million.

Second, there continues to be a heavy reliance on Lagos for its gross revenues as revenues generated from Lagos State increased significantly from circa 33 per cent at the end of 2019 to over 50 per cent by the end of 2020. The share of the Lagos segment in gross revenue thus continued to grow and currently represents a significant market concentration risk for DSR Plc.

READ: Nigeria’s biggest oligopolies: Who are the real beneficiaries?

Third, provision for impairment on financial assets or in simple terms, receivables that are unlikely to be collectable, also trended upwards from ₦ 1.3 billion in 2019 to ₦ 1.45 billion by end of 2020 with net financing expenses also rising significantly from ₦ 516.2 billion in 2019 to ₦ 1.92 billion by the end of 2020. This rise in expenses was largely driven by a significant rise in exchange losses incurred in the ordinary course of business, rising from about ₦ 7 million in 2019 to over ₦ 1.57 billion at the end of 2020.

Finally, administrative expenses represented mainly by employee salaries grew year-on-year by over ₦ 1.2 billion.

With the recent reopening of land borders, we expect that revenues and margins will become squeezed as sales and production volumes become constrained by the influx of largely smuggled, lower quality, and much cheaper sugar and its substitutes. DSR Plc’s sugar refinery is also strategically located very close to the Apapa port and its logistics operations, distribution of raw materials and delivery of finished goods will continue to be impacted by the infamous Apapa Traffic Gridlock and road diversions/closures around the axis. Although the effort of Lagos state and the recent introduction of the electronic call up of truck by the NPA has eased the issue, still, it needs to be watched closely.

READ: Dangote Sugar yearly revenue surge by 33%, announces a dividend of N1.50

Earnings per share at the end of 2020 was ₦ 2.45 (2019: ₦ 1.87; 2018: ₦ 1.85)

Subject to approval at its forthcoming Annual General Meeting, DSR Plc board of directors have proposed a dividend of N1.50k per ordinary share (2019: ₦ 1.10k, 2018: ₦ 1.10k).

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Blurb

CBN “Naira 4 Dollar Scheme” Explained

What the CBN’s Naira 4 Dollar scheme means for your money.

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CBN

In what appears to be an attempt to incentivize dollar remittances by all means possible, the Central Bank of Nigeria (CBN) released a circular to Deposit Money Banks (DMBs), International Money Transfer Operators (IMTO), and the General Public, advising that remittances paid into a bank account will attract an additional credit alert for every USD$1 received!

Yes, you read that correctly. The CBN will facilitate a special additional credit alert of N5 for every USD$1 received. In other words,

  • if someone sends you $10,000, you get an additional special credit alert for N50,000.
  • If someone sends you $100,000, you get an additional special credit alert for N500,000.

Who is eligible?

To be eligible, the diaspora remittances need to be processed and received from one of the registered IMTOs and funds received into a Bank account operated by the DMBs. (So, if you are receiving funds via Crypto sorry you are not eligible).

Additionally, the circular says this “incentive runs from Monday 8th March 2021 to Saturday 8th May 2021″. So, if you have plans to receive dollars, you can plan accordingly.

The circular is not clear how exactly the commercial banks will know which account to pay the extra special credits into. Although, that may be a question diaspora funds recipients will need to ask their DMB accounts officers to clarify for them.

How will this be funded?

The circular notes that the “CBN shall through commercial banks, pay to recipients the N5 incentive for every USD$1”. In other words, it is the CBN funding the cost of this special extra credit.

  • One would argue that given the costs of alternative incentives to attract dollars such as the special OMO window for FPI, this may be a cheaper alternative for the CBN.
  • But we will need to see the volume of expected remittance to be certain of that. Nigeria attracts about $5billion per quarter in remittances and only trails oil in terms of foreign earnings.

Why this matter to Nigerians?

Following the collapse of US Dollar inflows into the country, the CBN initially tried to balance its current account deficits and avoid an official devaluation by tackling FOREX demand (Think ban of 41 items, etc).

Finally, this short-term Naira-4-Dollar scheme will not be called an official Naira Devaluation. But a question is what do we call the new short-term price of N412.50 + N5.00? Maybe we can call it Naira Modulation.

 

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