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Company Results

STOCKS: Poor operating performance downgrades Guinness Nigeria to Sell

In its recently released 9M 2020 results, Guinness reported a 5.3% y/y decline in Revenue to N96.0bn from N101.4bn in 9M 2019. On q/q basis, revenue declined 33.2% to N27.7bn in Q3 2020 (Jan – Mar 2020) from N41.4bn in Q2 2020.

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Guinness Revenue, Quick Take: Lower revenue & higher leverage underpins weak operating performance 

In its recently released 9M 2020 results, Guinness Nigeria Plc (Guinness) reported a 5.3% y/y decline in Revenue to N96.0bn from N101.4bn in 9M 2019. On q/q basis, revenue declined 33.2% to N27.7bn in Q3 2020 (Jan – Mar 2020) from N41.4bn in Q2 2020. Pressured by higher excise as well as the closure of on-trade channels in the final week of the quarter, the company’s performance in Q3 2020 (historically one of the best quarters for Guinness) was weak with Q3 2020 Revenue and Net Income declining 17.6% and 97.2% respectively when compared with Q3 2019.

We cut our Revenue forecast for the rest of the year as on-trade channels remained shut for the first 5 weeks of Q4 2020 (Apr-Jun 2020) while ceremonial activities remain banned in many states in the country. Furthermore, while we expect lower barley prices would provide some support to Gross Profit, we expect Opex and Finance cost to remain significant pressure points in Q4. We forecast a loss in the final quarter of the year which would pressure FY 2020e Net Income lower.

We cut our target price for Guinness Nigeria to N15.08/s from N32.12/s previously which implies a 21.5% downside to Wednesday’s closing price of N19.20/s. Thus, we downgrade our recommendation to a SELL from HOLD. We have revised down our profit lines steeply and lower pricing multiples in our relative valuation models given the company’s poor operating performance relative to peers. We arrive at our target price using a combination of the single-stage FCFF model and Relative valuation in the ratio 60:40 with the greater weighting on the FCFF methodology.

READ ALSO: Analysis: A better way to price Guinness shares

Confluence of headwinds pressure Revenue

In its recently released 9M 2020 results, Guinness reported a 5.3% y/y decline in Revenue to N96.0bn from N101.4bn in 9M 2019. On q/q basis, revenue declined 33.2% to N27.7bn in Q3 2020 (Jan – Mar 2020) from N41.4bn in Q2 2020. Revenue performance was unusually weak in Q3 2020 given it is historically one of the best quarters for Guinness. To give perspective, on a y/y basis, Q3 2020 Revenue declined 17.6% y/y.

The decline in revenue was driven by a confluence of several factors. First, we note that Guinness remains the most affected brewer from the change in excise duty calculation. The company’s portfolio consists of both beer (Excise: Q3 2019–N3,000/hl Q3 2020 – N3,500/h) and spirits (Excise: Q3 2019 – N15,000/hl Q3 2020 – N17,500/hl) making it more exposed to the excise changes. In addition, on-trade channels were shut for the final week of the quarter due to lockdown measures to control coronavirus spread, thus, affecting volume growth. These headwinds combined to mute the impact of price increases earlier implemented by the company.

READ ALSO: Nigerian Breweries: Lower profit estimates on higher Opex; HOLD rating retained

Lower volume and input cost underpin COGS decline

The company recorded a 1.9ppts expansion in gross margin to 38.3% in Q3 2020 due to a faster decline in Cost of Sales relative to Revenue. Cost of Sales declined 8.1% y/y to N59.3bn in 9M 2020. We were particularly impressed by the faster decline in Q3 2020, as Cost of Sales declined 46.5% q/q (vs. Q2 2020) and 29.4%y/y (vs. Q3 2019). While we note that a decline in volume sold contributed to the dip in Cost of Sales, lower Barley prices (down 3.9% y/y in Q3 2020) also contributed to the decline. Nevertheless, Gross Profit was relatively flat in 9M 2020, down 0.5% y/y to N36.7bn. In addition, Gross Profit was considerably weaker in Q3 2020, down 6.7% q/q due to lower revenue.

Operating performance deteriorates on Opex & Depreciation increase Operating Expenses (adjusted for depreciation) increased by 4.6% y/y to N23.8bn in 9M 2020 from N22.7bn in 9M 2019. The increase was driven by pressure across Marketing & Distribution Expenses (adjusted for depreciation) and Administrative Expenses (adjusted for depreciation) with both increasing by 3.6% y/y and 7.1% y/y respectively to N16.7bn and N7.1bn in 9M 2020. Consequently, EBITDA was down 8.6% y/y to N13.0bn in 9M 2020 from N14.1bn in 9M 2019. The 9.3% increase in Depreciation & Amortisation cost placed further pressure on operating performance as EBIT dipped 28.8% y/y to N5.2bn in 9M 2020. Q3 2020 operating performance was particularly weak, with EBIT down 38.4% y/y.

READ ALSO: Quick take: MTN’s Strong Operational Performance Underpins double-digit growth

Finance cost spikes due to jump in FX losses

Guinness reported a 197.5% spike in Net Finance cost on the back of higher Finance cost (+97.1% y/y) and lower Finance Income (-49.8% y/y) in 9M 2020. The jump in Finance cost was primarily driven by 506.7% spike in FX losses to N1.4bn. We also saw an Increase in Interest on Loans & Borrowings (+26.2% to N1.5bn) and Interest on Overdrafts (+129.0% to N0.5bn) as total Loans & Borrowings increased by 74.0% to N20.7bn as at 9M 2020 from N11.9bn in 9M 2019. The spike in Net Finance cost pressured Pre-Tax profits lower by 67.9% y/y to N2.0bn in 9M 2020 from N6.3bn in 9M 2019. Net profits were also down 68.0% y/y to N1.4bn in 9M 2020 from N4.3bn in 9M 2019. Q3 2020 Net Income declined significantly, down 97.2% y/y to N0.05bn in Q3 2020 from N1.7bn in Q3 2019. Earnings per Share for 9M 2020 was N0.62/s (9M 2019 – N1.94/s).

Outlook & Forecasts

Pressure on “on-trade” channels threatens Revenue We lower our Revenue forecast for Guinness given expectations of an unusually poor Q4. We forecast revenue of N27.8bn (2.6% lower than our previous forecast) for Q4 2020 (Apr – Jun 2020) which brings our FY 2020e (Jul 2019 – Jun 2020) to N123.8bn. We lower our Revenue forecast due to on-trade channels remaining shut for the first 5 weeks of the quarter while ceremonial gatherings remained banned. Furthermore, the final phase of the new excise regime will be implemented for spirits in June (the last month of the financial year) which would see it move to N20,000/hl from N17,500/hl previously. However, the impact would be minimal considering it would only impact one month in the whole year. The full impact will be felt in FY 2021.

READ ALSO: Cadbury releases 2019 FY result, grows profit by 26%

Favourable commodity price to support Cost of Sales

International commodity prices have remained low relative to last year although signs of recovery are beginning to show. Thus, with Barley prices expected to remain low in Q4 2020, we lower our modeled cost margin by 3.0ppts to 62.0% for FY2020e. Consequently, our new Cost of Sales forecast of N76.8bn implies a decline of 8.7% from FY 2019. We forecast a Gross Profit of N47.1bn. We highlight possible devaluation as a risk to our forecasts over the medium to long term. With Guinness’ financial year ending in June, we do not expect the devaluation risks to crystallise so soon.

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Growth in Depreciation & Opex to dampen performance

We forecast sustained pressure on Operating Expenses which we expect to impact on the company’s operating performance for the rest of the financial year. We forecast operating expenses will grow 7.4% to N31.0bn thus placing pressure on EBITDA which we forecast will be down 11.9% y/y to N16.1bn (Prior forecast – N16.6bn). Pressure on operating performance will be further aggravated by high fixed depreciation costs, thus, dragging EBIT lower by 38.6% y/y.

Finance cost pressures to weigh further on Net Income

With Guinness Nigeria booking unexpected FX losses in Q3 2020, we expect Finance cost to remain a key pressure point for the rest of the financial year with the company carrying some dollar-denominated debt and payables. We raise our forecast for finance cost to N4.4bn and consequently, Net Finance cost to N3.9bn. The resulting impact of this is a dip in Pre-Tax profit which we revise lower to N1.6bn for FY 2020e. We also revise our Net Income forecast to N1.1bn for FY 2020e from N2.7bn. Our new Net Income forecast implies a 79.6% y/y decline from FY 2019.

READ MORE: Nestle : On track for solid 2019 despite emerging concerns

Valuation: Downward revisions to estimate informs downgrade

We cut our target price for Guinness Nigeria lower to N15.08/s from N32.12/s previously. Our new target price represents a 21.5% downside from Wednesday’s closing price of N19.20/s, thus we downgrade the stock to a SELL. The steep cut in our target price is due to downward revisions on our profit lines and lower pricing multiples in our relative valuation models given sub-optimal performance relative to EM peers. Our valuation methodology uses a combination of the single-stage FCFF model and relative valuation in the ratio 60:40 with the greater weighting on the FCFF methodology.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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Company Results

MTN post N385.3 billion in revenues in 3 months as Nigerians guzzle data

MTN posted revenue of N385.3 billion representing a 17% increase from the N329.1 billion reported in the same period in 2020.

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UACN appoints Toriola as new Director 

Nigeria’s largest telecoms network, MTN posted revenue of N385.3 billion representing a 17% increase from the N329.1 billion reported in the same period in 2020.

The double-digit growth is happening at a time when Nigerians have put the Covid-19 lockdown behind them and returned fully to work across the country. It is also happening on the back of tumultuous three months of SIM card registration bans and government mandates for all Nigerians to register to obtain their NIN and link the numbers to their SIM Cards.

MTN reported an 8% growth in Voice related revenue topping N208 billion for the period under review. Data revenue continued to lead revenue growth printing at N105.7 billion, a 42.6% growth year on year, showing heavy reliance on data by MTN’s 61.5 million internet subscribers, the highest in the country.

MTN commands the market share for internet subscriptions owning about 42% of the market. MTN also controls 40% of the Voice market share, the highest compared to any other competitor.

READ: Banks, MTN reach agreement, restore suspended USSD services

Commenting on the result, MTN’s CEO, Karl Toriola explained that “the effects of customer churn and the restrictions on new SIM sales and activations arising from changes in SIM registration regulations” had resulted in a decline of its subscriber base. This reduction led to a marginal drop of 71,000 in Q1 active data subscribers to 32.5 million but this did not affect growth. Rather they recorded an 86.7% increase in data traffic and a 48.5% increase in usage (MB per user) from the existing base.

Toriola explained that “the improvement in data services was supported by the completion of our acquisition and activation of an additional 800MHz spectrum” enabled the company to further increase traffic by 10% and enhance throughput by 79%.

MTN also doubled its revenue from Digital business rising to N3.7 billion during the quarter while FinTech related revenue rose 28.5% to N14.6 billion.

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“Digital revenue grew by 101.0% and fintech revenue by 28.5% as customers continued to adopt more digital products and services, a trend accelerated by the pandemic. As of the end of March 2021, we had 449,100 registered MoMo agents and 4.6 million fintech customers.”

MTN also revealed it was being owed N40.3 billion by deposit money banks (DMBs) on services provided for under its USSD product. MTN did not recognize any revenue for its USSD business resulting in a flat year-on-year revenue for its enterprise business.

What next for MTN?

The GSM behemoth maintains it will continue to pursue double-digit revenue growth in 2021 through its 4G network expansion and positioning its FinTech Business for “accelerated growth” to unlock its full potential.

MTN also revealed it will continue to push for a revised commission paid to banks on its air time sales and is exploring other options of selling its airtime outside of banks.

“We will continue to sustain our expense efficiency programme to strengthen our financial position and support margins. We remain in dialogue with the DMBs on a pricing option for airtime sales commission while diversifying our airtime recharge channels to offer our subscribers more options to purchase airtime and stay connected.”

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Company Results

Dangote Cement incurs N97 billion taxes in 2020

The cement giant incurred its taxes on record.

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One of Nigeria’s largest indigenous companies and the largest by market capitalization incurred a company income tax of N97 billion for the financial year ended December 2020.

This s according to the information contained in its full-year audited financial statements for the period under review.

Dangote Cement Taxes. 2018 was a tax credit.
Source: Nairalytics Research

Why this matters?

Dangote Cement has enjoyed Pioneer Status over the years and has often been criticized for not paying enough taxes despite its mega-profits.

  • The N97 billion incurred in 2020 is the highest company income tax reported by Dangote Cement since it became listed on the Nigerian Stock Exchange.
  • It incurred N49 billion in taxes in 2019 and got a tax credit of N89.5 billion in 2018.
  • Despite incurring N97 billion in taxes during the year, Dangote Cement’s actual tax paid was just N20.9 billion in 2020 compared to N4.6 billion paid a year earlier.
  • Tax incurred in the profit and loss statement is an accounting provision and is not always the actual tax paid in cash.
  • Putting it into context, the dividend paid during the year is N272 billion and interest payments to its creditors totals N48.2 billion.

Improved Cement Revenues

Despite the Covid-19 Pandemic, the Cement Giant reported full-year revenue of N1 trillion, the highest it has ever recorded since it was privatized almost 20 years ago. The company also reported a profit before tax of N373.3 billion only and a profit after tax of N276 billion, its highest since 2018.

Nigeria like most countries in the world has faced a challenging 2020 due to the impact of Covid-19 on the economy, especially the private sector. However, mega-corporations like Dangote Cement appear to have even performed better during the year. The cement industry in general also appears to have performed well during the year as the combined revenue of the top 3, Dangote Cement, Lafarge, and BUA rose to N1.47 trillion from N1.28 trillion.

The impressive result nonetheless, Dangote Cement’s margins remained strong during the year posting a gross profit margin of 57% in line with its 3-year averages. However, the higher taxes incurred in 2020 dropped profit margins to 26.7%. When compared to 2018 when it still enjoyed Pioneer status, the company posted profit margins of about 43%.

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