These are extraordinary times for Nigerians and by extension businesses who rely on them for survival as a going concern. Just when you think we have turned the corner, another one bites the dust.
This must be the reality for Guinness Nigeria Plc, one of Nigeria’s largest breweries.
The company must have thought it had turned the corner when it returned to profitability in 2021 following the disaster that was in 2020. But as has been the case more recently, Nigeria happened.
Guinness released its 2023 full-year results for the period ended June 2023, showing it reported a massive loss after tax of N18.1 billion.
The last time it reported a loss this wide was in the Covid year when it reported a loss after tax of N12.5 billion.
Unlike in 2020 when the loss was attributed to Covid-19, this time Guinness faces a multi-hydra-headed set of challenges. We will focus on a few.
Firstly, its customers face lower purchasing power due to higher inflation and tepid economic growth. Nigeria has grappled with a double-digit inflation rate made worse by the removal of fuel subsidies.
To mitigate this, Guinness has had to aggressively sell its value brands, especially its spirits division which grew by 36% year-on-year. It has also relied on price adjustments to bump up sales.
But while it managed to grow revenue by 11% YoY, it has struggled to contain costs.
During this year, OPEX gulped 70% of gross profits as against 67% a year earlier. On an absolute basis, the cost of sales and operating expenses was N209 billion versus N185 billion same period in 2022.
Despite a surge in cost, Guinness still managed to generate operational profits.
In business, there are things you can control and others that are just out of your control.
For Guinness and most Nigerian companies, the exchange rate has been out of their hands for years. While the real cost of transaction is market reflective, the Central Bank has kept the book entry of cost artificially low.
However, with the unification of the naira, companies like Guinness now have to revalue the foreign currency obligations using the new rates leading to a massive exchange rate loss.
The company reported an exchange rate loss of N49 billion wiping off the entire operating profit of N23 billion it had generated.
While the losses can be considered as paper losses, the impact will be felt on Guinness’s cash flows whenever it starts to repay the loans.
Guinness has a related party dollar loan of $22.5 million which means the naira equivalent is now N17.9 billion compared to N9.4 billion as of December 2022.
The company also has letters of credit related loans of about $33.8 million, EUR 18.8 million, and GBP 2.9 million at the end of the year.
Trade and other payables denominated in forex also amount to $48.1 million, EUR 245,000 and GBP 5.5 million.
These loans will cost the company more in the coming quarters and unless it is able to restructure the loans, achieving profitability will be a struggle.
It could also raise prices to increase revenues, but this will impact volumes and push customers to other brands.
This leaves Guinness with the best-case scenario of raising additional capital or getting an additional bailout from its parent company.
Despite the challenges it faces, the company defied all odds and declared dividends ostensibly out of retainer earnings. It can do this because it has cash.
It had cash of N92 billion and is expected to pay off dividends of N15.6 billion this year.
Guinness generates enough cash to sustain dividend payments, however, with just over N7 billion left in retained earnings, dividends will either have to be suspended or paltry.
How this will affect its current share price, will be a matter of time.
