This Day (Lagos)

20 February 2013

Nigeria: Guinness - Yielding to Competition, Weak Demand and Inflation?

Eromosele Abiodun writes that investors in Guinness Nigeria Plc may have to wait a little longer for a turnaround in the company's fortunes as weak demand, inflation, flooding, security issues, and competition experienced in recent times continue to tell on its bottom-lines

For the management, stakeholders and investors in Guinness Nigeria Plc and indeed the entire beer industry in Nigeria, these are certainly not the best of times.

Incorporated in 1950, Guinness Nigeria Plc was officially listed on the Nigerian Stock Exchange (NSE) in 1965. Guinness is majorly involved in the brewing, packaging and marketing of Guinness foreign extra stout, Guinness extra smooth, Malta Guinness, Harp Larger Beer.

Since its incorporation, Guinness Nigeria Plc has grown in leaps and bounds and has, through its two major stout brands, built a competitive advantage in the stout category of the breweries sector. Today, Guinness is one of the largest multinational brands in the breweries market with several branch offices, outlets and manufacturing plants in various locations of the world. The company has over the years carved a niche for itself in terms of the production and distribution of high quality brewed products, some of which have become household names and as a result provided bounty harvest for its investors.

Downturn

A lot has however changed for Guinness in the last one year and a half. The company has faced a couple of challenges that has impacted its profitability negatively. Inflation, flooding, security issues, competition are rife and the Nigerian beer market is flooded by brands of good quality. To fight competition and maintain market share, Guinness recently introduced Snapp, a move analysts said was not borne out of an attempt to give customers variety but to stave off competition from similar products that on the contrary rank as premier for lesser known competitors.

Consequently, its margins have had to pay the price. For instance, gross profit margins for 6 months to December 2012 shrunk 2.9 per cent when compared to the same period last year. Operational Profit margin also shrunk comparatively by 8.13 per cent due to increase in advertising and promotional cost as well as administrative expenses. Weak margin notwithstanding, Guinness Nigeria remains one of the best performers on the NSE and still consistently report profits.

In an analyst conference held last Monday, the management of Guinness Nigeria expressed optimism that the company would likely witness improved sales in the second half of their financial calendar noting improved consumer demands.

According to the first half year results released on Monday, the company reported a 16 per cent decline in net income to 6.42 billion ($40.8 million) for the six months ended Dec. 31, 2012.

Pre-tax profits also declined by 15.71 per cent to N9.44 billion from N11.20 billion in the corresponding period, while gross revenues rose marginally from N62.08 billion to N65.68 billion in the same period. Similarly, its 2012 financials shows its bottom line pointing southward when compared to the same in 2011. With profits down in 2012 compared to 2011, most investors will worry and hope this is just a blip.

Income

Guinness posted a turnover of N126.2 billion, a decline of 2.1 per cent from the same period in 2011. This drop is paltry when you consider the rise in preceding years; in 2011 revenue was up by 13 per cent, 23 per cent in 2010 and 28 per cent in 2009 respectively. A drop of 2.1 per cent, however, portends a market that is caving under the pressure of competition and discretionary consumer spending

Profitability

The company posted an operational profit of N22.8 billion for the year ended June 2012. This was a 14 per cent decline when compared to the prior year. A further analysis showed increased operational cost. The company spends N60 for every N100 of gross profit generated a fact that weighs down heavily on efficiency. Advertising and promotional expenses alone gulped off 44 per cent of gross profit. The year under review has also mostly being marked with high inflationary pressures due to the partial fuel subsidy removal and various security threats in major parts of the country.

Without the buffer of increased top line revenue it is difficult to achieve improved efficiency with operating costs such as this. The company's earnings from its line of product may well be heavily dependent on the famed Stout and less on the other products.

Funding Outlay

The company's borrowing is made up of finance lease and bank overdrafts totalling N13.4 billion, a 908 per cent rise from the prior year. With finance lease obligations taking up more than 60 per cent of borrowings the impact of borrowings may be adverse for cash flow depending on the terms of the lease. Overdrafts of almost N5 billion effectively puts the company in a negative cash flow territory. Despite this, the debt accounts for N32 for every N100 of equity it has.

Interest as a percentage of operational profit is just under 8 per cent for the year, a figure that is well below NSE average. The only worry maybe that the company didn't need any debt to post a pre-tax profit 14 per cent higher than that of the previous year.

The company may well put forward an argument of sacrifice for investing in the future even though lower margins may well be a clog to the wheel taking them there.

Bottom Line

Guinness Nigeria is listed among the elite NSE-30 (most capitalised stocks), with a market capitalisation of N383.4 billion, 26 per cent of its sector and 4.75 per cent of the total NSE market Capitalisation. Its current year high price of N260 puts it at a pricey 21X P.E ratio. Investors who bought the stocks this time last year has recorded a 24 per cent capital gain. "For those seeking to invest now, the stock represents a hedging opportunity in a market that has witnessed volatility amidst feeble fundamentals. The company has sound fundamentals and look likely to make profits in the coming years. New entrants into the brewery sector pose a medium-term threat just as the increase in spirits, Champaign consumption and wines dent their share of the strained Nigerian consumers, "said a trader at the NSE.

Return on Equity

Despite its current situation, any investor in the Nigerian equities market can testify that Guinness has consistently posted profits. With Return on Average Equity (ROE) of 36 per cent, one can hardly break sweat for any of the setbacks stated earlier. Very few Nigerian companies have the capacity to post yields higher than inflation. Guinness does just that leaving investors with a real return of 12 per cent. It's ROE down from the 44 per cent posted in the prior year but may just beat its rivals in the brewing sector and particularly Nigerian Breweries Plc who already posted 32 per cent for the first half of 2012-2013 alone. Following its 2012 performance, the company has proposed an N8 dividend payout and a one for thirty three bonus issue.

State of Beverage Market

In its half year results for the period ended December 31 2012, released recently, the company said it recorded a topline growth of 5 per cent, "with a continued strong performance of key bands like Guinness Foreign Extra Stout, Malta Guinness and Harp Lager driving net growth sales over the period in review."

Speaking on the results, Managing Director/Chief Executive Officer, Guinness Nigeria Plc, Mr. Seni Adetu, said the company continued to invest strongly in its brands and infrastructure. "Over the period in review we have again showed our commitment to enhance our focus on distribution and support long term growth. Marketing spend also increased ahead of net sales as a result of our growth strategy."

Commenting on the state of the beverage market in Nigeria, Adetu observed that the business was upbeat about the future despite a continuing decline in the beer and malt market. "We know that the beer market in Nigeria is undergoing a general decline but we are confident that there will be a reversal in this trend going forward. The critical thing for the management and board of Guinness Nigeria Plc is the confidence we have that our range of leading brands, our continued focus on distribution and our investment in our brands and people will deliver long term growth for the business, "he said.

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