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    Guinness Nigeria Attracts Buy Rating after Better Earnings Outturn

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    Following sluggish performance in the past quarters, Guinness Nigeria Plc.’s has been rated buy by a slew of equity analysts after an improved earnings debut in the third quarter of financial year 2021.

    Analysis of the brewer’s financials showed that profit margin for its 9 months 2020 hit a better than expected level, though gross profit margin plunged 5.9% percentage point due to overstretched costs profile.

    In the third quarter, there was a demand surged which analysts believe was driven by the segments which Guinness Nigeria has chosen to focus on strategically; Spirits, Malts and Stout.

    In a report, Vetiva Capital analysts explained that stout segment has performed well in local markets, especially its newly released Guinness smooth brand.

    Consensus analysts’ expectation pointed to possible price adjustment in financial year 2021/2022 as Nigerian Breweries Plc adjusted price upward.

    Recall that during the year, the brewer raised prices across its Spirits – Mainstream and International Premium and ready to drink (RTD) segments.

    Vetiva Capital recalled that the company had to de-stock its distributors last year and had been focused on returning to a normal stock level; we believe that the company’s re-stocking efforts have met some success.

    While demand improved after an unimpressive outing in the pandemic year, analysts would have seen declined in net profit in the period since gross margin was rundown by increased cost.

    But this was maneuvered with reduce non-cash flow items on the income statement as depreciation charged dropped enough to pave way for positive returns..

    Guinness Nigeria in its recently released 9M-2021 financials recorded an increase of 19.7% year on year in revenue to N114.96 billion compared with N96.02 billion in the comparable period in 2020.

    Guinness Nigeria Attracts Buy Rating after Better Earnings Outturn

    Analysts at CSL Stockbrokers in a report said this performance is in line with the company’s current positive growth trajectory, considering its Q3-2020 which is usually the first quarter on the Nigerian fiscal calendar.

    “This implies that Q3 2020 for the firm was the three-month before the announcement of lockdown in 2020”.

    Expectedly, on a quarter on quarter basis, Guinness recorded a tepid growth which came at 0.66% in revenue to N42.61 billion in Q3 2021 from N42.33 billion in Q2 2021.

    CSL Stockbrokers said the company’s performance this past quarter continues to manifest the level of recovery seen so far in the general economy, following the lock down in Q2 2020.

    “This has engendered the near-complete resumption of on-trade channels. This, alongside the opportunities to adjust prices aided revenue growth”, analysts added.

    Like its peers in the industry, 31.2% year on year growth in cost of sales ex-depreciation outpaced 19.7% revenue increase.

    Analysts remarked this reflects a surge in cost of inputs.

    “We had projected, earlier in the year, that full year 2021 will see a further devaluation of the Naira which will affect the cost of production in Nigeria”, CSL Stockbrokers recalled.

    Consequently, the marked rise in cost of sales pressured gross profit which grew marginally, up 0.9% year on year while gross profit margin slipped 5.9ppts to 31.9% from 37.8% in 9M 2020.

    Operating expenses ex-depreciation in the period increased by 1.9% year on year to N23.82 billion from N23.38 billion in 9M 2020.

    Analysts believe that the rise in operating expenses proves the weight (74% as of 9m 2021) of marketing and distribution overhead to the overall total operating expenses spending of the firm, noting that as a 3.2% increase in market and distribution costs propelled the growth in total expenses.

    In the period, Guinness Nigeria earnings before interest, tax, depreciation and amortization declined by 0.8% year on year to N12.85 billion from N12.96 billion in the corresponding period in 2020.

    Furthermore, analysts at CSL Stockbrokers noted the 24.4% year on year decline in depreciation and amortization to N6.17 billion from N8.16 billion as of 9M 2020.

    “This drop in depreciation and amortization aided growth in operating profit, which jumped up 39.3% year on year to N6.68 billion”, CSL Stockbrokers stated.

    On financing, the company recorded a decline in net finance cost of 1.1% year on year to N3.18 billion from N3.21 billion in 9M 2020.

    Meanwhile, its finance income sloped down 24.0% year on year due to the low yield environment while finance cost declined 3.5%.

    Despite the cost concerns, CSL Stockbrokers said the company’s pretax profit leveraged the marginal decline in net financial cost, depreciation and amortization.

    Non-operating incomes jerked up 122.5% year on year increase to N4.46 billion from N2.01 billion as of 9M 2020 as pretax profit margin grew by 1.8ppts to 3.9%.

    Guinness Nigeria tax expenses however grew 307.7% year on year to pressure the significant recovery posted on profit before tax. Consequently, its profit after tax expanded only 35.0% year on year to N1.84 billion.

    “For Q4-2021, we believe that there is room for expansion in the spirits market, given its increased focus on the space. We also expect a possible price increase in the beer segment, following an increase by market leader, Nigerian Breweries in this quarter”, Vetiva Capital hinted.

    In Q4-2020, analysts stated that the company made its lowest revenue in years, providing a significantly low base and an avenue for exponential growth in Q4-2021.

    In line with these expectations and its performance so far in 9M-2021, analysts Vetiva Capital revised financial year 2021 revenue estimate to ₦156.8 billion from ₦137.6 billion.

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