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    Guinness Nigeria Portfolio Resilience in Q3 2021 Results Spurred by Resurgent Demand

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    Broad-based increase to our 21-23f EPS forecasts; dividend payments likely to resume
    We have raised our price target on Guinness Nigeria (Guinness) to NGN28.6 and upgraded our rating to Neutral from Underperform. These adjustments follow an impressive set of results in Q3 ’21 (end March ’21), after renewed demand post COVID-19 lockdown and price increases. Management attributes the turnover expansion in Q3 ’21 to growth across its four main categories: stouts, local and imported spirits, malt and RTDs (Ready-to-Drink). For the stouts, volumes grew double-digits y/y, on a rebound in Guinness Foreign Extra Stout and Guinness Smooth.

    Increased demand for can packages led to a stronger growth of RTDs and Malta Guinness. Volumes of local and imported spirits brands also grew double digits y/y in Q3 ’21, which points to sustained success of the company’s increased focus on spirits. The resilience in demand within that segment shows the potential of the Nigerian market, in spite of its comparably higher prices. In changing our forecasts, we now expect FY ’21f turnover at NGN149.0bn (compared with prior forecast of NGN120.0bn). New forecasts reflect strong volume/price growth momentum. However, competitive pressures could slow the expected pace of turnover expansion. We have lowered our gross margin estimate for ’21f to 29.0% (from 30.0% previously) on the back of cost pressures. Elsewhere, we estimate opex at NGN35.3bn (+1.5% vs previous forecast of NGN34.8bn) due to our view of a continuous increase in marketing expenses.

    Our new opex forecast is slightly ahead of the 9M ’21 (end-March) run-rate of NGN34.3bn. Further down the P&L, we are projecting interest expense at NGN3.8bn (-11.3% vs. prior forecast) following the -30.5% ytd decline in total debt. This will culminate in a PAT forecast of NGN2.5bn in ’21f (vs. prior estimate of -NGN855m). Changes to our forecasts over 21f-23f, indicate a new average of EPS of NGN2.19, up 141%. We now think that dividend payment may resume in ’21f due to the improved margins, with a forecasted DPS of 45kobo in ’21f.

    Following these adjustments, we upgrade our rating to Neutral (from Underperform) and raise our price target to NGN28.6 (from NGN16.8 previously) up 70% because we have raised our risk-free rate to 12.5% from 10% prior. At current levels, our price target implies limited potential upside. Year-to-date, Guinness shares have gained 52.6% vs. the ASI’s -2.4% decline.

    Volume/price growth lifted margins in Q3 ’21 (end-March)
    In Q3 ’21, Guinness delivered sales of NGN42.6bn (+53.9% y/y and +0.7% q/q), which was ahead of our forecast of NGN29.4bn. Gross margin contracted by -706bps to 32.5%, after cost of sales rose by 71.8% y/y (ahead of sales growth rate in Q3 ’21) to NGN28.8bn. Operating profit was higher by 136.6% y/y and 25.4% q/q to NGN3.9bn in Q3 ’21 while PAT rose significantly to NGN2.2bn. In line with our forecast, net interest expense fell by -52.4% y/y to NGN755mn (vs. our estimate of NGN774mn), which supported the company’s bottom-line.

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