Guinness Nigeria Plc

GUINNESS NIGERIA PLC

Company Overview
About 2 years after independence, precisely 1962, history was made: the first bottle of Guinness Foreign Extra Stout was produced in Nigeria to the admiration of lovers of the brand across the country. This landmark signalled a major turning point for Nigeria’s economy and, indeed, Guinness Nigeria Limited which had been importing the product from Dublin since its inception on April 29, 1950. Since then, Nigerians have yet to turn down GUINNESS, making Nigeria the second largest market for Guinness Foreign Extra Stout in the world.

GUINNESS is a subsidiary of Diageo Plc, a famed brewer of long-running brands with strong presence in 180 markets across   the world. It boasts of leading brands such as Guinness Foreign Extra Stout, Malta Guinness, Harp Lager Beer, McDowell's, Smirnoff Ice and Origin Spirit Mixed Drink. Diageo Plc controls 58% of the company.

GUINNESS is, unarguably, the second largest brewer in Nigeria as it lags behind Nigerian Breweries by sales volume and total assets.

Product relaunches and quality improvement assisted by Diageo Group have helped it carve a niche for itself in the Nigerian market. Besides, management has been unrelenting, continuously innovating and creating brand awareness through robust promotional campaign and strong community presence. The company commissioned a PET production line in May 2018 and has begun production of Origin Zero, Dubic Malt and Malta Guinness in PET bottles. In addition, the company introduced Tappers and Royal Kingdom Lager in the year under consideration.

B.A. Savage chairs the Board of Directors. B. Magunda (Ugandan) was appointed Managing Director on July 1, 2018.  Magunda replaced P. Ndegwa who resigned on June 30, 2018. S.W. Njoroge joined the board in March, 2018 while Y. Ayeni (Mrs.) was appointed director in September, 2018.

Investment Thesis
GUINNESS acquired the right to market the brands of its parent company (Diageo Plc) such as Baileys, Gordons, Captain Morgan and Johnnie Walker in Nigeria. This has broadened its product portfolio and is expected to improve its earnings going forward.

Profit margins have declined in the past ten years owing to rising costs. Gross profit margin and operating profit margin lost 14.5% and 15.7% respectively in ten years. However, the company's performance has been improving since 2017. Profit Before Tax (PBT) and Profit After Tax (PAT) have gained 4.8% and 3.2% respectively year-on-year. Revenue increased by 13.6% and operating profit leapt by 36.2%. Earnings chart of Guinness Nigeria

Price to Sales and Price to Book Value are 1.5 and 2.4 times respectively. P/E at year end reached 31.9 times compared to 56 times of the previous year. The company expended NGN26 billion on marketing and distributing its products (2017:NGN25.3 billion).We are of the belief that it would reap its benefits if its marketing campaign does not lose its momentum.

Valuation
GUINNESS has an adjusted Earnings Power Value of NGN42.3. Its 15-year average P/E of 19.6 times its 15-year average Earnings Per Share (EPS) of NGN6.34 produces a price of NGN124.3. Its Book Value Per Share averaged NGN26.2.

The Two-Stage Dividend Discount Model puts a share of the company between NGN52.3 and NGN66. Using Discounted Cash Flow (DCF) Model, a value ranging from NGN74.5 to NGN84.1 is arrived at.

Financial Overview
Earnings growth has been unstable over the past seven years. Turnover appreciated by 6.5% while Profit After Tax (PAT) depreciated by 4.8% on a 3-Year CAGR basis. Marketing and distribution expenses jumped from NGN25.3 billion to NGN26 billion, representing a 2.9% hike.  Administrative expenses to turnover ratio declined by 4%, while marketing and distribution expenses to turnover ratio was 18.2% down from 20.1%. Operating profit margin gained 1.5 percentage points to close at 8.9%; Profit Before Tax (PBT) and PAT margin were 4.8% and 3.2% better than last year's figures. However, PBT and PAT margin both trails their 15-year averages of 15.1% and 10.6% respectively.Graph of returns of Guinness Nigeria Plc

RoE stood at 7.7% while RoA was 4.4%.  EPS improved by 139.8%. Shareholders' fund rose by 104% courtesy of a share premium of NGN38.5 billion.

Capital spending per share rose to NGN7.74 from NGN5.60 while the company could not produce positive free cash flow due to increased capital spending.

GUINNESS has paid down its debt; it is a low geared company. Total debts are 9.3% of shareholders' fund and 5.3% of total assets. Current ratio was 1.3 while acid test ratio was 0.8. We do not believe that the long-term solvency of GUINNESS is questionable.

Business Risk
GUINNESS remains a major player in its industry. The market is dominated by few players and Guinness Foreign Extra Stout, Malta Guinness and Harp Lager Beer are strong brands. Smirnoff Ice and Orijin are gaining prominence. Weak purchasing power of consumers and harsh operating environment have an adverse effect on sales revenue and profit margins. Increasing capital investment has to be matched by increasing sales so that the business stays viable.

Recommendation: Hold

Vital statistics of Guinness Nigeria