Guinness Nigeria Plc RATING RATIONALE. Issuer Rating

Transcription

1 2015 Corporate Rating Review Report Guinness Nigeria Plc Issuer Rating A- A company with good financial condition and strong capacity to meet obligations as and when they fall due Outlook: Stable Issue Date: 11 March 2016 Expiry Date: 31 December 2016 Previous Rating: A- Industry: Brewery Outline Page Rationale 1 Company Profile 3 Financial Condition 5 Ownership, Mgt & Staff 10 Outlook 12 Financial Summary 14 Rating Definition 18 Analysts: Ikechukwu Iheagwam ikechukwuiheagwam@agusto.com Isaac Babatunde isaacbabatunde@agusto.com Agusto & Co. Limited UBA House (5th Floor) 57, Marina Lagos Nigeria RATING RATIONALE Agusto & Co. affirms the A- rating assigned to Guinness Nigeria Plc ( Guinness, GNPLC or the Company ). The rating assigned takes into cognisance Guinness good cash flow and improved leverage position as well as the overt support of the parent company (Diageo Plc) which controls 54.32% of the Company s equity. Nevertheless, the Company s rating is tempered by inadequate working capital and declining profitability. Guinness is one of the leading alcoholic and non-alcoholic beverage companies in Nigeria with the dominant market share in the stout segment. The Company s strong market share in the brewing industry in Nigeria is supported by a good brand name, technical & product quality assistance from its parent company and an improved Route To Market (RTM) strategy. Although Guinness turnover grew by 9% during the financial year ended 30 June 2015 (FYE 2015), the six months unaudited figures for the period ended 31 December 2015 showed a 10% decline in top line growth when compared with corresponding figures of We consider this a rating concern on account of the current weak macroeconomic environment and declining consumers effective disposable income. Despite the uptick in revenue growth during FYE 2015, higher operating and finance expenses eroded the gains thus resulting in a lower profit before tax margin of 9% (FYE 2014: 11%). However, GNPLC recorded a satisfactory return on equity of 22% (FYE 2014: 26%) which is above the average yield on treasury certificate in the same period. Subsequent to year end, there has been changes in senior management with a view to turn around the fortunes of the Company as well as improve cost management amidst the challenging operating environment. Though GNPLC expected gains from these initiatives, a review of the unaudited accounts for the six months ended 31 December 2015 showed a 65% decline in profit before tax when compared with corresponding figures of In our view, Guinness profitability is declining and requires improvement. In FYE 2015, Guinness optimized its stock of raw materials to meet manufacturing demand as opposed to yearly build-up of raw materials as well The copyright of this document is reserved by Agusto & Co. Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Agusto & Co. Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited.

2 as improved its receivable collection period to 38 days from 52 days in the prior year. These initiatives, amongst others resulted in a significant increase in the Company s operating cash flow (OCF) by 96% in the period under review. Going forward, the Company intends to implement the Just in Time (JIT) procurement and inventory system as well as collaborate with local producers for cheaper input materials with a view to sustain the improved cash flow position. Guinness enjoys favourable terms of trade with its customers and suppliers; hence the Company has over the past three years recorded sufficient spontaneous financing which was adequate to cover its working assets. Nonetheless, GNPLC s long term funds are inadequate to cover the long term assets; hence the Company recorded working capital deficiency which was financed with short term borrowing. Subsequent to year end, Guinness acquired the rights to distribute Diageo Plc s International Premium Spirits (IPS) brands as well as United Spirits Limited s McDowell in Nigeria. In addition, the Company plans to deepen its distribution and sales of value products across the Country. In our opinion, quick penetration of these products into the market will make Guinness more competitive in the spirits and value segment of the Industry. Guinness plans to expand its Aba Brewery plant to support its Orijin bitters product manufacture as well as upgrade the Aba Logistics center in the short to medium term. In addition, the Company also plans to expand infrastructure to cover the optimization of the warehouse in Ikeja. Agusto & Co. believes that the successful implementation of the expansion projects will drive growth in the medium term. We have attached a stable outlook to Guinness Nigeria Plc. Table 1: Strengths, Weaknesses and Challenges Strengths Well established and diverse brands Qualified management team Strong support from parent company - Diageo Plc Dominant leader in the stout market Good cash flow Weaknesses Inadequate working capital Declining profitability that requires improvement Challenges Weak operating environment Higher raw material cost as a result of devaluation of the local currency Stiff competition for products in the value segments Lower consumers effective disposable income Corporate Rating Review Report

3 COMPANY PROFILE Guinness Nigeria Plc was incorporated on 29 April 1950 as a trading company importing Guinness Stout from Dublin, under the name Guinness Nigeria Ltd. In 1963, the Company commenced production in Nigeria and was listed on the Nigerian Stock Exchange (NSE) in Guinness is part of Diageo Group, the world s leading premium drinks business, trading in over 180 countries around the world. Diageo has a wide array of beverages and alcoholic brands spanning across spirits, wines and beer categories including Johnnie Walker, Smirnoff, J&B, Baileys, Tanquery, Captain Morgan, Guinness Foreign Extra Stout, Beaulem Vineyard and Sterling Vineyard wines. Guinness Nigeria Plc is primarily engaged in the brewing, packaging and marketing of alcoholic and nonalcoholic beverages comprising Stout (Guinness Foreign Extra Stout and Guinness Extra Smooth), Lager (Harp, Satzenbrau Pilsner and Dubic), Malt (Malta Guinness, Malta Guinness Low Sugar, Dubic), Flavoured Alcoholic Beverages (Smirnoff Ice, Smirnoff Ice Double Black with Guarana, Snapp and Alvaro) and Spirits & Bitters (Master s choice, Orijin mixed drink and Orijin bitters). Guinness Nigeria Plc s head office is situated at 24, Oba Akran Avenue, Ikeja, while the Company s 3 brewery plants are located in Lagos State (Ogba Brewery), Edo State (Benin Brewery) and Abia State (Aba Brewery). The plants have a combined installed production capacity of 6 million hectolitres and estimated total capacity utilization rate was 74% during FYE Table 2: Product categorization Premium Category Mainstream Category Value Category Guinness Foreign Extra Stout Harp Lager beer Dubic lager, Dubic malt, Dubic Ale Guinness Extra Smooth Malta Guinness, Malta Guinness Low Sugar Satzenbrau Pilsner Master s choice Premium Spirits Orijin bitters, Orijin ready to drink Smirnoff Ice, Smirnoff Ice Double Black with Guarana Alvaro, Snapp Source: GNPLC The Company s products are sold through over 130 major distributors spread across Nigeria and one in the United Kingdom. Guinness main competitors in Nigeria are Nigerian Breweries Plc and SAB Miller. Diageo Plc is the Company s largest shareholder with a 54.32% equity holding through subsidiaries; Guinness Overseas Limited (46.48%) and Atalantaf Limited (7.84%). The balance of 45.68% is held by other individuals, associations and organizations. Guinness Nigeria Plc maintains Technical Services Agreements and Trademark and Control Agreements with companies in the Diageo Group for various brewed products. The Company also sources some raw materials, engineering spares and fixed assets from other companies within the Group Corporate Rating Review Report

4 Guinness has a thirteen member Board of Directors consisting of eleven non-executives and three executive directors. The Company s Board is headed by Mr. B. A. Savage as Chairman, while the management team is led by Mr. Peter Ndegwa, who was appointed subsequent to year end. During the financial year ended 30 June 2015, Mr. Seni Adetu, the erstwhile Managing Director resigned his appointment and was replaced by Mr. John O Keeffe, a non-executive director. In the same review period, Messers Andy Fennel and Lisa Nichols resigned from the Board while Mr. R.C. Plumridge and Mr. Cephas Afebuameh were appointed as executive directors, while Amb. S.T Dogonyaro was appointed as a non-executive director. In June 2015, Mr. S.G. Lauridsen was appointed to the Board as Managing Director to replace Mr. John O Keeffe, who was elevated to the role of President Diageo Africa and remains a non-executive director in the Company. In the same month Mr. S.G. Lauridsen resigned as Managing Director. Subsequent to year end, Ms. Ngozi Edozien and Dr. (Mrs.) Omobola Johnson were appointed to the board as non-executive directors, while Ms. Yvonne Ike resigned her appointment from the board as a non-executive director. Table 3 - Current Directors Mr. Babatunde Abayomi Savage Chairman Dr. Nick Blazquez Vice Chairman Mr. Peter Ndegwa Managing Director/Chief Executive Officer (appointed 4 September 2015) Mr. Cephas Afebuameh Executive Director Supply Chain Mr. Ronald Plumridge Executive Director Finance & Strategy Prof. J. O. Irukwu, SAN Non-executive Director Mr. Bismarck Jemide Rewane Non-executive Director Mrs. Zainab Abdurrahman Non-executive Director Mr. Rory John O Keeffe Non-executive Director Mr. Philip John Jenkins Non-executive Director Amb. S.T. Dogonyaro Non-executive Director Ms. Ngozi Edozien Non-executive Director Dr. (Mrs.) Omobola Johnson Non-executive Director Source: GNPLC 2015 annual report and investor presentation As at 30 June 2015, Guinness had total assets of billion (2014: billion). The Company generated turnover of 118 billion and recorded profit after tax of 7.8 billion during the financial year ended 30 June Guinness had an average staff strength of 1,371 (2014: 1,368 persons). Table 4 - Background Information Authorized Share Capital: Paid-up Capital: Shareholders Funds: Registered Office: Principal Business: Auditors: Source: GNPLC 2015 annual report 1.25 billion 752 million 48.3 billion The Ikeja Brewery, Oba Akran Avenue, Ikeja Brewery KPMG Professional Services Corporate Rating Review Report

5 FINANCIAL CONDITION ANALYSTS COMMENTS PROFITABILITY Guinness Nigeria Plc is a leading producer of alcoholic and non-alcoholic beverages in Nigeria. During the year ended 30 June 2015 (FYE 2015), Guinness recorded a top line growth of 9% to 118 billion. The key sales drivers were improved turnover performance of Orijin and Satzenbrau products as well as efficiency of the Guinness Route To Market distribution strategy. The Company s flagship products which includes Guinness Stout, Malta Guinness and Harp Lager beer accounted for over 80% of revenue during the review period. Similar to prior year, Nigeria remains the Company s primary geographical segment accounting for over 98% of sales. During the financial year ended 30 June 2015, the Company imported about 66% of its raw materials, while the balance was sourced locally. Despite the uncertainty in the foreign exchange market and the impact on the cost of imported raw materials, GNPLC maintained a cost of sales to turnover ratio of 53% in 2015, mainly due to the use of existing stock of raw materials and local sourcing of packaging materials. Subsequent to year end, Guinness ramped up local sourcing of raw materials to about 50% and plans to increase this to about 75% by 2017 through collaborations with local suppliers to provide sugar, ethanol, sorghum and other raw materials. As is common with large manufacturing concerns, GNPLC s marketing and distribution expenses accounted for two-thirds of operating expenses in FYE 2015, while administrative expenses mainly comprising personnel cost represented the balance. Operating expenses to revenue ratio increased marginally to 35% (FYE 2014: 33%) mainly on account of higher distribution and marketing cost incurred in the year under review. Thus, the Company recorded an operating profit margin of 13% (FYE 2014: 14%), which is within our expectation but lower than Nigerian Breweries operating profit margin of 21% for the year ended 31 December Guinness other income comprising operating lease income, interest income on bank deposits and other gains on foreign exchange transactions amounted to 1.4 billion during the FYE This resulted in a profit before interest and tax of 16.4 billion during the same period. Over the last three years, GNPLC s other income has averaged 1 billion per year and is primarily generated from an operating lease arrangement for property, plant and machinery and motor vehicles as well as interest earned on bank deposits. Agusto & Co. therefore believes that the Company s other income is sustainable giving the steady nature of the underlying transactions. Figure 1: Operating Profit Margin (OPM) & PBT to Sales 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% OPM PBT to Sales Corporate Rating Review Report

6 In the same period under review, the Company recorded an interest expense to revenue ratio of 4.7% (FYE 2014: 4.4%), which we consider high when compared with our benchmark. Although Guinness Nigeria Plc recorded a satisfactory profit before tax margin of 9.1% in FYE 2015 (FYE 2014: 10.7%), this level is lower than Nigerian Breweries (NB) 18.5% for the year ended 31 December Guinness recorded a return on assets (ROA) of 13% which is within our acceptable benchmark, although lower than NB s 18% for the financial year ended 31 December Figure 2: Return on Assets (ROA) 30% 28% 25% 25% 20% 18% 17% 15% 13% 12% 10% Due to the decline in profit before tax during the year, Guinness return on equity (ROE) declined to 22% (FYE 2014: 26%). Although GNPLC s ROE is lower than NB s ROE of 32%, it still provides significant premium above the average yield on government debt securities over the same period. 5% 0% Guinness NB Guinness unaudited accounts for the six months period ended 31 December 2015 showed a 10% decline in turnover to 49.8 billion from corresponding period in Although the Company made changes to its senior management team to drive growth as well as significant cost improvements in the areas of distribution and administration, GNPLC recorded a profit before tax of 1.65 billion representing a 65% decline from the comparable period of In our view, we expect to see further cost savings from the sourcing of raw materials locally as well as gains from deepening the distribution network and sales of innovative value products in the short to medium term. Overall, Guinness profitability is declining and requires improvement. Figure 3: Return on Equity (ROE) 60% 50% 40% 30% 20% 10% 0% 22% 32% 26% 36% 37% 55% Guinness NB Corporate Rating Review Report

7 Our Benchmark Guinness Nigeria Plc CASH FLOW Guinness credit policy entails an evaluation of customer s credit quality before a credit limit which represents maximum open amount is set. Nevertheless, the Company predominantly engages in cash sales and grants an average credit period of 21 to 49 days to major customers depending on the customer s size and stocking capacity. The Company also enjoys favourable terms of trade with its suppliers with an average trade creditor period of 60 days. During the financial year ended 30 June 2015, GNPLC s operating cash flow (OCF) spiked to 33.6 billion, representing a 96% increase from prior year. This growth was mainly spurred by optimization of stock of existing raw materials to meet manufacturing demand (as opposed to yearly buildup of raw materials due to the unfavourable foreign exchange regime) as well as marked improvement in receivable collection period to 38 days from 52 days in prior year. In the course of the year, debtors & prepayments declined by 42%, while stocks and trade debtors decreased by 24% and 21% respectively. Going forward, the Company plans to implement the Just in Time (JIT) procurement and inventory system to improve its cash flow position. The Company s OCF in FYE 2015 was sufficient to pay returns to providers of finance of 10.6 billion, comprising interest (53%) and dividend (47%). The net OCF was also sufficient to cover estimated mandatory capital expenditure and current portion of long term loans. Over the last three years ( ), Guinness recorded cumulative OCF of 74.9 billion, which was sufficient to cover payments to providers of finance amounting 42.1 billion. The three year cumulative net OCF of 32.8 billion was only sufficient to cover cumulative amortized estimated loan principal of 28.5 billion. The Company s OCF to sales ratio improved significantly to 28% during the financial year ended 30 June 2015 (FYE 2014: 16%). In the last three years ( ), Guinness OCF to sales ratio averaged 21% which is slightly higher than our benchmark. In our opinion, the Company s cash flow position is good and sustainable. Figure 4: OCF to Sales 30% 28% 25% 20% 20% 16% 15% 10% 5% 0% Corporate Rating Review Report

8 ( ' billion) Guinness Nigeria Plc FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL As at 30 June 2015, Guinness working assets stood at 26.8 billion, representing a 22% decrease from prior year. The main reasons for the reduction in working assets is the depletion of stocks (especially raw materials) as well as the reduction in trade & other debtors owing to improved receivables collection. Trade debtors account for 46% of working assets, while stocks and other debtors & prepayments represent 37% and 12% respectively of working assets as at FYE The Company s spontaneous financing which stood at 53.2 billion as at 30 June 2015 is mainly supported by a favourable trade credit terms of 60 days. Guinness spontaneous financing was sufficient to cover working assets, leaving a short term financing surplus of 26.4 billion as at the same date. Over the last three years, GNPLC has consistently recorded short term financing surpluses. We consider this to be good as it provides sufficient cover for the Company s working assets. As at 30 June 2015, Guinness long term assets stood at 89.6 billion. As at the same date, the Company s long term funds of 60.5 billion, comprising equity (79%) and long term borrowings (23%), were insufficient to finance its long term assets, leaving a long term financing need of 29.1 billion. Over the last three years ( ) GNPLC has persistently recorded long term financing need largely attributable to the ongoing capacity expansion programme and investment in the RTM distribution infrastructure. Similar to FYE 2014, Guinness short term financing surplus of 26.4 could not cover the long term financing need of 29.1 billion, hence the Company resulted to short term borrowings (overdraft and 180-days commercial paper issuance) to fund the working capital deficiency of 2.7 billion in FYE In our view, the Company s working capital is inadequate. Guinness long term financing need has been on the upward trajectory largely as a result of the ongoing plant expansion at the Aba brewery. GNPLC recorded overall working capital deficiencies over the last three years. Going forward, Guinness plans to access long term debt from the capital market to diversify its funding source and create a balance in the shortterm and long term funding composition. Figure 5: Working Capital Deficiency ( 'billion) (1.0) (2.0) (3.0) (4.0) (5.0) (6.0) (7.0) (8.0) (9.0) (10.0) (2.7) (1.5) (9.1) Agusto & Co believes that Guinness working capital deficiency will persist except there is fresh injection of long term funds in the form of equity or long tenured debt instruments Corporate Rating Review Report

9 LEVERAGE Guinness Nigeria Plc had total liabilities of 73.9 billion as at 30 June representing a 15% decline from prior year. The dip in total liabilities was due to repayment of unsecured commercial bank loans (used to fund plant expansion) during the year. As at the same date, non-interest bearing liabilities accounted for 72% of total liabilities, while interest bearing liabilities (IBL) represented the balance of 28%. As at 30 June 2015, GNPLC s non-interest bearing liabilities consisted largely of trade creditors (33%), deferred taxation (25%) and other creditors & accruals (17%). As at the same date, the Company s interest bearing debt (IBD) declined by 41% from prior year. GNPLC s IBD to equity ratio of 43% as at FYE 2015 (FYE 2014: 78%) was within our expectation. Figure 6: IBD as a % of Equity Figure 7: Interest expense as a % of Sales 90% 80% 70% 60% 50% 40% 30% 20% 10% 43% 5% 78% 15% 46% 8% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 4.7% 2.8% 4.4% 2.2% 3.4% 2.8% 0% Guinness NB 0.0% Guinness NB During the financial year ended 30 June 2015, the Company s interest expense to sales ratio pegged at a high 4.7% (FYE 2014: 4.4%). Nonetheless, Guinness operating cash flow is sufficient to cover interest expense 6 times, which in our opinion is satisfactory. As at 30 June 2015, the Company s total assets was funded by shareholders funds (40%) and total liabilities (60%) depicting satisfactory equity cushion. As at the same date, Guinness net debt (total debt less cash) as a percentage of average total assets at 56% is in line with our expectation. In our opinion, Guinness Nigeria Plc s leverage is satisfactory Corporate Rating Review Report

10 OWNERSHIP, MANAGEMENT & STAFF As at 30 June 2015, Guinness Nigeria Plc s had over 69,000 shareholders with Diageo Group Plc holding 54.32% of the Company s shares via its subsidiaries Guinness Overseas Limited and Atalantaf Limited. The remaining shares are held by other investors. Guinness has a thirteen member Board of Directors headed by Mr. B. A. Savage as Chairman, while Mr. Peter Ndegwa was appointed as the Managing Director in September During the financial year ended 30 June 2015, Messrs Seni Other investors 45.68% Atalantaf Limited 7.84% Guinness Overseas Limited 46.48% Adetu (the erstwhile Managing Director), Andy Fennel and Lisa Nichols resigned from the Board, while Mr. S.G. Lauridsen who was appointed to the Board as Managing Director in June 2015 also resigned in the same month. Amb. S.T. Dogonyaro was appointed as a non-executive director, while Mr. R.C. Plumridge and Mr. C. Afebuameh were appointed as executive directors during the review period. Subsequent to year end, Ms. Ngozi Edozien and Dr. (Mrs.) Omobola Johnson were appointed to the Board as non-executive directors, while Ms. Yvonne Ike resigned from the board as a non-executive director. Over the last two years, there has been series of changes to the senior management team, although all of which are from within the Diageo group. Guinness management also known as the Guinness Leadership Team (GLT) comprises 8 members including the Managing Director. Members of the GLT have broad experience within the Diageo group and the minimum relevant years of experience of the GLT members is about fifteen years. In our opinion, Guinness leadership team is qualified. In November 2014, Mr. Seni Adetu, the erstwhile Managing Director resigned his appointment and was replaced by Mr. John O Keeffe, a non-executive director. In June 2015, Mr. Soren Lauridsen was appointed as Managing Director to replace Mr. John O Keeffe who was elevated to the role of President, Diageo Africa. In the same month, Mr. Soren Lauridsen resigned his appointment with the Company. Subsequent to year end, Mr. Peter Ndegwa, a Kenyan, was appointed as the Managing Director to oversee the operations of the Company in Nigeria. Mr. Peter Ndegwa holds a Bachelor of Economics degree from University of Nairobi. He is a qualified accountant and alumnus of the London Business School, University of IESE and Strathmore University. Peter has over 10 years experience in East Africa and the United Kingdom with PricewaterhouseCoopers. He joined East African Breweries Limited, an integral part of Diageo Plc in 2004 as Strategy Director; he was later appointed Sales Director in 2006 and Group Finance Director in Prior to joining Guinness Nigera in September 2015, Peter was the Managing Director for Guinness Ghana Breweries Ltd Corporate Rating Review Report

11 Mr. Ronald Plumridge is an internationally experienced CFO. He began his career in the UK where he qualified as a Chartered Accountant with Ernst & Whinney (now EY), prior to joining SSL International, a UK organisation which subsequently became part of Reckitt Benckiser. He was with SSL International for 15 years in a variety of senior finance and CFO roles across Europe and the Americas. In 2004, he was appointed Commercial Director (CFO) at Guinness Nigeria Plc where he served as an executive director until 2007 when he became the CFO for Diageo Africa until he left Diageo in Ronald was appointed an Executive Director in charge of Finance and Strategy of Guinness Nigeria Plc with effect from 29 January Mr. Cephas Afebuameh is the Executive Director in charge of Supply Chain division at Guinness Nigeria Plc. He holds a Bachelor of Engineering degree from the Federal University of Agriculture, Makurdi and an MBA from the University of Benin. He has attended several management courses at the Lagos Business School among other renowned management schools. Cephas joined Guinness Nigeria Plc in 2002 and has worked in various capacities in the Benin Brewery, Lagos Brewery and East African Brewery, Kenya, where he was the operations director until he was appointed the Supply Chain Director in Other members of the Guinness Leadership team include: Sesan Sobowale Monica A. Peach Paul Costigan Gavin Pike Neil Comerford Corporate Relations Director Human Resources Director Commercial Director Marketing & Innovation Director General Manager, Spirits The recruitment of staff is guided by the Company s human resources policy, which promotes a transparent process of selecting the best candidate with the appropriate skills and experience, devoid of discrimination. In the year under review, Guinness staff strength comprised males (85%) and females (15%) from diverse backgrounds, ethnic origin and religion. The staff (non-management) of Guinness Nigeria Plc belongs to the National Union of Food and Beverages & Tobacco Employees, while the management staff belong to Food Beverages & Tabacco Senior Staff Association. The Company has a series of incentive and performance related packages which it uses to reward its employees periodically. Average staff cost per employee increased significantly by 30% to 9.2 million (FYE 2014: 6.9 million) through the activities of labour union negotiations. Revenue per staff increased by only 8% to 86.4 million in the same period. Notwithstanding, revenue per staff is 9.3 times the average staff cost per employee, which in our opinion is satisfactory Corporate Rating Review Report

12 OUTLOOK The effective demand in the brewery industry in Nigeria has slowed down over the last two years as a result of weak macroeconomic environment and declining consumers effective disposable income. In addition, scarce and expensive foreign currency resulting to higher cost of imported raw materials, persistent irregular power supply and the insecurity situation in some parts of the country are major challenges for the manufacturing industry generally and brewing, in particular. Competition to increase wallet share in the Industry continues to be intense as disposable income of consumers also declined in the review period. Nevertheless, Guinness intends to drive volume on value products and consolidate gains on the Orijin brands which appeal to large number of consumers. Subsequent to year end, Guinness Nigeria acquired the distribution rights to Diageo Plc s International Premium Spirits (IPS) brands and also took over the inventory of Diageo Brands Nigeria (DBN) to distribute and market the IPS brands in Nigeria. Going forward, we expect the Company s sales to be driven by products in the value category (Dubic and Satzenbrau), the newly acquired international premium spirits brands (McDowells) as well as dominant flagship products Guinness Extra Stout and Malta Guinness. The Company plans to expand spirit manufacture through installation of 10,000 bottles per hour (bph) Origin Bitters 20cl plant in Aba, creation of extra 1,500 bph packaging capability and Cube Extension by way of an additional packaging line of 2500 bph capacity. Guinness also plans expansion in infrastructure to cover the optimization of the warehouse in Ikeja and upgrade of the Aba Logistics center. Agusto & Co. believes that the successful implementation of the expansion projects will drive growth in the medium term and enable the Company compete favourably in the value segment of the Industry. In the year under review, the Company opened a 180-day unsecured commercial paper (CP) financing line of 10 billion to augment working capital and also refinance some portion of pricey unsecured commercial bank loans. As at 31 December 2015, the Company s outstanding interest bearing liabilities stood at 29.5 billion mainly driven by short term borrowings. Guinness plans to access long term debt from the capital market to diversify its funding source. In our opinion, the Company s working capital inadequacy which has persisted over the last three years will continue unless additional long term funding by way of equity or long tenured debt is injected into the business. Although Guinness was able to post a 9% top line growth during the financial year ended 30 June 2015, the unaudited accounts for the six months period ended 31 December 2015 showed a 10% decline in turnover from prior comparable period to peg at 49.8 billion. Despite the significant cost improvements in distribution and administration cost in the six months period ended 31 December 2015, GNPLC recorded a profit before tax of 1.65 billion representing a 65% decline from comparable period in Agusto & Co. believes that the cost efficiencies realised in H will be sustained as GNPLC s management intends to increase the volume of locally sourced raw materials and also drive down distribution cost through RTM strategy. Nevertheless, Agusto & Co. does not expect notable improvement in profitability in the short term due to contraction in economic activities and weak consumer disposable income. Agusto & Co. also expects the Company to continue to enjoy the support of Diageo Plc, given the proposed increase in parental equity holding to 75% from 54.32% previously held. Overall, we expect Corporate Rating Review Report

13 Guinness to continue to enjoy favourable terms of trade with customers, suppliers and related parties, which in turn will impact positively on its cash flow in the short to medium term. Based on the aforementioned, we have attached a stable outlook to Guinness Nigeria Plc Corporate Rating Review Report

14 FINANCIAL SUMMARY STATEMENT OF FINANCIAL POSITION AS AT 30-Jun Jun Jun-13 '000 '000 '000 ASSETS IDLE CASH 1,950, % 3,061, % 1,507, % MARKETABLE SECURITIES & TIME DEPOSITS 3,854, % 3,228, % 1,681, % CASH & EQUIVALENTS 5,804, % 6,290, % 3,189, % FX PURCHASED FOR IMPORTS ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS STOCKS 9,796, % 12,906, % 11,252, % TRADE DEBTORS 12,310, % 15,491, % 9,066, % DUE FROM RELATED PARTIES 1,582, % 396, % 930, % OTHER DEBTORS & PREPAYMENTS 3,100, % 5,388, % 6,782, % TOTAL TRADING ASSETS 26,790, % 34,183, % 28,031, % INVESTMENT PROPERTIES OTHER NON-CURRENT INVESTMENTS PROPERTY, PLANT & EQUIPMENT 87,754, % 90,683, % 88,112, % SPARE PARTS, RETURNABLE CONTAINERS, ETC 954, % 562, % 1,148, % GOODWILL, INTANGIBLES & OTHER L T ASSETS 942, % 608, % 578, % TOTAL LONG TERM ASSETS 89,651, % 91,854, % 89,839, % TOTAL ASSETS 122,246, % 132,328, % 121,060, % Growth -7.6% 9.3% 14.2% LIABILITIES & EQUITY SHORT TERM BORROWINGS 1,471, % 4,680, % 3,747, % CURRENT PORTION OF LONG TERM BORROWINGS 6,967, % 3,148, % 8,557, % LONG-TERM BORROWINGS 12,250, % 27,429, % 8,796, % TOTAL INTEREST BEARING LIABILITIES (TIBL) 20,690, % 35,259, % 21,100, % TRADE CREDITORS 17,669, % 20,404, % 20,899, % DUE TO RELATED PARTIES 4,886, % 3,966, % 3,282, % ADVANCE PAYMENTS AND DEPOSITS FROM CUSTOMERS OTHER CREDITORS AND ACCRUALS 8,926, % 6,353, % 6,250, % TAXATION PAYABLE 2,275, % 1,585, % 4,050, % DIVIDEND PAYABLE 3,903, % 4,110, % 4,486, % DEFERRED TAXATION 13,341, % 12,559, % 11,955, % OBLIGATIONS UNDER UNFUNDED PENSION SCHEMES 2,212, % 3,028, % 2,994, % MINORITY INTEREST REDEEMABLE PREFERENCE SHARES TOTAL NON-INTEREST BEARING LIABILITIES 53,215, % 52,007, % 53,920, % TOTAL LIABILITIES 73,905, % 87,266, % 75,021, % SHARE CAPITAL 752, % 752, % 752, % SHARE PREMIUM 8,961, % 8,961, % 8,961, % IRREDEEMABLE DEBENTURES REVALUATION SURPLUS OTHER NON-DISTRIBUTABLE RESERVES 18, % 18, % 18, % REVENUE RESERVE 38,608, % 35,328, % 36,306, % SHAREHOLDERS' EQUITY 48,341, % 45,061, % 46,039, % TOTAL LIABILITIES & EQUITY 122,246, % 132,328, % 121,060, % Corporate Rating Review Report

15 STATEMENT OF COMPREHENSIVE INCOME FOR THE 30-Jun Jun Jun-13 YEAR ENDED '000 '000 '000 TURNOVER 118,495, % 109,202, % 122,463, % COST OF SALES (62,604,362) -52.8% (57,868,906) -53.0% (66,385,104) -54.2% GROSS PROFIT 55,891, % 51,333, % 56,078, % OTHER OPERATING EXPENSES (40,946,728) -34.6% (35,944,182) -32.9% (35,960,323) -29.4% OPERATING PROFIT 14,944, % 15,389, % 20,118, % OTHER INCOME/(EXPENSES) 1,428, % 1,054, % 1,016, % PROFIT BEFORE INTEREST & TAXATION 16,372, % 16,443, % 21,134, % INTEREST EXPENSE (5,577,720) -4.7% (4,761,559) -4.4% (4,125,926) -3.4% PROFIT BEFORE TAXATION 10,795, % 11,681, % 17,008, % TAX (EXPENSE) BENEFIT (3,000,203) -2.5% (2,108,080) -1.9% (5,145,149) -4.2% PROFIT AFTER TAXATION 7,794, % 9,573, % 11,863, % NON-RECURRING ITEMS (NET OF TAX) MINORITY INTERESTS IN GROUP PAT PROFIT AFTER TAX & MINORITY INTERESTS 7,794, % 9,573, % 11,863, % DIVIDEND (4,818,842) -4.1% (10,541,217) -9.7% (11,799,404) -9.6% PROFIT RETAINED FOR THE YEAR 2,976, % (967,737) -0.9% 64, % SCRIP ISSUES OTHER APPROPRIATIONS/ ADJUSTMENTS 303,602 (9,657) (24,039) PROFIT RETAINED B/FWD 35,328,845 36,306,239 36,265,956 PROFIT RETAINED C/FWD 38,608,504 35,328,845 36,306, ADDITIONAL INFORMATION 30-Jun Jun Jun-13 Staff costs ( '000) 12,728,213 9,527,408 8,899,803 Average number of staff 1,371 1,368 1,433 Staff costs per employee ( '000) 9,284 6,964 6,211 Staff costs/turnover 10.7% 8.7% 7.3% Capital expenditure ( '000) 9,075,583 13,512,308 22,926,310 Depreciation expense - current year ( '000) 11,215,213 10,525,929 9,995,054 (Profit)/Loss on sale of assets ( '000) Number of 50 kobo shares in issue at year end 1,505,888 1,505,888 1,505,888 (' '000) Market value per share of 50 kobo (year end) 16,281 20,000 25,107 Market capitalisation ( '000) 309,708, ,650, ,190,160 Market/Book value multiple Auditors KPMG KPMG KPMG Opinion CLEAN CLEAN CLEAN Corporate Rating Review Report

16 CASH FLOW STATEMENT FOR Y/E 30-Jun Jun Jun-13 =N='000 =N='000 =N='000 OPERATING ACTIVITIES Profit after tax 7,794,899 9,573,480 11,863,726 ADJUSTMENTS Interest expense 5,577,720 4,761,559 4,125,926 Minority interests in Group PAT Depreciation 11,215,213 10,525,929 9,995,054 (Profit)/Loss on sale of assets Other non-cash items 303,602 (9,927) (67,495) Potential operating cash flow 24,891,434 24,851,041 25,917,211 INCREASE/(DECREASE) IN SPONTANEOUS FINANCING: Trade creditors (2,735,125) (495,161) 2,410,255 Due to related parties 920, , ,986 Advance payments and deposits from customers Other creditors & accruals 2,573, ,236 (149,139) Taxation payable 690,384 (2,465,036) (1,138,825) Deferred taxation 781, ,768 1,052,924 Obligations under unfunded pension schemes (815,729) 34, ,748 Minority interest Cash from (used by) spontaneous financing 1,415,186 (1,536,951) 3,202,949 (INCREASE)/DECREASE IN WORKING ASSETS: FX purchased for imports Advance payments and deposits to suppliers Stocks 3,110,132 (1,654,332) 703,272 Trade debtors 3,181,022 (6,425,855) (4,594,447) Due from related parties (1,186,067) 534,138 (697,413) Other debtors & prepayments 2,287,495 1,394,474 (417,689) Cash from (used by) working assets 7,392,582 (6,151,575) (5,006,277) CASH FROM (USED IN) OPERATING ACTIVITIES 33,699,202 17,162,515 24,113,883 RETURNS TO PROVIDERS OF FINANCING Interest paid (5,577,720) (4,761,559) (4,125,926) Dividend paid (5,026,312) (10,917,485) (11,765,371) CASH USED IN PROVIDING RETURNS ON FINANCING (10,604,032) (15,679,044) (15,891,297) OPERATING CASH FLOW AFTER PAYMENTS TO PROVIDERS OF FINANCING 23,095,170 1,483,471 8,222,586 NON-RECURRING ACTIVITIES Non-recurring items (net of tax) CASH FROM (USED IN) NON-RECURRING ACTIVITIES INVESTING ACTIVITIES Capital expenditure (9,075,583) (13,512,308) (22,926,310) Sale of assets 789, ,826 1,112,255 Purchase of other long term assets (net) (726,231) Sale of other long term assets (net) - 556, ,139 CASH FROM (USED IN) INVESTING ACTIVITIES (9,012,113) (12,540,393) (21,622,916) FINANCING ACTIVITIES Increase/(Decrease) in short term borrowings (3,208,463) 932,640 (1,181,331) Increase/(Decrease) in long term borrowings (11,360,553) 13,225,625 5,567,706 Proceeds of shares issued - - 7,431,040 CASH FROM (USED IN) FINANCING ACTIVITIES (14,569,016) 14,158,265 11,817,415 CHANGE IN CASH INC/(DEC) (485,959) 3,101,343 (1,582,915) OPENING CASH & MARKETABLE SECURITIES 6,290,582 3,189,239 4,772,154 CLOSING CASH & MARKETABLE SECURITIES 5,804,623 6,290,582 3,189, Corporate Rating Review Report

17 STATEMENT OF CASH FLOW FOR THE YEAR ENDED 30-Jun Jun Jun-13 '000 '000 '000 Operating cash flow (OCF) 33,699,202 17,162,515 24,113,883 Less: Returns to providers of finance (10,604,032) (15,679,044) (15,891,297) OCF after returns to providers of finance 23,095,170 1,483,471 8,222,586 Non-recurring items Free cash flow 23,095,170 1,483,471 8,222,586 Investing activities (9,012,113) (12,540,393) (21,622,916) Financing activities (14,569,016) 14,158,265 11,817,415 Change in cash (485,959) 3,101,343 (1,582,915) PROFITABILITY PBT as % of Turnover 9% 11% 14% Return on equity 23% 26% 40% Real sales growth -0.6% -17.6% -3.0% CASH FLOW Interest cover (times) Principal payback (years) WORKING CAPITAL Working capital need (days) Working capital deficiency (days) LEVERAGE Interest bearing debt to Equity 31% 64% 39% Total debt to Equity 141% 180% 156% Corporate Rating Review Report

18 RATING DEFINITIONS Aaa This is the highest rating category. It indicates a company with impeccable financial condition and overwhelming ability to meet obligations as and when they fall due. Aa This is a company that possesses very strong financial condition and very strong capacity to meet obligations as and when they fall due. However, the risk factors are somewhat higher than for Aaa obligors. A This is a company with good financial condition and strong capacity to repay obligations on a timely basis. Bbb This refers to companies with satisfactory financial condition and adequate capacity to meet obligations as and when they fall due. Bb This refers to companies with satisfactory financial condition but capacity to meet obligations as and when they fall due may be contingent upon refinancing. The company may have one or more major weakness (es). B This refers to a company that has weak financial condition and capacity to meet obligations in a timely manner is contingent on refinancing. C This refers to an obligor with very weak financial condition and weak capacity to meet obligations in a timely manner. D In default. Rating Category Modifiers A "+" (plus) or "-" (minus) sign may be assigned to ratings from Aa to C to reflect comparative position within the rating category. Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the - (minus) sign Corporate Rating Review Report

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