Guinness Nigeria Plc Nigeria Equities Breweries November 22, 2013 Revenue growth remains a challenge Year-on-year decline in 1Q sales revenue is sustained for the second consecutive year. In its first quarter to September 2013, Guinness Nigeria recorded sales revenue of N22.41billion, c.5.4% lower than the N23.69billion posted in the same quarter of the previous year. Also, the sales revenue reported in the review quarter is below our estimate of N25.60billion by 0.9%. In our view, the decline in the top-line was a result of changes in the consumption pattern from premium brands to lower-tier brands, which is also a direct consequence of the economic situation in Nigeria. The decline in the first quarter sales revenue sustains the trend that started in the last financial year following a reversal of established trend of growth in 1Q sales numbers. (fig. 6) Lower decline in input costs restrains gross profit. The company s cost of sales (COS) of N11.95billion in the review quarter is 4.2% lower than the N12.48billion recorded in the corresponding period of 2012. The lower y/y decline in COS relative to the 5.4% decline in sales revenue resulted in a 6.8% decline in gross profit to N10.56billion in 1Q2013/14 relative to N11.21billion posted in 1Q2012/13. Consequently, the company recorded a COS/revenue ratio of 53.3%, which is ~60bps higher than the 52.7% recorded in the corresponding period of the preceding year. (fig. 10) Higher y/y administrative expenses impacts overall cost ratios. On the contrary, operating expenses (opex) increased marginally by 0.8% y/y to N8.03billion from N7.96billion in 1Q2012/13, this was a result of 14.1% y/y increase in administrative expenses to N2.48billion in 1Q2013/14 from N5.55billion last year. However, distribution cost decreased by 4.2% y/y in the same period. Hence, opex/revenue ratio moved up to 35.8% against 33.6% in 1Q2012/13. Overall, total cost declined by 2.2% to N19.98billion in the period from N20.44billion reported in the same period of the previous year. This resulted in total cost/revenue ratio of 89.2% in the review quarter compared with 86.3% in 1Q2012/13 (fig. 11). Moses Ojo mojo@dunnlorenmerrifield.com Price: - Current N241.98 * - Target N231.36 Recommendation: HOLD * As at Thursday November 21, 2013 Fig. 2: Stock data FYE Source: NSE, DLM Research June Price Mov t: YtD / 52wk -12.01%/+1.14% 52-week range N 230.00 - N 297.50 Average daily vol./val. Outstanding Shares Market Cap. (N mn) 370,243/N98.435mn 1,506mn 364,394 ($2,214mn) EPS, N 12mth trailing 7.84 DPS, N FY2012/13 7.00 FCFPS, N 3M 2013/14-0.32 Source: Bloomberg, Company s Annual Reports, DLM Research Fig. 3: Key ratios 3M 2013/14 3M 2012/13 Gross profit margin 46.66% 47.33% Net profit margin 7.77% 7.62% Equity multiplier 2.77x 2.91x Asset turnover 0.47x 0.59x Source: NSE, DLM Research Fig. 4: Valuations P/Sales 3.02x 2.97x 2.82x 2.70x P/E 31.22x 29.83x 27.65x 28.59x PEG N/A 4.68 3.51 N/A EV/EBITDA 12.61x 11.88xx 11.36x 10.78x P/B 8.05x 7.82x 7.58x 7.41x ROE 25.77% 26.23% 27.40% 25.92% ROA 9.80% 9.60% 9.96% 9.35% Div. Yield 2.80% 2.80% 3.20% 3.20% Fig. 5: GUINNESS vs. NSE, 52-wk movement November 22, 2013 Please read the Important Disclosures at the end of this report. www.dunnlorenmerrifield.com
Fig. 6: First quarter (1Q) sales revenue (N bn) Source: Bloomberg, DLM Research Fig. 7: Comparison of personnel cost & sales/employee (Guinness vs. Ind. Av.) Furthermore, our analysis revealed that Guinness Nigeria s personnel cost has been consistently above the industry average, though sales revenue also moved in the same pattern but lower than at a disproportionate level. Source: Bloomberg, DLM Research Furthermore, our analysis revealed that Guinness Nigeria s personnel cost has been consistently above the industry average, though sales revenue also moved in the same pattern but lower than at a disproportionate level (fig. 7). Tax credit fails to lift net profit. Guinness Nigeria s net profit for the period dropped by 3.5% to N1.74billion against the N1.81billion posted last year. This is regardless of the 85.3% y/y decline in tax provisions to N125million compared with N850million last year. This was a result of the tax credit of N386million granted the company in 2012 by the relevant tax authority, consequent to the pioneer status approved for Guinness Nigeria by the Nigerian Investment Promotion Commission (NIPC) following the company s recent extensive capacity expansion and new product development. November 22, 2013 2 www.dunnlorenmerrifield.com
Fig. 8: Quarterly sales revenue (N bn) Fig. 10: Quarterly COS/Sales revenue ratio Fig. 9: Annual sales revenue (N bn) Fig. 11: Quarterly Opex/Sales revenue ratio November 22, 2013 3 www.dunnlorenmerrifield.com
Fig. 12: Profit margins Consequently, we maintain our HOLD recommendation on the stock of Guinness Nigeria Plc. NSE, Company Financials, DLM Valuation methodology Our revised valuation put the target price of the stock of Guinness Nigeria at N231.36. We employed multiples of price/earnings, price/sales, price/book, and price/cash flow; we also used the DDM valuation methodology. Consequently, we maintain our HOLD recommendation on the stock of Guinness Nigeria Plc. Our revised valuation and forecast also took into consideration the challenging operating environment in the country, the level of strength of consumer spending, the macroeconomic factors, and the intensity of competition in the market. November 22, 2013 4 www.dunnlorenmerrifield.com
Fig. 13: Statement of Profit or Loss, N mn Sales revenue 122,463 126,749 133,720 139,337 Change 3.50% 5.50% 4.20% Cost of sales 66,385 68,445 72,343 76,635 Change 3.10% 5.70% 5.93% Gross profit 56,078 58,305 61,378 62,702 Change 3.97% 5.27% 2.16% Operating expenses 36,279 37,391 39,581 41,244 Change 3.07% 5.86% 4.20% Other operating income 815 782 837 643 Change -4.00% 7.00% -22.00% Operating profit 20,614 21,696 22,634 22,111 Change 5.25% 4.32% -2.31% Z Finance income 201 390 558 507 Change 94.00% 43.00% -9.00% Interest expenses 3,807 3,997 3,678 3,530 Change 5.00% -8.00% -4.00% Profit before tax 17,008 18,089 19,514 19,088 Change 6.35% 7.88% -2.18% Income tax 5,145 5,468 5,899 5,917 Change 6.28% 7.88% 0.31% Profit for the year 11,863 12,620 13,615 13,171 Change 6.38% 7.88% -3.26% Fig. 14: Statement of Financial Position, N mn Non-Current Assets Property, plant & equipment 88,112 100,007 106,008 111,308 Intangible assets 579 463 408 346 Other received. & prepayments 131 128 116 112 Total non-current assets 88,822 100,599 106,530 111,766 Current Assets Inventories 12,400 12,834 12,449 12,698 Trade & other receivables 16,649 14,984 14,535 13,517 Cash & cash equivalents 3,189 3,079 3,241 2,867 Total Current assets 32,238 30,897 30,225 29,082 Total assets 121,060 131,496 136,755 140,849 Equity 46,039 48,117 49,684 50,807 Non-Current Liabilities Deferred taxation 11,956 13,152 14,467 15,335 Employee benefits 2,994 2,246 2,470 2,766 Loans and borrowings 8,796 8,884 8,973 9,107 Total non-current fin. liab. 23,746 24,281 25,910 27,209 Current Liabilities Trade & other payables 30,433 30,737 31,352 31,979 Current tax liabilities 4,050 5,145 5,468 5,899 Dividend payable 4,487 10,542 12,048 12,048 Short-term borrowings 12,304 12,673 12,293 12,908 Total current liabilities 51,274 59,097 61,161 62,834 Total equity and liabilities 121,059 131,496 136,755 140,849 Fig. 16: DuPont Analysis Total assets turnover 2.23x 2.22x 2.28x 2.33x Operating profit margin 16.83% 17.12% 16.93% 15.80% Equity multiplier 2.63x 2.73x 2.75x 2.77x ROCE 37.59% 38.06% 38.59% 36.90% Fig. 17: Efficiency ratios Fixed assets turnover 1.38x 1.26x 1.26x 1.25x Current assets turnover 3.80x 4.10x 4.42x 4.79x Total assets turnover 1.01x 0.96x 0.98x 0.99x Inventory turnover 5.19x 5.42x 5.72x 6.09x Receivables turnover 18.09x 13.95x 14.65x 15.18x Payables turnover 3.33x 3.29x 3.43x 3.66x Days inventory outstanding 70 67 64 60 Days collection outstanding 20 26 25 24 Days payable outstanding 110 111 106 100 Operating cycle (days) -19-17 -18-16 Fig. 18: Liquidity ratios Working capital (N millions) -19,036-28,524-31,367-33,770 Current ratio 0.63 0.52 0.49 0.46 Quick ratio 0.39 0.30 0.29 0.26 Cash ratio 0.06 0.02 0.05 0.05 Fig. 19: Long-term solvency & stability ratios Gearing 27.4% 27.1% 26.1% 26.5% Equity multiplier 2.63x 2.73x 2.75x 2.77x Total debt-to-equity 162.95% 173.95% 176.12% 177.26% Total debt-to-assets 61.97% 63.65% 63.98% 63.94% Proprietary 38.03% 36.59% 36.33% 36.07% Interest coverage 5.41x 5.43x 6.15x 6.26x Cash coverage 6.38x 6.29x 6.43x 5.89x Fig. 20: Shareholders investment ratios FY2013 FY2014E FY2015F FY2015F EPS, N 7.88 8.38 9.04 8.75 DPS, N 7.00 7.00 8.00 8.00 Payout 88.86% 83.53% 88.49% 91.48% FCFPS, N 5.54 6.53 6.14 4.97 Source: Company s annual reports, DLM Research Fig. 15: Profitability & return Gross profit margin 45.79% 46.00% 45.90% 45.00% Operating profit margin 16.83% 17.12% 16.93% 15.80% Net profit margin 9.69% 9.96% 10.18% 9.45% ROCE 37.59% 38.06% 38.59% 36.90% ROE 25.77% 26.23% 27.40% 25.92% ROA 9.80% 9.60% 9.96% 9.35% Source: Company s annual reports, DLM Research November 22, 2013 5 www.dunnlorenmerrifield.com
Equity research methodology employed in this report Views documented in this equity research report stem from conclusions reached through the use of multiple valuation methodologies, industry-wide knowledge, company specific information and our near to medium term expectations of industry and company performance, as well as market outlook. Our forecasts are based on a combination of top down and bottom up analysis, alongside historical trends in industry and company financials. Where appropriate, we factored in available forecasts and business direction provided by company management. This equity research report qualifies as an initiation research report on the company whose stock has been analysed, hence the level and depth of details documented herein. Further updates on this company, or its stock, or both, will be communicated to investors via brief research notes or earnings-flash emails, as occasion demands. Our recommendation is slightly biased towards value investing. Therefore, our investment rank gauge a customized scale we use to judge how well a firm under coverage has performed is determined using major value parameters as well as relevant ratios and multiples computed with figures from the company s most recent financials. The investment rank or grade given to a company is an alphabet which falls in the set {A+, A, B, C+, C, D, E, F}, where Grade A+ means the company has done excellently well on all fronts that form the basis of our consideration, and has a strongly positive performance outlook. Grade A means the company s performance is of high quality, but can be made better. Outlook for the company is positive. Grade B means the company performed marginally above average, at least relative to its peers, but faltered on some fronts. Outlook is weakly positive. Grade C+ means the company s performance is exactly average; outlook is neither positive nor negative. Grades C and D indicate that dwindling performance is the company s fate at the current time. Outlook for the company is mildly negative. Grades E and F mean the company is headed for towards jeopardy, which might impair its ability to continue as a going concern. Outlook for the company in this case is alarmingly negative. The variables used to arrive at the company s investment rank cover a wide range of measures which characterize liquidity, operational efficiency, profitability, profitability margins, growth, economic profitability, gearing, relative valuation ratios, capital structure and management performance. Our investment recommendation is underpinned by the upside or downside potential of a stock under coverage. This potential is estimated by comparing the stock s current market price to its price target and fair value, on a percentage increase or decrease basis as summarized below: Deviation from current price Recommendation >30% STRONG BUY 10% to < 30% BUY -10% to < 10% HOLD <-10% SELL Source: Company Financials, DLM Research In our analysis, we distinguish between fair value and price target. Fair value is our opinion of the actual fundamental worth of a stock, irrespective of what the market thinks of the stock or what investors are willing to pay for it. Value investors purchase stocks way below their fair values, while income investors might purchase stocks at their fair values at the very maximum. Price target, on the other hand, is the estimated price we opine the stock will trade in the near to medium term. It is the price that, if realized, could result in the best investment returns, given prevailing market conditions. It gives an idea of the price other investors might be willing to pay for a stock regardless of its actual worth. We employ fair value, price target or both to determine a stock s upside or downside potential. A BUY recommendation directly means what it says; purchase the stock according to your wallet and appetite for risk. A SELL recommendation prompts investors to exit their positions in the stock, as the analyst believes the stock is not worth investors time and capital commitment. A HOLD recommendation generally tells investors to do nothing; if you have not bought the stock, do not buy it and if you have bought it, do not sell it. November 22, 2013 6 www.dunnlorenmerrifield.com
IMPORTANT DISCLOSURES. This research report has been prepared by the analyst(s), whose name(s) appear on the front page of this document, to provide background information about the issues which are the subject matter of this report. It is given for informational purposes only. Each analyst hereby certifies that with respect to the issues discussed herein, all the views expressed in this document are his or her own and reflect his or her personal views about any and all of such matters. These views are not necessarily held or shared by Dunn Loren Merrifield Limited or any of its affiliate companies ( DL Merrifield ). The analyst(s) views herein are expressed in good faith and every effort has been made to use reliable comprehensive information but no representation is made as to its accuracy or completeness. The opinions and information contained in this report are subject to change and neither the analysts nor DL Merrifield is under any obligation to notify you or make public any announcement with respect to such change. This report is produced independently of DL Merrifield and the recommendations (if any), forecasts, opinions, estimates, expectations and views contained herein are entirely those of the analysts. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the recommendations, forecasts, opinions, estimates, expectations and views contained herein are fair and reasonable, none of the analysts, DL Merrifield nor any of its directors, officers or employees has verified the contents hereof and accordingly, none of the analysts, DL Merrifield nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. With the exception of information regarding DL Merrifield, reports prepared by DL Merrifield analysts are based on public information. Facts and views presented in this report have not been reviewed and may not reflect information known to professionals on other DL Merrifield business areas including investment banking. This report does not provide individually tailored investment advice. Reports are prepared without regard to individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. It is recommended that investors independently evaluate particular investments and strategies. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances or objectives. Neither the analyst(s), DL Merrifield, any of its respective directors, officers nor employees accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each analyst and/or any person connected with any analyst may have acted upon or used the information herein contained, or the research or analysis on which it is based prior to its publication date. This document may not be relied upon by any of its recipients or any other person in making investment decisions. Each research analyst certifies that no part of his or her compensation was, or will be directly or indirectly related to the specific recommendations (if any), opinions, forecasts, estimates or views in this report. Analysts compensation is based upon activities and services intended to benefit clients of DL Merrifield. As with other employees of DL Merrifield, analysts compensation is impacted by the overall profitability of DL Merrifield, which includes revenues from all business areas of DL Merrifield. DL Merrifield does and seeks to do business with companies/governments covered in its research reports including market making, trading, risk arbitrage and investment banking. As result, investors should be aware that DL Merrifield may have a conflict of interest that could affect the objectivity of this report. DUNN LOREN MERRIFIELD Elephant House 214 Broad Street, November 22, 2013 7 www.dunnlorenmerrifield.com Lagos, Nigeria Tel: 234 1 462 2683-4 www.dunnlorenmerrifield.com