In its recently released quarterly result, Guinness Nigeria Plc’s (the Company) revenue increased by 6% to N65.60bn in Q2 2023 from N61.66bn in Q2 2022. The management attributed the revenue growth to price increases taken across all product categories. Although volume declined in the reporting period, the price increases taken were enough to offset the volume decline.
We attribute the volume decline to weak consumer demand as inflationary pressure continued to erode consumer purchasing power. In addition, the company disclosed that it exited from the PET branding in the Malt category, and that significantly impacted volumes. According to the Management, the decision to halt the PET branding was led by the Company’s strategic priorities as regards its portfolio choice.
Cost of sales increased marginally by 3%, and gross profit grew to N24.05bn from N21.27bn in the comparable period of 2022, recording a 13% increase and effectively, gross margins increased by 200 basis points to 37%.
Operating expenses increased by 16% – administrative expense increased by 69%, while marketing and distribution expense increased by 2%. Finance cost also worsened to N4.25bn in Q2 2023 from N187.00mn in Q2 2022 – an increase which greatly impacted the Company’s profitability.
The management attributed the increase in costs to the macroeconomic challenges the country faced in the reporting period. The major of which was the illiquidity in the foreign exchange market that resulted in currency depreciation. In addition, the management highlighted that some suppliers gave prices based on the parallel market rate which averaged N761.13 in the reporting period (I&E: N442.42). The flooding (which affected logistics), and the insecurity in the eastern part of the country were also pain points for the company’s profitability.
Consequently, profit after tax slumped by 73% to N1.28bn from N4.77bn in Q2 2022.
Although the management stated that it aims to grow revenues (and margins) via sustained price increases, we expect volumes to decline due to heightened inflationary pressures that would erode consumer purchasing power. Therefore, we forecast weak revenue growth in H2 2023.
We also expect dampened profitability in H2 2023 due to persistent cost pressures induced by currency depreciation, and hike in energy costs. To this effect, we revise our fair value to N68.81 (previous: N80.55).
Based on our fair value estimate, we recommend a HOLD for the stock, with a total return of 15% – consisting of a 9% price return and a 6% dividend yield.
Please follow the link “Guinness Nigeria Plc Q2 2023 Earnings Update – Another Bottomline Decline as Macro Pressures Stiffen” to view the whole report.
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