GUINNESS NIGERIA PLC Q1’22 EARNINGS RELEASE- A supersized start to the year

What shaped the past week? Global:

Global markets traded in a mixed manner this week, as investors took profit following weeks of gains across the global space. In the Asian region, the Hang Seng which had been on an impressive run of green weekly closes, ended this week deep in the red, down 2.87% w/w, while the South Korean Kospi and the Shanghai Stock exchange eased 1.18% w/w and 0.98% w/w respectively. On the macro front, Japan reported weaker consumer inflation in October, as CPI expanded 0.1% in the period while industrial activity ticked lower, down 5.4% m/m, according to the country’s Ministry of Economy, Trade, and Industry. Meanwhile, in business news China Evergrande Group is expected to make another payment on the bonds, avoiding default for a second time, this according to a report from the New York Times reported which cited one of the company’s bondholders. Moving to the European region, sentiment in the region was largely positive as major markets in the region closed higher, amidst weaker activity across the markets. The German Dax rose 0.35%, while the French CAC rose 0.75% w/w. With earnings season still in full swing, investors digested the latest quarterly earnings across the region, while they kept an eye on the latest macro data coming out the region. Santander and Deutsche Bank saw revenue increases in the third quarter. Meanwhile, Germany’s consumer confidence is set to improve in November, while September import prices rose. Finally, US markets traded higher this week, with investors favoring tech-stocks. The Nasdaq had risen 2.76% w/w at time of writing, while the S&P 500 was up 0.55% w/w.

Domestic Economy:

Earlier this week, President Buhari launched Nigeria’s central bank digital currency (CBDC) - the eNaira, which he asserted could bolster economic activity by $29 billion in ten years. The CBDC piqued the interest of Nigerians within 24 hours of its introduction, with 33 banks fully integrated into the network, around 200,000 wallets, and over 100,000 downloads. While we are optimistic about the e-Naira’s ability to enhance economic exchange, we also foresee a subtle competition with existing online payment service providers. However, the Bank noted that charges for transactions on the eNaira platform would be free for the first 90 days. While this could boost adoption in the short term, the introduction of charges thereafter could reduce the substitutionary impact of the eNaira on existing online banking and fintech platforms. In the medium term, however, the enablement of cheaper credit access, cheaper cross-border transfers, social transfer programs, and other unique features on the app could increase user features and facilitate widespread adoption.

Equities:

Equities: The local bourse ended the week in the green, rising 66bps w/w to close at 42036.60pts. The Oil and Gas sector was the best performer this week, rising 404bps w/w, due to gains observed in stocks like TOTAL (+1752bps w/w). Likewise, in the Banking space, buy-side activity in ETI (+1788bps w/w) helped fuel gains in the sector, as it rose 243bps w/w. Also, the consumer goods sector closed in the greens as gains in GUINESS (+2305bps w/w) and CADBURY (+1813bps w/w) propelled the sector higher. Finally, the Industrial goods sector posted moderate gains to close 49bps higher w/w, as gains in WAPCO (800bps w/w) weighed in on the sector.

Fixed Income:

Trading activity across the fixed income space was largely bullish this week, with yields declining across all three segments of the market. Starting in the OMO space, buy- side activity at the mid-long end of the market, saw average yields dip 14bps w/w. Similarly, in the NTB space, investors bought tenors across the midlong end of the curve, as a result yields across the space declined 5bps on average. Finally, in the bonds space players were majorly buyside driven, causing yields to moderate 2bps w/w

Currency:

The Naira remained stable at the I&E FX Window to close at N415.07

What will shape markets in the coming week?

Equity market: In the last few months, we have seen a consistent improvement in market performance, from 1.74% in August, to 2.55% in September, and market now posting 4.33% in October, which could be attributed to persistent demand in the banking space on the back of strong valuations, increased global oil prices boosting the oil and gas space, as well as impressive earnings results seen in the later part of the month, largely due to economy rebound. We foresee this positive sentiment trickling into the new week, as investors continue to cherry pick attractive counters across board. However, we do not rule profit taking in some names that have appreciated in recent sessions..

Next week, we foresee a tepid trading session in the NTB and OMO markets to open the week, as liquidity levels remains constrained. Meanwhile, we expect the bonds market to remain bullish in the nearterm.

Fixed Income: Currency:

We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.

Focus for the week

GUINNESS NIGERIA PLC Q1’22 EARNINGS RELEASEA supersized start to the year

In its recently released Q1’22 results, Guinness Nigeria reported a 58% y/y expansion in topline to N47.5 billion, surpassing our N39.1 billion estimate by 20% and substantially its best Q1 performance so far. What’s more, the company reported a PAT of N4.4 billion, from a Loss after Tax of N0.8 billion in Q1’21 reviving EPS from a loss per share of N0.38 in Q1’21 to N1.85 in Q1’22.

Why did Guinness do so well?

As at FY’21, the Lager business still contributed the largest to Revenue (37%), although Guinness’ de-prioritization on the segment led to a 39% y/y decline in Lager sales for that period. However, in line with the company’s strategy and further aided by the revival in social activities, the other segments, especially the Spirits segment, are picking up the slack, and showing sizeable volume growth. Furthermore, in its last earnings call held in August, management revealed that it had taken price increases (high single to double-digit increments) across brands in its Spirits (Mainstream and Premium), Malt and Guinness segments in the Q1’22 period, further muting the impact of excise duties on Sales. Given that Guinness’ second quarter is a seasonally strong quarter, volumes are expected to turn out more solid than in Q1. Also, we expect the stronger pricing implemented in Q1 to carry into the next year. Additionally, the company recently launched a dial-a-delivery service in Lagos, which delivers products directly to consumers

Robust margins expand profit

Cost of sales surged 40% y/y to N33.0 billion, steered by volume growth as well as inflationary and FX pressures on raw materials and imported products. Despite this, gross margin grew 9% y/y to 23% doubling gross profit y/y to N15.2 billion. Though lower than our expectation, OPEX rose 35% y/y to N9.0 billion. Meanwhile the impressive Revenue performance resulted in over 10x growth in EBIT from 0.5 billion in Q1’20. Thus, EBIT margin soared to 9%, the best performance since Q4’17. Whilst interest expense printed lower y/y at N170.5 million (Q1’21: N580.9 million) driven by loan repayments and in line with our expectations, the company reported further losses on foreign exchange balances amounting to N894.8 million. However, net finance expense declined 38% y/y. This brought PBT to N5.9 billion (Q1’21: N0.3 billion) and PAT to N4.0 billion, with net margin improving 12ppts y/y to 9%.

For the rest of the year, whilst we expect Guinness to build on its volume growth trajectory, we expect costs to follow suit amid lingering FX impacts on raw and packaging materials. As such, we cautiously estimate that gross margin will mildly decline by 1% y/y to 31%. This, in line with a projected OPEX of N36.3 billion (-1% y/y), yields an EBIT margin of 12%. Overall, we estimate a PAT of N11.8 billion, a TP of N54.37 and place a BUY recommendation on the stock.