Vanguard News Nigeria

Guinness Nig Plc: Stock returns drop further, as investors protest bad results

… Management assures of a brighter future

By Emeka Anaeto, Economy Editor

ON the back of a weakened financials, the board of directors of Guinness Nigeria Plc had, Tuesday last week, recommended payment of a final dividend of N753 million, down by 84.4 per cent from N4.8 billion last year.

Based on the number of ordinary shares in issue on 30th of June 2016, the recommended gross dividend represents a dividend of 50k per share as against 320k last year.

Consequently, adverse market reaction brought Year-to-Date, YtD, returns on the stock down further from -17 per cent to -22.8 per cent as at yesterday.

What went wrong?
The full year results for the period ended June 30th, 2016 showed topline and bottomline in distress as post-tax losses climbed to about N2 billion bringing loss per share to all time high of 113 kobo.

Though this came in total variance with a profit before tax, PAT of N7.7 billion reported in the same period last year, the two years were totally different in macroeconomic environment measures. But the almost 14 per cent decline in topline did not justify the rather, massive regress in bottomline. Thus, something went massively wrong with the profitability of the multinational brewing giant during the year under review.

As can be seen through the recent financial history, Guinness has had to deal with declining profits since it’s stellar profit peak of N17.9 billion in 2011. We can just see three problems, a ‘triple C’ challenge: cost, competition and consumer weakenings.

Peter Ndegwa, MD, Guiness Plc

Cost over-run
As revenue dropped by 13.94 per cent, a corresponding (or near that) drop in cost would have made all the difference. But cost dropped by just 4.8 per cent. Rising finance cost of about N6.7 billion (2015 N4.8 billion) finally helped throw the company into its first loss in over a decade.

One would have expected the company to increase its product prices proportionate to inflationary and other cost rates, but this could not happen due to other constraining factors, the competition and consumer resistance.

Competition
Apart from the traditional first tier competition from the peer, Nigerian Breweries, Guinness have had to cope with a growing second tier competition in the increased influx of cheaper brands both from local producers and importers.

And in the face of worsening macroeconomic environment the second tier competition resonated in chopping off significant market share from both Guinness and Nigerian Breweries.

This situation didn’t just dawn on Guinness as it had worked during the financial year to reposition its product basket in response to the challenge.

Thus it acquired the rights to import and sell in Nigeria the international premium spirit (IPS) brands of Diageo, its parent company with effect from January 01, 2016.

The company now has distribution rights to Diageo brands in Nigeria including, Baileys, Smirnoff, Gordons, Ciroc and the Johnny Walker range.

Guinnes Nigeria has also acquired the rights to locally manufacture some of the most successful mainstream spirit brands in Nigeria that are part of the Diageo brands including McDowell’s whisky, Royal Challenge whisky, Smirnoff vodka and Gordon’s gin.

The management says “this exciting new portfolio of fantastic brands makes Guinness Nigeria the only total beverage alcoholic (TBA) business in Nigeria with the experience and capacity to cater to the needs of all consumer segments and deliver great value to its stakeholders”.

But industry experts said this reposition hardly solved the problem as they expected the company to address the challenge with options similar to the Origin brand initiative which, though diminished now, had a ground breaking impact in the market share, resonating in both topline and bottomline. The management only hope to make this magic happen with repositioning of older brands, Satzenbrau and Dubic.

Industry experts also observed that the repositioned product basket has not adequately addressed the issue of price competitiveness, especially emanating from second tier competition, which was essentially driven by consumer weaknesses.

Perhaps, it is against the backdrop of these that Guinness announced an investment of £12 million into its Benin City, Edo State, Nigeria, plant for the manufacture of mainstream spirits, locally produced drinks that are offered at a lower price point when compared to imported ones.

Consumer purchasing power
And this takes us to the third challenge, the decline in purchasing power of Nigerian consumers in low and average segment which formed the bulk of the market.

Aside the switch to cheaper brands the consumer weaknesses also resonated in overall drop in total patronage across all brands as consumers re-allocate resources to more basic needs.

Guinness financials
The net impact of these developments is seen in the just announced result of Guinness.

The income statement show inability to reduce cost of goods sold, selling, general and administrative expenses and interest paid, in proportion to sales. Consequently, gross margin at 41 per cent, net profit margin at negative of -1.98 per cent and operating margin subdued to 4.33 per cent, all combined to throw net income into negative territory of -N2.02 billion.

Thus, all returns went negative. Return on assets, return on equity and return on investment were -1.56%, -4.48% and -2.76% respectively. The company’s cash reserves have fallen by N1.43 billion as cash flow from financing totaled N8.43 billion or 8.26% of revenue.

The other side of the company’s cost over-run is seen in its debt-to-total capital ratio which skyrocketed to 48.46%, as against the previous year’s 25.34%, indicating a highly geared operation.

 

Management pulse

Presenting these results to the Nigerian Stock Exchange last week, Babatunde Savage, Chairman, Guinness Nigeria Plc, stated: “Despite the continuing deterioration in the operating environment, the Board is pleased to note that our core brands of Guinness FES and Malta Guinness are in growth and we now have a strong participation in the growing value segment of the market through Satzenbrau and Dubic.

“We have also started to see early signs that our decisions to acquire the distribution rights in Nigeria to the International Premium Spirits brands of Diageo and to invest in local capacity for spirits manufacturing are the right ones for the business.”

Peter Ndegwa, Managing Director/Chief Executive Officer, Guinness Nigeria Plc, said that the combination of a tough economic environment and challenges with Naira devaluation had a significant impact on the company’s overall performance.

He stated: “Our performance this year was impacted by two major factors, one being the very tough economic challenges around consumer spending, driving consumer preferences towards value brands across the sector, the other, and more significant factor being the effect of FX policy and the devaluation of the Naira.

“When you take out the impact of the latter, our underlying performance for the year was broadly in line with the prior year in spite of the pressure on the top line.”

However, he informed that, “Following the acquisition of distribution rights for IPS and USL brands, we are the first and only total beverage alcohol (TBA) business in Nigeria offering the widest range of drinks – from adult premium non-alcoholic drinks (APNADS) to lager, stout, mainstream spirits and IPS”.

“Additionally, innovation continues to be a strong platform for us, we have a highly successful track record with about 60 percent of our beer and non-alcoholic business now comprised of innovation products launched in the past four years.

Against the backdrop of foreign exchange induced cost over-run, the company said it has received a $95 million loan from mother body, Diageo, to help it cope with dollar shortages in Nigeria.

Chief finance officer, Ronald Plumridge, said the company’s foreign currency needs were much bigger than it was able to source locally and from its exports and so Diageo had stepped in with the loan. The loan was priced at 3-month London Inter-bank Rate plus 4.75 percent.

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