FBNQuest Guinness Nigeria Q3 2017 (end-Mar) results review: Neutral rating maintained

Neutral rating maintained

  • Increase to earnings estimates and price target: Guinness Nigeria’s (Guinness) Q3 2017 (end-Mar) results were stronger than we expected. The results were driven mainly by stellar sales growth of 54% y/y and a gross margin expansion of about 1,000bps y/y; both sales and gross margins beat our forecasts. Consequently, we have increased our earnings estimates over the 2017-18E period significantly. However, we have increased our price target by only 5% to N72.5 because we have increased our risk free rate assumption by 100bps to 15.5%. Having already declined by -31.0% in 2016 (NSEASI: -6.2%), Guinness shares have shed -16.0% this year and have significantly underperformed the NSEASI (+5.8%). We believe the shares are moving into oversold territory. From current levels, the shares now show a 10% upside potential to our price target. We have maintained our Neutral rating on the stock.
  • Profit in Q3 2017 after four consecutive quarters of losses: Q3 sales of N30.4bn advanced by 54% y/y. PBT and PAT of N2.2bn and N2.1bn compare with pre-tax and post-tax losses of –N448m and -308m respectively reported in Q3 2016. Although operating expenses and net finance costs increased by 43% y/y and 207% y/y respectively, these were more than offset by the strong sales growth and a +988bp y/y gross margin expansion to 54.7% leading to the strong bottom line. On a sequential basis, Q3 sales were down -17% q/q. We attribute the slowdown to seasonality. Q3 is one of Guinness’ weaker quarters. The PBT and PAT compare with pre-tax and post-tax losses of –N2.5bn and –N2.4bn respectively reported in Q2 2017. Despite the q/q sales decline, a 24% q/q increase in net finance costs and a 25% q/q rise in operating expenses, the company’s bottom line was boosted (versus the losses reported in the preceding quarter) because of a +3,010bp q/q gross margin expansion.

 

  • Outlook: Cautiously optimistic: Guinness’ Q3 2017 results were positively surprising due to better-than-expected gross margins. Although interventions by the CBN may have eased some pressure in sourcing fx, we have not fully reflected the positive gross margins in our estimates. In addition, without management’s guidance on the sustainability of this line, we would like to see some consistency in the next few quarters before our view turns positive. However, as for the topline, we are more optimistic: we see sales growing by 26% y/y in 2017E. Our forecast for 2017E PBT implies a -28% y/y decline.

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