Q3 surprised positively; upgrading to Neutral
· Increase to earnings estimates and price target: Guinness Nigeria’s (Guinness) Q3 2018 (end-Mar) results were stronger than we expected. Although sales were in line, PBT and PAT surprised positively. As such, we have increased our earnings estimates by 18% on average over the 2018-19E period and our price target by 13% to N103.5. Although we have reduced the risk free rate assumption driving our DCF valuation by 100bps to 13%, the positive impact on our valuation from this reduction is moderated by an increase in our beta assumption from 0.55 to 0.7. Guinness shares have gained +10.1% this year and have outperformed the broad index (+7.8% slightly. The shares are trading on a 2018E P/E multiple of 23.2x for EPS growth of 35.3% y/y in 2019E. From current levels, the shares are trading in line with our fair value estimate of N103.5. As such, we are upgrading the stock to Neutral from Underperform.
· Q3 PBT advanced by 98% y/y: Q3 2018 sales grew by 15% y/y to N34.9bn. Although gross margins contracted by -922bps y/y to 33.2%, this was not strong enough to offset the strong sales growth, a -12% y/y decline in operating expenses and a net interest income of N318m versus a net interest expense of –N2.1bn recorded in the corresponding quarter of 2017, leading to PBT growing faster, by 98% y/y to N4.4bn. Owing to a 2,811bp y/y expansion in the tax rate, PAT growth slowed to 40% y/y to N3.0bn. On a sequential basis, sales declined by -14% q/q, which we attribute to seasonality. Despite the sales decline and a -32bp q/q gross margin contraction, PBT grew by 24% q/q due to a 21% q/q decline in operating expenses and the net interest income figure recorded (versus a net interest expense of –N498m in the preceding quarter).
· Outlook: Our outlook for the sector remains slightly positive. We also expect the company’s focus on the spirits business to bode well, even if modestly. However, we believe the major downside risk to the brewers is the upward review of excise duties proposed by the federal government. For 2018E, we see sales growing by 16% y/y. In addition, the inflow of funds from the rights issue and the resulting reduction in the company’s debt burden continues to positively impact the P&L. Consequently, we forecast strong PBT growth of 358% y/y in 2018E.