Guinness Nigeria’s Q2 2018 (end-Dec) results showed marked y/y growth on all key headline items. While sales grew by 12% y/y to N40.7bn. PBT and PAT advanced to N3.5bn and N2.1bn compared with pre-tax and after-tax losses both of which came in at -N2.4bn in the corresponding period of 2017 respectively. The strong growth in earnings was driven by a gross margin expansion of 601bps y/y to 33.5% and a 70% y/y reduction in interest expense. While we attribute the marked y/y expansion in gross margin to lower input costs due to the improvement in fx liquidity, we believe that the significant reduction in interest expense is likely related to the deleveraging of the firm’s balance sheet, with the proceeds of its N40bn rights issue.
On a sequential basis, sales grew by 36% q/q, largely driven by seasonally stronger sales in the final quarter of the year. Thanks also to the clean-up of the firm’s balance sheet, PBT and PAT accelerated by between 50x to 85x. We note that Guinness’ total debt (including overdrafts) declined by around 64% y/y following the rights issue.
Compared with our estimates, sales were broadly in line. Although, PBT beat our forecast by around 22%, the beat on the PAT line was weaker at 4% due to a higher effective tax rate of 40.3% compared with the 30% tax rate that we had in our model.
When annualised and adjusted for seasonality, Guinness Nigeria’s H1 2018 PBT tracks slightly behind consensus’ FY PBT forecast of N8.2bn. Consequently, we expect to see slight downward revisions to consensus PBT forecast and a Neutral reaction from the market.
Guinness’s shares have broadly tracked the index this year. The shares have returned 19% ytd compared with the 16% return delivered by the broad index.
We rate Guinness Nigeria shares Underperform. Our estimates are under review.
Guinness Nigeria Q2 2018 (end-Dec) results: actual vs. FBNQuest Research estimates (N millions)