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Guinness Nigeria Plc shares still of good value despite decline in earnings

The 2023 fiscal year has not been too good for Guinness Nigeria Plc.

Its Q1 2023 results are grim and the latest results; in Q2, 2023 are grimmer. Is the brewing company returning to the 2020 earnings curve?

In retrospect, Guinness reported a net profit in 2017, 2018, and 2019 and a net loss in 2020 before returning to the path of profit in 2021 and 2022 FY.

  • In 2020, revenue decreased by 21% from N131.498 billion in 2019 to N104.37 billion in 2020, resulting in a net loss after tax of N12.57 billion.
  • A review of the 2020 FY financial statements showed that the negative earnings and resultant negative EPS and P/E ratio were on the back of not only a decline in revenue but a number of one-off accounting adjustments of about N13 billion and about 127% rise in net finance cost.

And looking at the company’s most recent results; Q1 and Q2 results show that its results are tilting toward the 2020 trajectory.

  • In Q1 2023 ended September 30, 2022, for example, the brewing company rode on a tough terrain as its operating costs profile worsened profit performance.
  • Earnings declined by about 32% to N2.745 billion in Q1 2023 from N4.03 billion in Q1 2022 as higher direct, administrative, and finance costs eclipsed the relatively better top-line growth.
  • And this downward trajectory worsened in Q2 2023 as earnings declined by 54% on-year to N4.025 billion from N8.820 billion reported a year ago.
  • The decline in profit after tax was due to higher finance net costs of N5.315 billion, which includes foreign exchange differences and loss on re-measurement of foreign currency balances.
  • Overall, they reported an EPS decline of 54% year-on-year to N1.84 in 6M 2023 compared to N4.03 a year earlier, which is just 37% of the company’s trailing twelve months EPS.

These are perhaps why the share price has been bearish and analysts have cut their estimates on the expectation that earnings will underperform subsequently:

  • The company’s share price came down to N69.30 as of the close of trading on December 31, 2022, from its peak price of N110.00 per share on May 5, 2022, prior to the 2021 FY earnings announcement and has not been able to revert to that price till date.
  • This year, the stock has been bearish with a -9.09% YTD return, trailing the NGXASI 4.3% YtD return as well as the company’s 2022 and 2021’s YtD gain of 78% and 105% YtD gain respectively.
  • And at a beta of 0.56, the stock is most likely to move less than the market, with a corresponding lower return potential.

Is it then good to buy Guinness Nigeria Plc shares? Looking at Guinness from a free cash flow perspective offers optimism.

  • Over the past 3 years (2020-2022), the company’s free cash flow compounded annual growth rate (CAGR) was 109.92%.
  • This means that free cash flow has grown from N1.927 billion in the 20220 FY to N17.925 billion in the 2022 FY. Currently, its trailing twelve months’ free cash flow is N8.01 billion.
  • And a positive FCF (last fiscal year) of N17.825 billion and FCF per share (annual) of 7.74, below 10, seem good, as it is trading at 7.74x its free cash flow.
  • From an EPS perspective, at a trailing twelve months EPS of N4.96, Guinness’s price-to-earnings ratio of 12.7x is trading below its average peer’s P/E ratio of 15.5x and the Global Beverage industry P/E ratio of 20x, which means Guinness’s stock is cheaper relative to its peer/industry and of good value, especially for value investors.
  • Guinness is a dividend-paying company.  Its current dividend yield of 11.33% based on the last reported dividend per share of N7.14 is notable.  The yield is higher than the bottom/top 25% of dividend payers in the NG market.

Can we expect growth from Guinness Nigeria?  The major downside risk seen impinging earnings growth is the foreign exchange losses due to Nigerian forex market volatility, with that mitigated, we expect growth.

  • In the 2022 FY that ended June 30, 2022, with a 94% decline in net finance cost, profit after tax was up 1,147% year-on-year to N15.561 billion.
  • Guinness’s earnings are expected to increase by 24% over the few years, above the savings rate of 12.4% and the NG market’s expected growth rate of 11.6%.  This should lead to more robust cash flows, feeding into a higher share value.





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