Analysis: Nestlé strong but exposed.


Years of massive contraction from competing brands, loss on re-measurement of foreign currency, amongst others, threaten the existence of Guinness Nigeria as its Q3’20 YoY results show a 97.2% drop in profits for the quarter from its Q3’19 results

Decades of Nigerians having big stout as a choice companion for their Friday night hangouts or wedding parties might have given the Guinness brand a strong name in the local alcohol industry, but the latest results show that it has done very little to retain their loyalty. The covid-19 pandemic has, in the past few weeks, presented a good enough reason for many across the world to drown at the bottom of alcohol bottles.

Republic National Distributing Company (RNDC), a major $20-billion-revenue wine and spirits distribution company, revealed that sales of spirits jumped by around 50% in the third week of March 2020. In the US, weekly retail sales of alcoholic beverages took a jump to 55% in the week ending March 21st according to Neilsen market research. Unfortunately, the makers of names like Smirnoff, Ciroc, and Black Label amongst others cannot say the same for themselves as the company’s witty strategic actions did not translate to real numbers.

READ MORE: Why we experienced profit declines- Guinness Nigeria

The Results

Guinness Nigeria Plc in its just-released Q3 2020 results had a drop in revenue of 17.6% from ₦33.6 billion in Q3 2019 to ₦27.6 billion in Q3 2020, with inflows from export revenue plunging by 78.6% from a year earlier. Its profit after tax expectedly followed in a worrisome 97.2% drop from ₦1.7 billion in Q3 2019 to ₦46.4 million in Q3 2020. The company also reported growth in marketing and distribution expenses, an addition of 9.5% YoY in the period being reviewed, possibly reflecting its increased advertising efforts in the sector.

Needless to say, the additional expense did not translate to revenue growth in the quarter being reviewed. Finance cost also increased by over 495% from ₦280 million in its Q1 2019 results to ₦1.7 billion in the quarter just ended. The difference as a result of the loss on the re-measurement of foreign currency balances from its Dollar-denominated intercompany loan.

READ MORE: Flourmills posts impressive Q3, sustains recovery in 2020 financial year

The Reason and denial

Just early this year, the CEO of the company Baker Magunda reeled out a number of causative factors affecting its results.

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“The profit margin has reduced significantly. The overall pricing on alcohol has declined over the last four years. The inflationary trend has moved from 11% to 12%. There has been an increase in tariffs. There is congestion at the ports, it costs the company over N700,000 to transport a container from the Apapa port to our factory at Ogba in Ikeja area of Lagos,” he added. 

Mr. Magunda may have some points but he missed out on the key issue. Younger Nigerians don’t just drink Guinness Stout anymore and the tens of millions spent on advertising the brand are also not yielding the desired results. There is a general apathy towards beer-drinking as can be seen from the results of other beer makers. So what should Guinness do?

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Reinvent the brand and marketing techniques. For some reason, the Guinness Milk brand is yet to be introduced into the Nigerian Market. To capture a younger generation with acquired taste in spirits and sweet mixers, it needs a beer that’s compatible with taste buds. It also needs to invest in celebrities who actually drink Guinness Stout and not just flash it on the screen like their followers cannot discern.

READ MORE: Real estate: Declining credit reflects underlying weakness 

Share Price

The markets also reflect the company’s troubled waters. Now at the bottom of its industry, its share price stood at ₦17.50 when markets closed on the 5th of May 2020. With a 52-week range of ₦17.50 and ₦52, its current share price is at an all-time low. Unfortunately, it is still slightly trading at a premium when you consider the negative headwinds.

The third quarter is usually one of Guinness’s better quarters. Last year it reported an EPS of 76 kobo compared to just 2 kobo this quarter. This year, we project earnings per share could fall to as low as N1 per share. On today’s all-time low price of N17.50, that’s a 17.5x price-earnings ratio.

Guinness’s current price-earnings ratio of 14.79x is already higher than the broader index. There are certainly cheaper stocks out there with better fundamentals. With its low price to book ratio, if investors believed there was a possibility for a rebound, the low P/B will have suggested that an opportunity existed. But it’s basically carrying legacy assets it can’t seem to sweat and for investors they rightly discount it. Guinness needs to return value to its shareholders.

READ ALSO: Faltering Guinness pays bumper dividends but Diageo rakes in billions in royalties

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A logical method to value Guinness will have to be via its dividends yield. Guinness has rewarded its shareholders with dividends consistently for years. Last year it paid out 73% of its profits as dividends achieving a dividend per share of N1.8 (N0.6 prior year).

Using today’s price its dividend yield is about 8% and will present unique values if prices trend lower to deliver a yield of 12%. Guinness has a robust retained earning and can fund further dividend payouts. Last year it paid out just N4 billion and has paid out N20.5 billion in dividends in the last 5 years.

Perhaps at that price, Guinness can start to appear tasty again.

 



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