Modupe Gbadeyanka
By Modupe Gbadeyanka
A new report by Cordros Captial Ltd has revealed that the stock of Guinness Nigeria Plc will see further decline.
Since Guinness released its disappointing first half 2016/17 result on January 26, its share price has, justifiably, fallen by 2.3 percent.
The selloffs notwithstanding, the new report said it anticipates further decline (13%) in the share price from current level (N65.00), driven by slower-than-expected performance recovery over the near term, and importantly, the potential dilutive impact of the proposed capital raising exercise. The report further said hopes that Guinness will overturn the current loss after tax in the second half (January-June 2017) remains to be seen and forecasts loss to expand to N5.1 billion by year end on persistent cost pressure.
The vulnerability of costs to foreign exchange fluctuations remains elevated, as FX scarcity is expected to persist amid tamer supply outlook.
Although flexibility over the adjustment of unit prices has slightly improved (across the FMCG universe) with the reality of local and imported inflation, we think the impact on Guinness’ margins will be muted by higher risk of negative mix, considering the severity of the weakened aggregate purchasing power.
Brewery products do not belong to the category of consumer goods (food and staples) which have lesser price elasticity even in Nigeria’s current episode of depressed disposable income.
The Board recently received shareholder approval for a capital raise of N40 billion via rights issue and it expects that the rights will be offered to shareholders at N60 per share, thus potentially increasing the shares outstanding by 44 percent assuming all current shareholders exercise their rights.
The dilutive impact of the new issues was also taken into consideration in arriving at our new target price of N56.72 (previously N78.24).
On the positive, the deployment of the rights proceeds to the settlement of outstanding debt (at 137% of equity in H1-16/17) should have visible impact on profitability by taming finance charges (at 5-year CAGR of 70% by end-2016FY).
Worthy of note in the latest Q2-16/17 result was the 29.8% y/y and 58.4% q/q growth in revenue, achieved through a combination of increased sales from exports, spirits expansion, and continued resilience of the value beer category. We think these factors will remain important drivers of growth
(+24% in 2017FY), more so, given the renewed commitment to route-toconsumers (a major weak spot in GUINNESS’ operation).
Full analysis here: file:///C:/Users/USER/Desktop/Photos/Guinness-Nig-Q2-2017.pdf
