By Dipo Olowookere
One of the leading brewery companies in the country, Guinness Nigeria Plc, has been tipped to maintain its strong market position despite the various challenges it is facing at the moment.
Share price of the company at the Nigerian Stock Exchange (NSE) has plummeted lately and at the close of market on Monday, it was down by 30 kobo to sell at N18 per share.
Last week, a local rating agency, Global Credit Ratings (GCR), assigned national scale issuer ratings of A+(NG) and A1(NG) in the long term and short term respectively to Guinness Nigeria Plc, with the outlook stable.
In a statement obtained by Business Post, GCR said Guinness Nigeria, which controls about 22 percent of the market share in the country, should remain relevant in the space as a result of its “well-diversified portfolio of strong brands spanning lager, stout, spirits and non-alcoholic beverages.”
However, it warned that heightened competitive pressure, coupled with the tough operating environment will continue to affect the organisation.
Guinness Nigeria is a subsidiary of Diageo Plc, a global brewing company with operations in more than 180 countries.
With Nigeria being one of its major markets, Diageo is committed to providing technical, strategic and funding support to the firm, which experienced growth in revenue supported by an increase in sales volume and addition of some new local products to its portfolio.
“Like other industry players, Guinness Nigeria has experienced rising margin pressure, triggered by the depreciation of the Naira, which has impacted the prices of imported raw materials and other locally sourced inputs.
“Cost pressures are expected to worsen in the medium term given the uncertainties in the Nigerian foreign exchange market, coupled with inability to fully pass on additional costs to consumers.
“This notwithstanding, management is confident that earnings margins will stabilise due to the efficiency initiatives, centred on cost rigour and high margin products, rather than volumes,” GCR said.
It said the spike in debt at FY16 and FY17 saw net gearing rise above 80 percent and net debt to EBITDA over 190 percent, from a low of 31.4 percent and 56.4 percent at FY15.
However, gross debt has reduced substantially since FY18, following the conversions of intergroup loans to equity and part settlement of outstanding bank facilities. Thus, net debt to EBITDA moderated to 86.1 percent at end-March 2020 (3Q FY20), while net debt to equity registered below 18 percent, comparing favourably to its major peers,’ the rating firm said, adding that interest coverage has improved to exceed 4x in FY19.
Later in the year, Guinness Nigeria plans to establish a commercial paper issuance programme to refinance its maturing short-term borrowings, as well as diversify sources of funding. Even when gross debt has been fairly elevated, Guinness has reported moderate gearing metrics.
“Guinness evidences a favourable cash conversion cycle that facilitates strong cash generation and liquidity. Nevertheless, the uncertainties in the currency market has forced the company to increase inventory holding to ensure sufficient raw materials are readily available.
“Access to liquidity remains strong with over N16 billion in unutilised bank debt and $23.1 million of intercompany loans available,” the statement said.
GCR noted that it considers the brewing sector to evidence lower cyclicality, the COVID-19 crisis has elevated downside risks for the sector, given its reliance on hospitality and entertainment to drive volumes, saying it “expects Guinness Nigeria to maintain its strong market position due to its entrenched brands.”
“An upward rating movement is contingent on a sustained growth in revenue and firmer margins that translates into more stable profitability and cash flows.
“Conversely, a worse than anticipated disruption to demand from COVID-19 and/or severe weakness in the consumer market, could see earnings fall substantially.
“Furthermore, excessive debt utilisation would see credit protection deteriorate, leading to a rating downgrade,” it said.
