By Adedayo Ayeni.
WED, FEBRUARY 21 2018-theG&BJournal-Guinness Nigeria remains on the path to recovery, in our view, with its beer business seeing strong volume growth, despite a challenging consumer environment. While management highlights the improvement in headline macroeconomic numbers, this is yet to trickle down to the consumer. We see 1) cost pressures from still-high inflation; 2) intensifying competition; and 3) and the inability to fully pass on costs to consumers, keeping cash margins flat in the next 18 months vs the sharp improvement in cash margins indicated by Thomson Reuters consensus. As a result, we cut our FY19-20 EBITDA forecasts by 9.6% on average. Our downward revisions to EPS, EBITDA and FCF have driven a cut to our Guinness TP of 15.7% to NGN103.3/share. Maintain HOLD rating.
Lifting sales marginally but cautious on near-term margins
Following 1H18 results, our recent trip to Lagos to gauge consumer sentiment on the ground, and our beer distributor visits, we cut our near-term margin estimates for Guinness. In the light of management’s guidance on its c. 9-11% internal target of advertising and promotion as a proportion of net sales value and view that inflation remains a challenge, we cut our FY18 EBITDA forecast by 2.4% and by 15.8% in FY19. We now forecast a lower EBITDA margin of 15.9% in FY18 and further deterioration in cash margins to 15.0% in FY19. The major driver of our lower EBITDA margin expectations in FY19 is intense competition which will limit price pass-through on beer to sub-inflation levels. Our net profit forecasts are now 6.8% and 24.4% lower in FY18 and FY20, respectively. We expect EPS to grow by 125.7% in FY18 and 60.8% in FY19 with materially lower net finance cost boosting growth in FY18. Following the completion of the rights issue in FY17, we forecast significantly lower financial leverage of 1.7x in FY18 vs 3.4x in FY17.
FCF – still strong on modest capex
While management has not provided near-term capex guidance, we see no major near-term capex driver, especially in the beer segment. In the 1H18 results call, management highlighted that despite improving utilisation on strong growth (+17% in 1H18), its beer capacity utilisation is still below 70% of overall packaging and brewing capacity. Given that it will be investing in other packaging formats such as PET and others for spirits, we expect 2H18 capex to be higher than 1H18. We therefore raise our capex intensity forecast to 4.3% in FY18, but highlight that capex/sales is still lower than the 6.7% intensity seen in FY17 and the average of 7.9% in FY15-17. Further out, we forecast average capex efficiency of 3.9% in FY19-23. Despite a moderate capex outlook, a downward revision to our FY19-20 EBITDA forecasts has resulted in a c. 16% cut to our FCF forecast in FY19-20.
Valuation – closer to current price on forward P/E
On our estimates, Guinness trades on FY18 P/E and EV/EBITDA of 36.4x and 10.3x, which we view as expensive vs the SSA peer averages of 23.0x and 10.1x, respectively. However, strong EPS growth in FY19E should help drive its two-year forward P/E down to 22.6x with EV/EBITDA down to 9.5x. While still more expensive than the peer average on forward P/E in FY19E, two-year compounded EPS growth of 111.4% in FY19-20E helps drive its FY20E P/E down to 17.2x, on our numbers.
If you have any questions or comments regarding this report, please contact Adedayo Ayeni,Renaissance Capital
