THUR, 22 OCT, 2020-theGBJournal- GUINNESS published Q1-20 (end-Sep 2020) results after the close of the market yesterday, reporting a loss after tax increase of 127.2% y/y. Earnings were impacted by weaker gross margins and a higher tax expense.
Net revenue grew by 11.6% y/y in Q1-20, 4.3% and 5.2% above our estimates and consensus estimates, respectively when annualised.
This is the highest level of growth since Q3-18 and in our view, was underpinned by multiple mid-single-digit price increases implemented to cover for the VAT and excise duty hikes since December 2019. Sequentially, net revenue grew by 259.2% q/q, as volumes recovered following the easing of the COVID-19 restrictions in Nigeria and the gradual reopening of on-trade channels.
Gross profit (-619 bps) fell to 23.4% in Q1-20, a record low, and is indicative of the impact of surging inflation, and FX weakness and illiquidity on input costs – COGS grew 21.4% y/y, much faster than revenue. Notably, GUINNESS sources c.80% of its inputs locally.
Consequently, EBIT and EBITDA declined by 14.0% y/y and 18.6% y/y respectively, as the gross margin contraction offset the decline in operating expenses (-10.2%). Notably, the OPEX-to-sales ratio declined (-536bps) significantly to a seven-quarter low during the period, showing strong cost management and operational efficiency by the company.
Net finance cost fell by 14.1% y/y, as a 96.9% increase in finance income (GUINNESS recorded NGN384.44 million in FX gains) offset the 6.2% increase in finance costs. Consequently, the company’s loss before tax declined by 14.3% y/y however, following a NGN524.17 million tax charge during the period (Q1-19: no tax) loss after tax increased by 127.2% to NGN841.65 million.
Elsewhere, cash generation was strong as the company significantly shrank its working capital funding gap. Receivables, mostly from related parties, fell by NGN12.44 billion in the period, while inventory reduced by NGN5.62 billion.
What Cordros Research analysts said- ‘’The strong top-line growth is laudable. However, the prevailing FX issues and surging inflation continue to be a major drag on margins and earnings, despite increased operational efficiency by management. GUINNESS has lost as much as 56.7% in value this year and has slowly gained 23.1% since the start of August. In our view, the result may trigger profit-taking in the stock. Our estimates are under review.’’-With Cordros Research
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