The lull is the Nigerian economy has adversely impacted the beer market

By JULIUS ALAGBE

The brewery sector of the economy particularly suffered a devastating blow from the outbreak of coronavirus pandemic as social gathering and events were banned during the lockdown, which has left the industry struggling. This has been compounded by the aftermath of the lockdown with low purchasing power and COVID-19 induced adjustment to a household scale of preferences.

Customers are rationalizing, prioritizing, and scaling down expenses as inflation rate water down purchasing power, which has been on the rise for 11-months straights. Guinness Plc,  Nigeria’s second major brewer has seen its performance adversely affected by this present situation with earnings outlook looking grim.

Some 52 weeks ago, you can only buy GUINNESS Nigeria share at ₦41.40 but on Monday, it traded ₦13.90 with more than two-thirds of its value knocked off. What that means is that the brewer’s stock has lost more than 66% of its 52-week high, and it is currently trading 52-week low.

 Investors’ sentiment in the performance of the company has dropped significantly. This comes on a combination of weak fundamentals and, of course, weaker than usual earnings scorecards. Understandably, competition has been tough, and it is more likely to get tougher as brewers compete for customers’ wallets.

Recently, the board of directors notified the market regulators about material circumstances that will impact its 2020 results. The management signified that the adverse impact of the sharp contraction in economic activities and the knock-on effect of the COVID-19 lockdown took a toll on the on-trade segment of the business across all its markets.

As a result, production and revenues have thus been negatively affected. This is in line with 7.78% revenue drop projection made by Meristem Securities Limited. Also, Guinness Nigeria said it has carried out a comprehensive review of its asset base and made a strategic decision to impair a certain category of assets, which were generating sub-optimal returns.

“This is in line with the company’s long-term strategy of delivering value to shareholders”, the management stated.

 Due to a combination of the impact of COVID-19 and the asset impairment, GUINNESS Nigeria said it expects the profitability of the Company for the Financial Year to 30th June 2020 to be badly impacted.

 Following the disclosure, GUINNESS stated that its balance sheet remains strong, and this gives the Board the confidence that the Company has the right resources to continue to deliver the strategy.

Equity research analysts at Meristem Securities, however, have expressed mixed views on the earnings performance of the brewers, stating that its performance has been on a decline even before the pandemic. It was gathered that GUINNESS is the only brewer in Nigeria with portfolios across all segments of beer, malt, and spirits, making it a total beverage brand.

Its flagship products include Guinness Foreign Stout, Harp, Orijin, Smirnoff ice, Malta Guinness, and so on. In 2019, the firm launched Guinness Gold, a premium lager, reiterating their commitment to driving product innovation. Guinness has over 130 distributors spread across the country, and still plans to invest further in its distribution capabilities by increasing the number of its distributors to deepen its route to market.

The brewer’s top-line performance remains pressured, as revenue has expanded at a average annual growth rate of 2.10% between 2015 and 2019. Meristem explained that major growth drivers are Guinness Foreign Extra Stout, its non-alcoholic brands and more recently, its spirits brands. This contributes about 17% to the brewer’s revenue.

The 9-month result in 2020 (full year ends May), revenue weakened by 5.31% to ₦96.02 billion as against ₦101.40 billion in 9m of 2019. Export sales were down 78.60% year on year to ₦1.25 billion, from ₦5.83 billion, as the brewer grapples with slowing exports since the loss of malt sales to its sister company in Ghana.

The drop in export sales which analysts at Meristem said is set to continue, remains a threat to revenue. They said this is further worsened by the impact of COVID-19, which is expected to impact volumes negatively.

Meristem said the prevailing increase in excise duties on alcoholic beverages and the lagging revenue contribution – at 17% as against 25%-30% target set in 2019 – of the spirits segment should moderate revenue growth further in 2020.

“We project a 7.78% decline in revenue to ₦121.27 billion in 2020 from ₦131.50 billion in 2019”, Meristem stated.

Raw Material Cost

Meristem explained that Guinness’ cost to sales averaged 61.95% in the last five years, exceeding the industry average of 61.01%. Increases in prices of raw materials and consumables have led to a surge in cost of production especially on account of exchange rate cost. Consequently, cost to sales has trended higher, pegging at 67.92% in 9M of 2020.

“We expect costs to sales to tick higher within the range of 68%-70% due to the anticipated increase in costs of raw materials and finished goods especially as the firm imports its premium spirits”, Meristem remarked.

Analysts stressed that operating expenses on the other hand has moderated for two consecutive years due to management’s efforts to drive costs down. However, operating expenses expanded by 4.89% in 9m of 2020, pegging operating margin at 5.43% compared to 7.23% in the corresponding period.

With naira devaluation, the brewer’s foreign currency risk on debt earlier booked crystallised. GUINNESS recorded a loss on re-measurement of foreign currency balances – a consequence of the brewer’s exposure to dollar-denominated debt, and the adjustment to the prevailing exchange rate.

 Weakening Net Margin

Meristem stated that net profit has gone from a high of ₦11.86 billion in 2013 to ₦5.48 billion in 2019. The impact of a decline in revenue increased production costs, and accumulated finance costs got the brewer in a loss position in 2016; this prompted the firm to have a Rights issue in 2017, in a bid to deleverage and meet working capital needs.

Following the rights issue, Guinness showed some level of recovery as net profit climbed to ₦1.92 billion in 2017 and subsequently to ₦6.72 billion in 2018, analysts explained. However, cost pressures have in recent times threatened the firm’s margins and erased the gains previously achieved.

 In 9m of 2020, net profit slumped by 67.97% to ₦1.36 billion, settling net margin at 1.42%, from 4.19% in the previous period. Meristem said: “We forecast 2020 earnings of ₦2.31 billion which is a 57.85% decline from ₦5.48 billion recorded in 2019.

“This is on the back of our expectation of both a decline in revenue and elevated operating and finance costs”.

Paltry ROE

Meristem noted that GUINNESS return on equity has declined consistently in recent years, from a high of 16.13% in 2015 to 6.16% in 2019, averaging 6.49% over the period. Analysts held that major drag to ROE recently has been the declining net margin and increased financial leverage.

In 2019, ROE declined to 6.16% from 7.67% in 2018, dragged by a lower assets turnover of 0.82x from 0.93x in 2018, and a declining net margin of 4.17% compared with 4.70% in 2018 and increased financial leverage of 1.81x as against 1.75x in 2018.

 In 9m of 2020, analysts said trailing ROE ticked lower to 2.95%, further reflecting the meager earnings for the period. The focus of the company as guided by management is to drive the expansion of its spirits brand, build breadth in the upper mainstream and premium lager segments, as well as drive better margins in value lager.

Meristem said the spirits expansion plan although, supported by the firm’s consistent product innovation and its competitive advantage (being the major player in that space), still requires more traction as the required target remains unmet.

It also remains to see how the firm’s strategy of deepening its premium/upper mainstream lager segments plays out, due to the stiff competition and tussle for market share in that segment. This is further worsened by consumers’ persistent shift towards the value end of the segment which is cannibalizing on demand for the premium brands.

The drop in the firm’s export sales also remains a pressure point to top-line performance, dampening our overall projection for the company, analysts explained.