Nigeria | Equity Research | Consumer Goods | Company Update June 20, 2024

BLOOMBERG: GUINNESS NL

GUINNESS NIGERIA PLC BUY

Target Price: 85.69

Strategic acquisition to unlock upside potential
Ref Price: 66.25

In its 9M'23/24 results, Guinness Nigeria Plc (GUINNESS) recorded a Tomiwa Adeniji
27.2% YoY revenue growth and a pre-tax loss of N60.4 billion. Although [email protected]
the company has maintained a strong top line despite the challenging
macroeconomic conditions, foreign exchange losses continue to Oluwakemi Abiodun
pressure its bottom line. Nevertheless, we update our Target Price (TP) [email protected]
to N85.69 per share (vs N73.56 previously) and maintain a BUY rating
as the company continues to optimise revenue growth through a Adebayo Adebanjo, ACA
margin-accretive selective portfolio play. In addition, we like GUINNESS' [email protected]
relatively effective management of foreign exchange exposures via
increased local inputs sourcing and FX debt repayments.
Market Data GUINNESS
The potential synergies from the plan to transfer Diageo's majority
stake to Tolaram group are also likely to expand addressable markets Market Cap (N’bn) 131.97

and shore up the top line. Last close price (N) 66.25
52-week high/low price (N) 80.00/42.05
Tolaram synergy & product portfolio "mix play" to drive turnover
Avg 3M daily volume (mn) 1.32
According to management, the recent revenue growth (9M'23/24:
+27.7% YoY) reflected the optimisation of a good "mix play" of its
1 year price performance (rebased)
portfolio, which revolved around pushing product categories that have
a more resilient consumer base. In addition, the company has
efficiently transferred a portion of its cost burden to customers,
demonstrated by an average price increase of c.10.0% - 15.0% across
all product categories. These initiatives have also helped cushion the
effect of lower volumes in less resilient product categories. Elsewhere,
the company was able to support revenue by growing exports
(9M'23/24: +48.9% YoY).

For FY'23/24, we forecast a 27.0% YoY increase in topline to N291.4

billion as the company builds on the strategies mentioned above. Going Source: Bloomberg, CardinalStone Research
into FY'24/25, we expect the traction in the topline to be maintained,
aided by the recent acquisition of a majority stake by Tolaram group.
Precisely, GUINNESS could leverage Tolaram's strong distribution
networks, marketing channels, and supply chain efficiencies to boost
revenue accretion across its product portfolio. We also expect
GUINNESS to continue to enjoy brand superiority and loyalty, with
Diageo set to continue producing the brands under a licensing
agreement with Tolaram. However, the effect of rising inflation on
consumer wallets and intense rivalry for market share pose a downside
risk.

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Figure 1: Revenue projected to reach N291.1 billion in FY’23/24 Figure 2: Slight margin contraction expected in FY’23/24

Source: Company Financials, CardinalStone Research

Cost drags and FX exposures to pressure margins

Figure 3: Price changes across select products
We expect cost pressures to remain elevated, driven by the impact of rising
inflation on locally sourced raw materials (e.g. sorghum) and foreign Change
Product Segments* May-24 Jan-24
(%)
exchange volatility on imported products, notably the international
premium spirits portfolio. Given that raw materials make up over 50.0% of
Brand Guinness
the cost of sales, we envisage a compression in gross profit margin to 32.0%
in FY'23/24 (vs. 34.1% in FY'22/23). For FY'24/25, we expect gross margin to Guinness smooth 45cl
710 690 2.90%
remain mostly flat, with headline inflation set to experience a material Guinness foreign extra
moderation between July 2024 and December 2024 due to the impact of the stout 45cl 710 690 2.90%
high base effect from the prior year and the impact of lower AGO prices.
Premium Spirits
For operating costs, we envisage a flattish EBIT margin of 10.1% in FY'23/24
(vs. 10.2% in FY'22/23), driven by the impact of high energy prices on Johnny Walker - Black
label 70cl 12yrs 39,900 30,000 33.00%
distribution costs. Similarly, marketing expenses are expected to close the
Duff town- Singleton
period higher due to increased brand awareness spending as industry 70cl 12yrs 58,000 32,120 80.57%
competition becomes rife. However, we anticipate a recovery in EBIT margin
Ciroc vodka 100cl
to 10.2% in FY'24/25 as the company begins to enjoy cost savings benefits 28,350 28,350 0.00%
from leveraging Tolaram's strong distribution networks and efficient supply
chain. The impact of lower AGO prices is likely to provide further support on Ready-to-Drink
this front.
Orijin 60cl
740 570 29.82%
Elsewhere, we expect a surge in finance costs emanating from the
company's balance of financial liabilities. In FY'22/23, GUINNESS took a Smirnoff ice 60cl
850 670 26.87%
$22.5 million loan from its parent company, which is expected to be paid in
full this fiscal year. Given the nature of the loan, the company is also Malts
exposed to foreign exchange volatility, which resulted in an exchange loss of
N83.0 billion and a c.89.0% YTD surge in related party loans in 9M'23/24. Dubic Malt can 33cl
450 310 45.16%
We expect the knock-on effect of this exposure to put pressure on earnings
Malta Guinness can
in FY'23/24 (Loss after tax of N55.2 billion vs loss of N18.2 billion in 33cl
550 330 66.67%
FY'22/23).
Sources: GUINNESS, CardinalStone Research
Going into FY '24/25, we expect the company to recover to a positive
earnings position due to the localisation of its raw materials, improved *The table above shows a selection of GUINNESS’
products
export earnings, and lower foreign currency exposure, given the settlement
of its FX-denominated borrowings.

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However, we note that the company's reliance on continued importation and

distribution of Diageo's International Premium Spirit (IPS) brands is a key risk
capable of driving some FX losses via revaluation of payables.

Change in distribution strategy for IPS brands delayed till FY'24/25

In October 2023, GUINNESS announced a change in its distribution model for

the IPS line — a move in alignment with Diageo's decision to establish a new
wholly-owned spirits-focused business to manage the importation and
distribution of its IPS portfolio in West and Central Africa, which management
had projected to become effective in April 2023. However, the company
extended the timeline for this project to the fiscal year of 2025 as a result of
delays in transitioning. During the transition period, the company aims to
continue importing and distributing Diageo's IPS products, including Johnnie
Walker, Singleton, and Baileys, among others, under its existing 2016 sales and
distribution agreement with Diageo.

Figure 4: GUINNESS’ net short FX exposure poses downside risk Figure 5: ROE pressured by negative net margins and high leverage

Source: Company Financials; CardinalStone Research

ROE pressured by losses and high leverage

ROE breakdown using the three-way Dupont analysis revealed that return on
equity (ROE) has primarily been eroded by negative net margins, exacerbated
by rising financial leverage and relatively flat asset turnover. Our investigations
reveal that the rising financial leverage has been driven by the impact of
foreign exchange volatility on borrowings and a shrinking shareholders' equity
from losses in past periods. The negative net margins are consequences of FX
losses on the bottom line. Notably, in FY'22/23, ROE declined to negative
32.2% (vs a positive 17.4% in FY'21/22), driven by the trifecta of higher
financial leverage (4.3x vs 2.4x in FY'21/22), a net margin of negative 7.9% (vs a
positive 7.6% in FY'21/22), and moderation in asset turnover to 0.95x (vs 0.96x
in FY'21/22).

In FY'23/24, we expect a near wipeout of shareholders' equity due to material

losses in 9M'23/24. However, we expect a recovery from FY'24/25 due to a
potential return to positive net earnings and lower financial leverage as the
company settles its FX-denominated financial obligations, which significantly
lowers its FX exposure.

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Tolaram acquires a majority stake in GUINNESS

On 11 June 2024, GUINNESS announced that Tolaram would acquire Diageo's

58.02% shareholding in GUINNESS and enter into long-term license and royalty
agreements for the continued production of the Guinness brand and its locally
manufactured Diageo ready-to-drink and mainstream spirit brands. This transaction
is expected to be completed during the fiscal year 2025, subject to regulatory
approval in Nigeria. The company further buttressed that following the completion
of this transaction, Guinness Nigeria will remain listed on the Nigerian stock
exchange, while Tolaram intends to launch a mandatory takeover offer in
compliance with local law requirements.

According to the SEC, the offer price in a mandatory takeover must be fair and at
least equal to the highest price paid by the acquiring entity for shares in the target
company during the 12 months preceding the announcement of the takeover bid.

Media outlets report that Tolaram will pay N81.60 per share in purchase
consideration, implying a 23.2% premium on GUINNESS' last closing price of 66.25/
share and a 1.6% premium on its 52-week high of N80/share.

In the past, Diageo has exited several of its holdings in African countries such as
Cameroon and Ethiopia. In Ethiopia, it sold its Meta Abo brewery to BGI, a part of
Castel, in January 2022. In July of the same year, Diageo also sold its brewery in
Cameroon to Castel for $459.8 million and licensed it to produce the Guinness
brand. Given the declining contribution of African countries to Diageo's revenue line
and the macroeconomic challenges in these countries, it is safe to assume that
these exits are a strategic business decision to invest in its capacities in other
countries with a more stable operating environment.

Furthermore, Tolaram is an established conglomerate in Nigeria with a wide

distribution channel across various products within the FMCG industry; this
potentially bodes well for Guinness, as Tolaram's distribution network could drive
improved sales.

Figure 6: Declining contribution to Diageo’s revenue from Africa

Source: Company Financials; CardinalStone Research

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Valuation and Rating

We update our recommendation with a new 12-month TP of N85.69 per share

(vs N73.56 previously) and retain the BUY rating. According to our estimates,
the stock is currently trading at an EV/EBITDA multiple of 3.5x, which is at a
discount to its 5-year mean of 3.8x and Middle East & Africa median of 7.0x.
Our revision stems from the expectations of strong revenue growth through a
margin-accretive selective portfolio play and margin protection via effective
management of its foreign exchange exposures (increased local inputs and FX
debt repayments). In addition, we note the potential upside from the
synergistic benefits of the recent transfer of majority shares by the company’s
parent company, Diageo, to Tolaram group.

Figure 7: GUINNESS appears cheap from a relative valuation standpoint

Source: Bloomberg; CardinalStone Research

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Figure 7: Summary of Financials

Income Statement (Nm) FY'21/22A FY'22/23A FY'23/24E FY'24/25E Cash Flow Statement (Nm) FY'21/22A FY'22/23A FY'23/24E FY'24/25E
Revenue 206,822 229,441 291,390 372,979 Cash flow from operating activities 28,119 34,380 43,059 54,270
COGS (134,159) (151,308) (198,145) (254,372) o/w Depreciation & amortization 8,608 9,482 8,735 8,660
Gross profit 72,663 78,133 93,245 118,607 o/w Changes in working capital 6,706 22,225 8,620 8,421
Other Income 2,740 3,531 4,034 5,163
OPEX (51,503) (58,306) (67,894) (85,785) Cash flow from investing activities (6,844) (6,317) 3,773 4,830
EBIT 23,900 23,358 29,385 37,985 o/w Capital expenditure (9,533) (9,917) (6,119) (7,833)
Net Interest (226) (45,496) (84,620) (35,499) as % of sales 4.6% 4.3% 2.1% 2.1%
PBT 23,674 (22,139) (55,236) 2,487
Tax (8,023) 3,971 - (796) Cash flow from financing activities 12,052 (8,885) (117,146) (59,896)
PAT 15,651 (18,168) (55,236) 1,691 o/w Dividends paid (1,008) (6,565) - -
EPS 7.15 (8.29) (25.22) 0.77 o/w Debt issued/(repaid) 15,190 2,537 (22,633) (11,735)

DPS (N) 0.46 7.14 0.00 0.00 Net change in cash 33,326 19,178 (70,314) (797)
Cash & cash equivalents at beginning of
Payout ratio 6.4% NM 0.0% 0.0% year (incl FX diff) 35,777 72,947 92,125 21,811
Cash & cash equivalents at end of the year 69,104 92,125 21,811 21,014
Shares outstanding (million) 2,190 2,190 2,190 2,190

Balance Sheet (Nm) FY'21/22A FY'22/23A FY'23/24E FY'24/25E Ratio Analysis FY'21/22A FY'22/23A FY'23/24E FY'24/25E
Cash and cash equivalents 69,104 92,125 21,811 21,014 Gross Margin 35.1% 34.1% 32.0% 31.8%
Accounts receivable 14,079 13,213 21,156 15,328 EBITDA Margin 15.7% 14.3% 13.1% 12.5%
Inventories 32,001 34,470 44,515 55,753 EBIT Margin 11.6% 10.2% 10.1% 10.2%
Other current assets 2,418 1,995 2,290 2,379 Net Profit Margin 7.6% NM NM 0.5%
Current assets 117,601 141,803 89,771 94,474
PP&E 97,686 99,178 96,562 95,735 ROE 19.1% -24.8% -191.7% 83.1%
Other non-current assets 374 768 775 777 ROA 8.1% -7.9% -25.8% 0.9%
Non-current assets 98,059 99,945 97,337 96,512 ROCE 17.4% -32.2% -4646.1% 58.7%
Total assets 215,660 241,748 187,108 190,985

Short-term borrowings 31,309 63,756 41,123 29,387 OPEX/Sales 24.9% 25.4% 20.5% 20.9%
Payables 69,683 111,236 138,702 152,623 Net debt/Equity (x) -0.4 -0.5 16.2 2.9
Other short-term liabilities 12,740 8,679 4,247 4,247 Net debt/EBITDA (x) -1.2 -0.9 0.5 0.2
Current liabilities 113,733 183,671 184,072 186,258 Sales/Assets (x) 1.0 0.9 1.6 2.0
Deferred tax liabilities 10,443 479 479 479 Assets/Equity (x) 2.4 4.3 157.4 66.3
Other long-term liabilities 1,505 1,173 1,369 1,369 Interest cover (x) 11.2 0.4 0.3 0.8
Non-current liabilities 11,948 1,652 1,848 1,848
Total liabilities 125,681 185,324 185,919 188,106 Tax Rate 33.9% NM NM 32.0%
Revenue YoY growth 28.9% 10.9% 27.0% 28.0%
Shareholders' equity 89,979 56,425 1,189 2,880
Total liabilities & equity 215,660 241,748 187,108 190,985
Valuation FY'21/22A FY'22/23A FY'23/24E FY'24/25E
BVPS 41.08 25.76 0.54 1.31 P/E (x) 12.0 NM NM 111.2
EV/EBITDA (x) 3.2 3.2 2.7 2.2
Net debt/(cash) (37,794) (28,369) 19,312 8,373 Dividend Yield 0.8% 11.9% 0.0% 0.0%

Source: Company Financials; CardinalStone Research

Note: N in millions (except per-share data). Fiscal year ends in December. o/w-out of which

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Company Disclosure
Guinness Nigeria Plc

a. The analyst holds personal positions (directly or indirectly) in a class of the common equity securities of the company

b. The analyst responsible for this report as indicated on the front page is a board member, officer or director of the Company

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