Company: GUINNESS NIG. PLC
Rating: Hold
Current Market Price at Earnings Release: N80.50
Intrinsic Value: N57.96
Latest Cash Div: N1.84
By: Jeariogbe Tunde Segun (Equity Analyst)

Key Financial Tickers
• This report considered the financial performance indices of Guinness Nigeria Plc for the full-year ended June 30, 2018, compared with figures for corresponding period of 2017.
• Note the increase in shares outstanding within the two periods compared in this report.
• Recall that Guinness Nigeria undertook a rights issue of 684,494,631 ordinary shares of 50k each at N58 per share on the basis of five new units for every 11 held as at the close of business on March 15, 2017.
• At the end of the offer, the issue was oversubscribed by 116%. Based on this, at listing of the rights issue, the company’s share outstanding rose from 1,505,888,188 shares to 2,190,382,819 units. The new shares arising were subsequently listed on the Nigerian Stock Exchange (NSE) in October 2017, after the release of its that year’s audited financials.

Strength
• Guinness is a leading alcoholic and non-alcoholic beverage companies operating in Nigeria with the dominant market share in the stout segment.
• The Company’s strong market share in the brewing industry is supported by a good brand name, technical & product quality assistance from its parent company and an established Route to Market (RTM) strategy.
• Renown and diverse brands
• Qualified management team
• Strong support from parent company – Diageo Plc
• Dominant leader in the stout market
• Good cash-flow

Weakness
• Inadequate working capital
• Declining profitability that now requires attention

Challenges
• Weak operating environment
• Rising raw materials cost as a result of local currency devaluation
• Stiff competition for products in the value segments, especially from smaller competitors
• Shrinking effective disposable income of consumers.

Corporate Figures
• Guinness Nigeria recorded higher Turnover in the review period, compared to 2017. Total turnover for the year was estimated at N142.97 billion, 13.55% above the previous N125.91 billion.
• After expenses, it achieved N13.386 billion Operating Profit for the year, 31.41% over the N10.186 billion posted last year
• Finance Income was estimated at N2.201 billion, as against N2.253 in 2017, while Finance Cost was N5.644 billion, down from the N9.777 billion of prior year. It is important to note that the drop in Finance Cost was due to the Rights Issue mentioned earlier.
• Profit before Tax therefore stood at N9.943 billion, which is 273.51% above similar figure in 2017 financial document
• Having deducted Tax Expense for the year, Total Income reported for the year stood at N6.717 billion, as against N1.923 billion is similar session of 2017, representing a N249.20% growth
• Similarly, Total Comprehensive Income was negatively impacted by the defined benefit plan accrual loss, patched by Tax Credits on other comprehensive loss. The figure is therefore estimated at N6.685 billion, compared to N1.888 billion in 2017
• Retained Earnings improved over the period by 17.51%, from N33.228 billion to N39.045 billion
• On the balance sheet, Total Assets grew by a marginal 4.94% to N153.254 billion, compared to the N146.038 billion last year.
• Nevertheless, Total Liabilities outstandingly dipped to N65.666 billion, same as 36.30% below the N103.095 billion posted at the end of 2017 financial year
• Net Assets climbed to N87.588 billion, improving by 103.96%, from the previous N42.943 billion reported in 2017.

Liquidity/Risk Ratios
• Commendably, the firm stood at an admirable point in its Latest Debt to Equity Ratio. Presently, we have estimated debt to be 9.27% of Equity, which is 84.64% below the industrial average of 60.35%. We expect this to further boost investors’ confidence.
• The firmness of Guinness Nigeria’s Liquidity level was further established by its Current Ratio estimated above unity at 1.27x and above the industry average at 1.07x. It is important to note that this is a confidence booster to its suppliers and other creditors.
• Fairly above its peers, beta value stood at 0.99, as against 0.65 industry average indicate lower volatility than the market
• Although far below the industrial average of 2.73x, Guinness still has enough strength to service its interest yielding liabilities as at when due. Note that it is strictly advised that, unless the company improves its financial strength, assessing interest yielding liabilities should done at the highest confidence of profitability.

Profitability Ratios
• Cost of Sales margin is currently estimated at 65.99% 7.08% above the 61.63% estimated last year.
• Profit Before Tax margin is 6.95%, other 3x the 2.11% margin estimated in the 2017 financial data.
• Similarly, Profit Margin tripled that of Q1-2017.
• We have currently estimated 4.70% as against the previous 1.53%
• Return On Average Equity is currently estimated at 7.67% far above the 1.32% achieved in 2017
• Return achieved on Average Assets is now 4.38% as against 1.32%
• This confirms the higher profitability rating by the management of Guinness Nigeria. We are of the opinion that despite the improvement achieved in the company’s profitability ratios, more effort is needed to build up these ratios, which further confirms both the effectiveness of the company and its management.

Efficiency Ratios
• To test management efficiency, the Asset Turnover was gauged and the Ratio improved marginally by 8.20% from 86.22% to 93.29%.
• Also tested was the Equity Turnover, currently at 163.24% as against the 293.23% estimated in 2017. Note that the rights issue proceeds further impacted the drop.
• In other words, the equity was multiplied 1.75x through the 2018 financial- year activities, far below the 3.40x in 2017.
• It was also estimated that Fixed Assets turnover is same as 144.94% above the 141.78% estimated in 2017.

Investment Ratios
• Following same trend as in the company figures, the amount earned per share of Guinness Nigeria through the 2018 financial performance, rose by 140.07% against the comparable period of 2017. The current EPS estimate is N3.07 compare to N1.28
• The said EPS produced a yield of 3.81% of the current market price as at the time the result was released to the market.
• Price Earnings Ratio (PE/Ratio) is currently estimated at 26.25x, as against the previous 62.05x. Although this is mainly used in confirming investment recouping time, it is also a measure of investors’ sentiments level on the share price of Guinness Nigeria; going by the reduction observed, it implies a decline in sentiments
• Two ratios confirming an overpriced position of each share of Guinnessshare on the floor of the Exchange are the Price to Book Value (P/BV) and the Book Value (BV).
• Since P/BV stood above one (1) it implies that the share unit is theoretically overpriced. Confirming this further is the estimated BV of N39.99as against the market price of N80.50 (as at the released of the current full year result).
• Nevertheless, going by the high level of sentiment in favour of the company, we arrived at a higher price as shown below.
• Note that the N1.84 cash dividend reported by the management in the 2018 financial year is same as 60% of the amount earned per unit.
• Thus, we have estimated a Sustainable Growth Rate of 3.07%.

Valuation
• Our analysis reveals that Guinness is a company with good financial conditions and strong capacity to repay obligations on a timely basis.
• Nevertheless, since our analysis is strictly programmed to guide investors through the process of achieving the best returns from their investments, we have remained conservative in our valuation of each unit.
• Thus, we valued each units of its shares at N57.96, which betrays an overpriced condition when put side by side with the current market price of the company’s shares.
• Nevertheless, due to the growth noticed in its performance in recent times, and the empowerment achieved through the last rights issue, we have Rated Guinness shares a HOLD.