No sign of respite in the very near term

Downward revision to estimates; Underperform rating maintained: Guinness Nigeria (GN) reported pretax and post-tax losses in Q4 2016 (end-June); the losses were significantly worse than our expectations. As such, we have cut our earnings estimates over the next two years by 88% on average. However, beyond 2019E, we believe that the company should start to show some signs of recovery on the back of its import substitution strategies and enhanced focus on the spirits business. As such, despite increasing our risk free rate assumption by 200bps to 14.5%, we have trimmed our price target by -8% to N80.12. GN shares have shed -7.2% (NSEASI: -0.2%) since the announcement of its Q4 2016 numbers. Despite the recent sell-off, we still find the shares relatively expensive. From current levels, they show a downside potential of -14% to our N80.12 price target. As such, we retain our underperform rating.

Pre-tax and post-tax losses in Q4 2016: GN reported a pre-tax loss of –N3.6bn in Q4 2016. The results were weak across all key headline items. Although a combination of factors including a -4% y/y decline in sales to N32.4bn, a gross margin contraction of -939bps y/y to 35.7% and a 6% y/y rise in opex all contributed to the pre-tax loss, a 3.1x spike in net interest expense was the major driver. Owing to a tax rebate, the after-tax loss narrowed to -N2.9bn. Sequentially, sales grew by 64% q/q due to seasonality. The pretax and post-tax losses compare with the -N449m and –N309m delivered in Q3 2016 (end-Mar).

Fx challenges to weigh on outlook: GN’s Q4 2016 numbers were weighed down by y/y gross margin contractions and a significant rise in finance charges. Both negatives resulted from fx challenges. We estimate that the company imports over 60% of its raw materials. GN reported an fx translation loss of N3.5bn in 2016. We believe the bulk of the loss was due to the company’s decision to take a loan of US$26m in the last quarter. Given the company’s significant reliance on imported raw materials and the naira having weakened further since June, we have been conservative on both the gross margin and interest expense lines in the very near term. We see a glimmer of hope in the company’s strategy to increase its focus on the spirits business, which ordinarily should attract higher margins than the mainstream beer segment. In 2017E, we see sales growing by 5% y/y and PBT and PAT of N257m and N400m respectively.

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