Guinness: N40bn Rights Issue to the Rescue?

The planned N40 billion rights issue may be one of the solutions Guinness Nigeria needs to return to the black, writes Goddy Egene

The approval given by shareholders of Guinness Nigeria Plc last week for a  rights issue of  N40 billion has been seen as a very good decision that will  save the company from its current loss position. Guinness Nigeria, for the first time in 30 years posted a loss of N2.0 billion for the year ended June 30, 2016. It has also recorded a loss of N4.7 billion for the half year to December 31, 2016.

Although the challenging operating environment contributed to the loss recorded by the brewing firm, its high exposure to debt financing that lead to high finance charges is   majorly caused the dismal performance.  Due to the company’s huge reliance on bank borrowings, it has been paying huge charges, a situation worsened as a result of the naira devaluation.

Guinness Nigeria’s net debt to equity ratio increased from by 23 per cent from 79.9 per cent to 103.9 per cent as the half year ended December 31, 2016.

This indicated that the company was highly leveraged and needs urgent equity injection to reduce the erosion of its earnings through high interest charges. Hence, analysts said the decision to go for a rights issue that will bring in about N40billion equity into the company would go a long way in repositioning the firm for better future performance.

The company had already confirmed that the rights issue is part of its plans to optimise its balance sheet and improve its financial flexibility.

Half year results

Guinness Nigeria last week announced its six months result to December 31, 2016. The company posted   a growth of 19 per cent in to N59.5 billion in 2016, from N49.8 billion in the corresponding period of 2015.

Cost of sales went up by 54.5 per cent from N28.4 billion to N43.9 billion. Gross profit stood at N15.5 billion, down by 27 per cent from N21.4 billion. The company strived to reduce operations expenses, which fell by 12.3 per cent   from N18.3 billion to N16 billion.

However, net finance charges surged 166 per cent from N1.723 billion to N4.578 billion.  Consequently, Guinness ended the period with a loss after tax of N4.663 billion as against a profit after tax of N1.652 billion in 2015 and a loss after tax of N4.668 billion compared with profit after tax of N1.172 billion in 2015.

 Management explains results

Commenting on the results, Managing Director/Chief Executive Officer of  Guinness Nigeria Plc, Mr. Peter Ndegwa,  said there are many bright spots for the company but that the challenging economic environment and high finance charges impacted results.

 He said: “We now have both International Premium Spirits (IPS) and locally manufactured mainstream spirits within our portfolio and these contributed to revenue growth for the half year. Our accessible beer brands also continue to grow strongly. Our productivity agenda continues to gain momentum enabling us to keep our administrative and distribution costs under control while optimising our investments to support our brands. The unrealised foreign exchange losses during the half year meant that our net finance cost grew by 166 per cent. As a result of the high input costs (in part driven by foreign exchange-fx ) and the fx impact on financing costs, we recorded a loss before tax  of N4.6 billion.”

Also commenting on the results, Chairman   of Guinness Nigeria Plc, Mr. Babatunde Savage, said: “We remain optimistic about the future of the company despite the prevailing challenging operating environment. We are confident that the steps we are taking to steer the business through these difficult times – including a comprehensive review of our capital structure, the expansion of our brand portfolio and our continued focus on reducing operating costs, will sustain the momentum we have in top-line growth and bottom line recovery.”

Before the half year results, Ndegwa had said despite the tough operating environment, they had seen contributions from  their mainstream and international premium spirits brands as well as continuing growth of  their  value brands.

“These were the key drivers of the  percent  revenue growth recorded for the(first) quarter. Our cost of sales was impacted by the high inflationary environment and continuing currency devaluation leading to a reduction in operating profit. The higher finance cost in the quarter is due to the impact of unrealised foreign exchange losses as a result of the currency devaluation.”

 He said going forward, innovation would continue to be a big part of our strategy us as we look to deepen our participation in the mainstream and value segments. “We will also continue to invest behind our brands with a key focus on building the right portfolio for future growth and re-shaping our organisation to take advantage of what is likely to continue to be a challenging market in the short to medium term,” he added.

Analysts’ comments

Looking at the half year to December 31, 2016 results, analysts at FSDH Research said the increase in revenue did not translate to an increase in cash, as trade  receivables increased.

 Cost of sales grew significantly faster   than revenue on account of higher input costs. Unrealised foreign exchange losses led to significantly higher finance costs. There was significant build-up in inventory for both finished goods and raw materials. The  slowdown   in the sales of Orijin, competition from other operators, the harsh  operating environment and high leverage all  impacted the company’ s operations,” they said.

On their own part, analysts at FBN Quest  said the only positive in the results was a sales growth of 30 per cent in second quarter (Q2) to December 31, 2016 to  N36 billion.

 “The company reported pre-tax and post-tax losses of –N2.4 billion. These losses compare with the PBT and PAT of N1.1 billion and N810 million reported in the corresponding quarter of 2015 respectively. The strong sales growth was significantly offset by a -1,843 basis point (bp) year-on-year(y/y) gross margin contraction to 25 per cent and a 112 per cent y/y rise in net interest expense and led to the weak bottom line. Operating expenses were down slightly by two per cent y/y. On a sequential basis, sales advanced by 58 per cent quarter on quarter (q/q), which we attribute to seasonality. The end-Dec quarter is usually one of the strongest quarters for the brewers. However, the pre-tax and post-tax losses were worse, by around 10 per cent q/q on average. Despite the strong q/q sales growth and a 42 per cent q/q decline in net interest expense, a gross margin contraction of -394bps q/q and a 67 per cent q/q rise in operating expenses were more significant and led to the weaker quarter,” they said.

FBN Quest said similar to most consumer goods names, Guinness continued to suffer from the unfavourable macroeconomic conditions.

“The fx pressure the company faces is being reflected in the gross margin line. We estimate that the company imports over 65 per cent of its raw materials. In addition, Guinness continues to report fx translation losses (N850 million) on the back of a $26 million loan on its books. However, the fx loss is less than the loss of N2.2 billion reported in the prior quarter. We believe the fx loss is less due to the slowdown in the deterioration of the currency,” they said.

 Offering quality brands

Industry analysts believe that once Guinness is able to deleverage, its performance would improve significantly driven by its quality brands. According them, their optimism stemmed from the company’s acquisition of the distribution rights for Diageo’s International Premium Spirits (IPS) like Johnnie Walker, Ciroc and Baileys in Nigeria. Also, the company acquired the rights to distribute brands from India’s United Spirits Limited (USL) for brands like McDowell’s whisky.

Explaining the acquisition, Ndegwa had said: “Following the acquisition of distribution rights for IPS and USL brands, we are the first and only total beverage alcohol (TBA) business in Nigeria offering the widest range of drinks – from adult premium non-alcoholic drinks (APNADS) to lager, stout, mainstream spirits and IPS. This puts us in a great position to continue to offer consumers quality brands, giving them a choice at every category and price point.”