Shareholders Disagree, Dividend Goes Lower Amidst Guinness Increasing Sales

The challenging operating environment has affected the fortunes of many companies thereby leading to declining returns on investments for shareholders. Guinness Nigeria Plc is one of the companies, which shareholders have had to contend with in reducing dividend payment in the last few years.

Specifically, for four years, shareholders of Guinness, crooner of ‘Origin’ herbal drink and leading stout brand have witnessed reduction in dividend payment. For the year ended June 30, 2014, the company paid N3.20 per share, down from N7.00 in 2013, N8.00 in 2012 and N10.00 in 2011.

Apparently worried by the short term decline in the company’s performance, a change in the position of managing director was made late last year. Mr. Seni Adetu was replaced by Mr. Rory O’Keeffe as MD/Chief Executive Officer last November.

Although the new helmsman came with certain strategies expected to boost its performance, the half year results to December 31, 2014 indicated that shareholders of the company will have to still face the reality of low dividend pay-out for the current year.

Even then, the half year results, certainly not attributable to O’Keeffe will be seen as from the third and fourth quarter, largely Adetu’s strategic new product infusions like ‘Origin’ herbal, a market changing brand, will continue to resonate.

Guinness Nigeria Plc poor financial performance for the half year ended December 31, 2014 impacted by high operating expenses and financial charges.

Specifically, Guinness recorded revenue of N55.267 billion in 2014, up from N52.757 billion in the corresponding period of 2013. Cost of sale rose from N27.47 billion to N29.513 billion, leading to a margin increase in gross profit which grew from N25.285 billion to N25.753 billion.

Marketing and distribution expenses also grew from N12.544 billion to N13.145 billion, while administrative expenses similarly jumped from N4.9 billion to N6 billion. Consequently, operating profit fell by 15 per cent from N8.22 billion to N6.97 billion.

However, finance charges jumped by 35 per cent to N2.708 billion, from N1.954 billion, which led to the company ending with a profit after tax of N3.398 billion, compared with N4.99 billion in 2013.

The half year performance of the company has attracted a downward review of its equity target price by many analysts. For instance, analysts at FBN Capital Limited, cut their target price by 21 per cent and down grade their rating of the stock to underperform.

According to them, although sales grew 13 per cent year on year(y/y) to N34.2 billion, a combination of factors including a gross margin contraction of 442 basis points (bps) to 44.4 per cent, a 20 per cent rise in operations expense (opex) and a 34 per cent growth in interest expense resulted in profit before tax (PBT) declining by 41 per cent to N2.7 billion.

“On a sequential basis, while sales increased by 63 per cent q/q, similar factors responsible for the y/y decline in earnings (mainly a gross margin contraction of 567bps q/q, a 45 per cent q/q rise in opex and a 28 per cent q/q rise in interest expense) resulted in PBT and PAT growing slower, by 37 per cent q/q and 29 per cent q/q respectively. Management disclosed that the reduction of stocks to channels, and one-off items resulted in losses of N1.2 billion and N0.5 million respectively,” FBN Capital noted.

In their review of the results, analysts at Dunn Loren Merrifield said cost of sales (COS) went up despite a decrease in inputs.

For the review period, the company posted an increase of 7.4 per cent in COS to N29.51billion against N27.47billion in the preceding year. The higher increase in COS relative to revenue led to an increase in COS/revenue ratio to 53.4 per cent relative to 52.1 per cent in the past year.

“Contrary to expectation, the COS moved up in spite of decline in the prices of grains in the global commodity market which are major inputs in brewing both alcoholic and non-alcoholic beverages. For example, barley and corn traded at average prices of $127/tonne and $174/tonne accordingly in the review period, down by 28 per cent and 21 per cent against the average prices of $177/tonne and $200/tonne in the previous period. Also, the average prices of wheat and sorghum declined by 15 per cent y/y and 9% y/y respectively to $260/tonne and $199/tonne compared with average prices of $307/tonne and $218/tonne in the six months to December 2013,” they said.

They added, however, that the average prices of grains are expected to fall further in the current year on the back of anticipated increase in supply without commensurate demand.

According to them, this is expected to have positive impact on margins in the quarters ahead.

The analysts said on a quarterly basis, the Guinness recorded COS of N19.01billion in the second quarter to December 2014, up by 81.1 per cent and 22.5 per cent compared with N10.50 billion and N15.52billion accordingly in the first quarter of the review year and the second quarter of the previous year.

“Similarly, the latest quarter’s COS is higher than the 8-quarter average of N14.58bilion by 30.4 per cent. Furthermore, the second quarter’s COS/revenue ratio of 55.6 per cent is higher than 49.9 per cent and 51.1 per cent in 1Q2014/15 and 2Q2013/14. It is also higher than the 8-quarter average of 52.7 per cent. In our view, the company’s operational efficiency declined in the latest quarter compared with the previous quarters revealed by the higher COS/revenue ratio as a result of the tendency of the company to reverse the declining trends of revenue in the recent past, hence margins were negatively impacted despite the increase in revenue,” they said.

For the review period, Guinness Nigeria’s operating expenses of N19.17billion was up by 9.8 per cent y/y against N17.46billion. DLM analysis revealed that the increase of 22.5 y/y in administrative expenses to N6.02 billion from N4.91billion and the 4.8 per cent increase in distribution costs to N13.14 billion compared withN12.55 billion in the previous year accounted for the movement in operating expenses.

“The higher increase in operating expenses relative to revenue led to a higher operating expenses/revenue ratio of 34.7 per cent relative to 33.1 per cent in the previous period. Overall, total costs moved up to N48.68 billion, up by 8.3 per cent against N44.93 billion in the preceding period and total costs/revenue ratio stood at 88.1 per cent relative to 85.2 per cent in 1H2013/14. Therefore, operating profit was down by 15.1 per cent toN6.98 billion compared with N8.22 billion in the previous period and operating profit margin dipped to 12.6% relative to 15.6 per cent in the previous year,” they said.

Although Guinness recorded an increase of 162.2 per cent in interest income to N388 million againstN148million due to net gain on foreign exchange transactions amounting to N207million, interest expense stood at N2.71billion, up by 38.6 per cent from N1.95 billion in the corresponding period of 2013.

According to the DLM, the increase in interest expenses was largely accounted for by the 126.4 per cent increase in interest on loans and borrowings to N1.86billion against N821million in the six months to December 2013.

“ On the contrary, interest expense on overdraft declined by 23.5 per cent to N519 million compared with N678 million. Further analysis revealed that loans and borrowings declined by 6.5 per cent to N27.65 billion againstN27.43 billion while bank overdraft moved up to N10.63 billion compared with N4.68billion. Overall, total borrowings stood at N37.89 billion, up by 7.5 per cent compared with N35.3billion. Consequently, net profit dropped by 32 per cent to N3.40billion compared with N5.00 billion in the previous period and net profit margin fell to 6.2 per cent relative to 9.5 per cent in the 2013,” they said.

The analysts therefore put the target price of the stock of Guinness Nigeria Plc at N134.96.