Guinness Nigeria Is Now Red

0
57

Guinness Nigeria is very popular owing to its flagship product- The Guinness Stout. For decades and till date, its commercial or advertisement is a delight to read, watch and listen to, because of its rich black colour and content that are played up to convey its potency at enhancing the strength of the drinkers.

For the second financial year, however, the producer of the rich Guinness Stout, Guinness Nigeria is losing sales revenue and the company is back in the red after three years of profitable trading. Its first-quarter operations that ended September 2019 shows that finance cost is rampaging once again at a time that sales are on the decline. The operating heat saw a profit drop at the end of the preceding financial year, which has extended to a loss in the company’s operations in the first quarter.

Inability to grow sales revenue is the core of the company’s challenges. Over the past five years, it grew sales revenue twice and lost it twice. Further revenue loss in the current financial year indicates a great deal of uncertainty for the brewed products market generally.

Turnover slowed down sharply in the 2018 financial year and dropped in 2019 but management applied cost cutting to lift profit in 2018. The strategy failed in 2019 in the face of loss of sales revenue.

Finance expenses have been the company’s cost cutting centre since it began to deleverage the balance sheet after injecting about N40 billion from rights issue in 2017. Finance expenses have dropped by 54 percent in each of the past two years. The cut in the last financial year was however insufficient to defend profit. This year, finance expenses are on the rapid growth once again and management had to raise fresh borrowings to meet interest payments.

The operational challenges facing the company continue to intensify. Input cost isn’t going down at equal pace with sales revenue, which has continued to raise the cost per unit of sales from 66 kobo in 2018 to 69 kobo in the 2019 financial year and further to over 70 kobo at the end of the first quarter. This has continued to depress gross profit margin.

Marketing/distribution expenses and administrative cost claimed increased proportions of revenue in the first quarter leading to a drop of 59 percent in operating profit. An upsurge of 217 percent in finance expenses threw the bottom line into the red.

Guinness Nigeria ended the first quarter operations for the 2020 financial year with sales revenue of below N27 billion, a year-on-year decline of 4 percent. In the 2019 financial year ended June, sales revenue dropped by 8 percent to N131.5 billion. The figure is less than 5 percent below our full year estimate of N138 billion for Guinness Nigeria for the 2019 financial year.

A major challenge for the company has been that cost of sales isn’t going down at equal pace with the decline in sales revenue. Against the 4 percent decline in sales revenue in the first quarter, cost of sales was flat. Hence input cost claimed an increased share of sales revenue at 70 percent, rising from 67 percent in the same period in 2018. The trend continues to depress gross profit margin, leading to a drop of 13 percent in gross profit to below N8 billion at the end of September 2019.

Guinness Nigeria continues to spend a lot in marketing/distribution expenses at over N5 billion in the first quarter. This is keeping up with the competitive battle to make a sale in a tight market. A drop of 37 percent in other income added to the operating pressure during the quarter. Operating profit dropped by 59 percent to N618 million over the review period.

The only improvement on the side of earnings during the period came from finance income, which grew by 45 percent to N235 million. This was more than countered by a sudden reversal of finance cost from a 54 percent drop in each of the preceding two financial years to an upsurge of 117 percent to about N1.3 billion at the end of the first quarter.

The operating profit of N681 million was insufficient to meet the net finance cost of over N1 billion at the end of the period. Management had to raise fresh borrowing to meet the interest payments.

Balance sheet borrowings are building up once again, amounting to over N27 billion at the end of the first quarter. This is an increase from less than N20 billion at the close of the preceding financial year in June 2019.

Guinness Nigeria posted a net loss of N370 million at the end of the first quarter in September, 2019, down from a net profit of over N835 million in the same period last year. Pressure on the bottom line is coming from declining sales revenue, sticky input cost and rapidly growing cost of finance.

How the company could deal with any of these fundamental issues and turn the tide in the coming quarters aren’t foreseeable for now. Increasing borrowings when operating profit is grossly insufficient to meet interest expenses seems to set the stage for rising losses ahead.

The company lost 17 kobo per share at the end of the first quarter, dropping from earnings per share of 38 kobo per share in the same period in the 2019 financial year. It earned N2.50 per share at the end of the 2019 financial year and has paid a cash dividend of N1.52 per share to shareholders.

[InsideBusiness]

LEAVE A REPLY