Guinness Nigeria Heads For Worst Profit In 3yrs
Guinness Nigeria Plc wears the outlook for a profit drop for the second year and the drop is looming big this financial year. The brewing company ended the third quarter operations in March 2020 losing more than two-thirds of profit year-on-year. With that, the worst profit record in three years and one of the worst since 2015 seems to be brewing for Guinness and turning its image from black to a permanent red.
The operating strength recorded in the second quarter that saw a return to profit from a first-quarter loss failed to extend to the third quarter. A marginal profit of just N46 million is all the company has to show for the third quarter operation – which is only a narrow escape from a loss. On a year-on-year basis, profit performance worsened from a drop by one-half in the second quarter to a more than two-third drop at the end of the third quarter.
The company’s closing profit of N1.3 billion for the second quarter was therefore virtually unchanged at N1.36 billion at the end of the third quarter. Guinness faces an admixture of declining sales revenue with rising costs that leaves a shrinking margin for profit. The bad combination intensified in the third quarter, which contributed to building costs rather than revenue and profit.
The rising cost of finance posed a bigger hurdle on the path of profitability for the company in the third quarter than in the preceding quarters. Finance expenses for the quarter alone, fueled by foreign exchange losses, accounted for close to half of the year-on-year figure at the end of March. Net finance cost nearly consumed the operating profit of N1.6 billion generated within the third quarter.
Falling sales revenue remains the centre of the company’s challenges and this worsened in the third quarter. The quarter accounted for much of the sales revenue the company lost at the end of the third quarter.
Other income lines keep dropping as costs keep pushing up. This is reinforcing the disappointing sales revenue performance and constraining profit capacity. The outcome is in line with our expectation for the company’s second-half – that “rising costs are likely to keep profit down based on the current growth rate”.
Revenue constraint is an industry-wide challenge that faces the brewed products market generally, which is intensifying under the difficult operating terrain of the current year. Profit delivery depends on the extent the operators in the sector can cut costs.
For Guinness Nigeria, cost-cutting was insufficient to defend profit in its preceding financial year. The position is worse this year in that costs are rising as the company is losing sales revenue. The company’s swinging profit performance is therefore on the downside this financial year ending June 2020.
Guinness Nigeria closed the third quarter operations for the 2020 financial year with sales revenue of N96 billion. This is a loss of momentum from flat growth at the end of the second quarter to a year-on-year drop of 5 percent at the end of the third quarter. The company suffered a drop of close to 18 percent in sales revenue on a quarter-on-quarter basis in the third quarter.
It was a turn of events for the company in the third quarter when a step up in sales revenue performance had been expected. The improvement in turnover earlier expected in the company’s second-half appears unrealizable for now.
Sales revenue projection is revised from N140 billion to N121 billion for Guinness Nigeria at the end of the 2020 financial year. In the 2019 financial year ended June, sales revenue dropped by 8 percent to N131.5 billion. A further drop is again to be expected for the second financial year.
The cost of sales shifted favorably at the end of the third quarter from growing against flat turnover in the second quarter to declining ahead of sales revenue. At N65 billion at the end of the quarter, cost of sales went down by roughly 7 percent compared to the 5 percent decline in sales revenue. That narrowed down the decline in gross profit to 2 percent to a little below N31 billion at the end of March 2020.
The result is that the cost per unit of sales, which increased from 66 kobo in 2018 to 69 kobo in the 2019 financial year, is down to below 68 kobo at the end of the third quarter. The cost moderation improved gross profit margin slightly at the end of the third quarter.
Other income dropped by over 32 percent to N417 million over the period while administrative and marketing/distribution expenses increased. This extended the drop in operating profit from 24 percent at the end of the second quarter to 29 percent to N5.2 billion at the end of the third quarter.
A further disappointment on the side of earnings came from finance income, which dropped by 50 percent to over N369 million at the end of the third quarter. Against the drop in finance income, finance expenses surged upward by 97 percent to N3.6 billion at the end of March.
Net finance cost nearly tripled to N3.2 billion to claim over 61 percent of operating profit at the end of the third quarter against 15 percent in the same period in the preceding financial year.
Guinness Nigeria posted an after-tax profit of N1.36 billion at the end of the third quarter, improving by only N46 million from the closing half-year profit figure of N1.3 billion. Profit drop extended from 50 percent at the end of the second quarter to 68 percent year-on-year at the end of the third quarter.
The full-year profit outlook has altered considerably for Guinness Nigeria in 2020. With the volatility in profit performance in the last two quarters, the full-year outlook for the company is uncertain. The initial profit projection in the region of N4.5 billion for Guinness Nigeria in the 2019/20 financial year is revised to uncertain.
This initial projection was based on the expectation that the upturn recorded in the second quarter would be sustained all through the second half. This failed to happen in the third quarter while the position may worsen with the economic lockdown in the final quarter.
Balance sheet borrowings are slightly up at N21 billion at the end of the third quarter from N18 billion at half-year. We had expected a slowdown in finance expenses in the second half but an upsurge of over 500 percent in foreign exchange losses prevented this from happening.
The company earned 62 kobo per share at the end of the third quarter, dropping from earnings per share of N1.94 per share in the same period in the 2019 financial year.
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