Guinness Plc. 2020 Final Rating Report

2020 Corporate Rating Report

Guinness Nigeria Plc Issuer Rating This is a company with good financial condition and strong capacity to repay A- obligations on a timely basis.

Outlook: Stable Issue Date: 26 April 2020 RATING RATIONALE Expiry Date: 31 December 2020 . Plc (‘Guinness Nigeria’, ‘GNPLC’ or ‘the Company’) is a Previous Rating: A- (expired member of the Group (‘Diageo’ or the ‘Group’) – one of the world’s December 2016) leading manufacturers of spirits, and . Diageo operates in over 180

countries and has over 200 brands across both alcoholic and non-alcoholic Industry: Brewery beverage categories. The Group is the largest international premium spirit producer in the world by revenue and continues to benefit from its global distribution networks and partnerships. Diageo has a strong market position Outline Page across multiple product categories, underpinned by its wide product portfolio Rationale 1 1 Company Profile 4 and marketing innovation. As at 31 December 2019 , the Group’s total assets Financial Condition 7 stood at £31.7 billion ($39.4 billion), while net revenue of £10.8 billion ($13.4 Ownership, Mgt & Staff 12 billion) was reported in the same period. Diageo Group has investment grade Outlook 14 2 Financial Summary 15 ratings from three international rating agencies, on the back of its improving Rating Definition 19 profitability and strong cash generating capacity.

. Over the years, Diageo Plc. has provided strong parental support (both Analysts: technical and financial) to Guinness Nigeria. This is demonstrated through the Ojuru Adeniji continued credit lines provided to the Company coupled with the Group taking [email protected] up its rights in the last concluded capital raise which increased its shareholdings Isaac Babatunde to 58.02% from 54.32%. Diageo considers Guinness Nigeria Plc. strategic in the [email protected] African frontier, therefore we expect a sustained parent backing in a bid to grow the Company’s market share in the breweries industry in Nigeria as well Agusto & Co. Limited as enhance the Group’s dominance in the global market. UBA House (5th Floor) 57, Marina . Guinness Nigeria Plc. is one of the leading alcoholic and non-alcoholic beverage companies in Nigeria, with a dominant market share in the Nigeria segment. The Company has a three brewery plants strategically located in

Nigeria, with a combined production capacity of circa 10 million hectolitres per www.agusto.com annum. GNPLC has an extensive product portfolio which caters to diverse consumer segments and a wide distribution network of over 130 key distributors spread across the country. Therefore, we believe the Company has strong brand name and good market position in the brewing industry in Nigeria.

. In the financial year ended 30 June 2019, Guinness Nigeria’s financial condition was characterised by good cash flow, adequate working capital and low

1 Half year numbers for the six months ended 31 December 2019 2 Moody’s (A3), Fitch A- and S&P A- The copyright of this document is reserved by Agusto & Co. Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Agusto & Co. Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited.

Guinness Nigeria Plc. leverage. However, the sub-par profitability level worsened by depressing margins due to heightening competition has moderated the Company’s financial condition. Agusto & Co recognises GNPLC’s strong parental support, experienced management team, strong brand, extensive distribution network and good market position as fundamentals for continued growth.

. During the financial year ended 30 June 2019 (FYE 2019), Guinness Nigeria’s net revenue declined by 8% to ₦131.5 billion, on the back of the increase in excise duty imposed on alcoholic beverages. Cost of sales as a percentage of net revenue trended up to 69% (2018: 66%), following lower net revenue reported in the year. Despite the cost saving recorded on operating expenses and finance expenses, the Company’s operating profit margin dipped to 6.5% (2018: 8.9%), on account of the outstanding royalties and technical services fees paid to its related parties3. Following the heightening competition in the industry, profitability ratios have shrunk, with pre-tax return on average assets (ROA) of 6% and pre-tax return on average equity (ROE) of 8%, both below our expectations.

. In the FYE 2019, the Company’s operating cash flow (OCF) more than doubled to ₦8.9 billion, on the back of the increase in trade creditors, amounts due to related parties and advance payments from customers. GNPLC’s operating cash flow was sufficient to cover returns to providers of finance comprising interest and dividend payment 4x (times). Guinness Nigeria’s OCF to sales ratio of 7% is low however; the three-year average OCF to sales (2017-2019) of 14% is within benchmark. Agusto & Co. is of the view that the Company has a sustainable cash generating capacity supported by its favourable terms of trade. Nonetheless, we recognise the adverse impact of the Covid-19 pandemic on demand for all players in the brewery industry in the short term.

. Guinness Nigeria enjoys favourable terms of trade with its customers, suppliers, and related parties; hence, the Company has recorded sufficient spontaneous financing which was adequate to cover its working assets, leaving short term financing surplus. As at year end, GNPLC’s long term funds were inadequate to cover the long term assets; resulting in a long term financing need which was sufficiently covered by the short term financing surplus.

. Although Guinness Nigeria’s interest bearing liabilities (IBL) increased significantly to ₦11.6 billion, up from ₦5.6 billion the prior year, IBL (net of cash & equivalents) to equity remained low at 13%. During the period under review, the Company’s interest expense to sales ratio improved significantly to 2% - lowest in the last five years and below the three-year average of 4.6%, due to the relative stability in the exchange rate for the most part of the financial. With the devaluation of the domestic currency, we believe this is threatened. Following the decline in interest expense, interest cover improved substantially to 3.42 times (2018: 0.32 times), slightly higher than our benchmark of 3 times for companies operating in the breweries industry.

. The management of the Company expects profitability indicators to improve

3 This fees which were outstanding since 2017 were previously unapproved by National Office for Technology Acquisition and Promotion (NOTAP) and could not be accrued until recent court ruling

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Guinness Nigeria Plc. in the near to medium term, driven by growth in malt, mainstream and premium spirit segments. As a result, the Company is optimising its route-to- market strategy, improving its distribution channels and enhancing positioning of its innovative portfolio. Nonetheless, we believe that heightening competition, coupled with the weak consumer spending, unfavourable regulatory environment and the impact of the novel coronavirus (Covid-19) pandemic on output and consumption particularly social gatherings remain major challenges for key operators in the brewery industry in Nigeria.

. Overall, Agusto & Co. believes that Nigeria’s large and growing population, favourable demographics, low per capita consumption of alcohol estimated at circa 9 litres and wide product offerings presents growth drivers for the Company in the medium term, despite the debilitating impact of Covid-19 on the general outlook of the economy. Based on the aforementioned and strong parental support demonstrated over the years which we have factored into the rating, Agusto & Co. assigns a ‘A-’ rating to Guinness Nigeria Plc. and attach a stable outlook.

Figure 1: Strengths, Weakness, Opportunities and Threats

Strengths

•Strong parental support from Diageo Plc. •Diversified and innovative product offerings •Dominant leader in the stout market •Good cash flow •Low leverage

Weakness

•Sub-par profitability

Opportunities

•Nigeria's large and growing population •Low per capita consumption of alcohol •Growth potentials in the malt and mainstream spirit categories

Threats

•Fierce competition in the domestic brewery industry, particularly in the segment •Negative macroeconomic headwinds weakening consumer wallet •Devaluation of the local currency could lead to upsurge in costs •Prolonged shut down of economic activities due to Covid-19 pandemic and attendant impact on output

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Guinness Nigeria Plc. COMPANY PROFILE

Overview & Background Guinness Nigeria Plc. was incorporated on 29 April 1950 as a trading company importing Guinness Stout from , under the name Guinness Nigeria Ltd. In 1962, the Company built its first brewery in Ikeja, following increased demand for its products. This was the very first brewery out of the British Isles and the third in the world. In 1963, the Company commenced manufacturing of its core Guinness Stout brand in Nigeria. Guinness Nigeria Plc. is primarily engaged in the brewing, packaging and marketing of alcoholic and non-alcoholic beverages. The Company has three breweries in Nigeria – Ikeja, Benin and Aba.

The Company later became a public limited liability company and was listed on the Nigerian Stock Exchange (NSE) in 1965. Guinness Nigeria is part of Diageo Group – one of the world’s largest producers of spirits and beers, operating in over 180 countries across the globe. Diageo has over 200 brands of alcoholic beverages spanning across beers, wines and spirits categories including the famous , , J&B, Baileys, , , Guinness Foreign Extra Stout, Beaulem Vineyard and Sterling Vineyard wines.

In January 2016, the Board of Directors approved the acquisition of the rights to import, market, distribute and sell locally the international premium spirit brands of Diageo Plc.-its parent company. As a result, Guinness Nigeria Plc has exclusive distribution rights to a number of Diageo’s brands including Baileys, Smirnoff, Gordons, Captain Morgan, Tanqueray, Ciroc and Johnnie Walker. In 2018, the Company installed polyethylene terephthalate (PET) production lines and commenced the production and sale of its products in PET format.

In line with Guinness Nigeria’s product portfolio expansion strategy, GNPLC acquired the rights to locally manufacture a number of mainstream spirit brands such as Baileys Delight, Smirnoff and Gordons which are part of the Diageo brands. In the same year Guinness Nigeria acquired the right to import, market, sell as well as produce locally MrDowell’s (formerly McDowell’s) and whiskey in Nigeria.

Figure 2: Key milestones of Guinness Nigeria Plc

Began local GNPLC was incorporated as 1963- 1965 2018 2020 manufacturing of a private limited liability Acquired rights to mainstream spirits company, importing import and locally previously imported Guinness Stout into Nigeria. distribute from Diageo Group. The Company built the first international Guinness brewery plant in premium spirit Nigeria in 1962. brands of Diageo

Commenced Installed PET manufacturing production lines and Evolving as a total beverage operations with began the sale of drinks company with a diverse portfolio of alcoholic and Guinness Stout. in PET format Listed on the Completed ₦39.7 bilion non-alcohlic brands which Nigerian Stock public offer cater to diverse consumer groups Exchange in 1965 1950-1962 2016 2019

Source: Financial Statements

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Guinness Nigeria Plc. Ownership Structure Diageo Plc. is the Company’s largest shareholder with a 58.02% equity holding through its subsidiaries: Guinness Overseas Limited (50.18%) and Atalantaf Limited (7.84%). Other institutional investors and private individuals held the balance of 41.98% as at 31 December 2019.

Figure 3: Ownership structure of Guinness Nigeria Plc.

Guinness Nigeria Plc.

Diageo Plc. Other shareholders (58.02%) (41.98%)

Guinness Overseas Atalantaf Limited Limited (7.84%) (50.18%)

Source: Financial Statements

Board Composition and Structure Guinness Nigeria Plc has a thirteen-member Board of Directors comprising 11 non-executive directors (six are independent directors) and two executive directors. The Board is led by Mr. Babatunde Savage as Chairman while Mr. Baker Magunda is the Managing Director/Chief Executive Officer who was appointed in July 2018. During the financial year ended 30 June 2019, Prof. Joe Irukwu, SAN retired from the Board while Mrs. Yemisi Ayeni and Prof. Fabian Ajogwu were appointed to the Board as independent Directors in September and November 2018 respectively. Furthermore, Mr. Paul Gallagher resigned from the Board during the period under review.

Table 1 - Current Directors

Mr. Babatunde Abayomi Savage Chairman Mr. John O’Keeffe Vice Chairman Mr. Baker Magunda Managing Director/Chief Executive Officer Mr. Stanley Njoroge Executive Director – Finance & Strategy Mr. Bismarck Jemide Rewane Non-executive Director Mrs. Zainab Abdurrahman Non-executive Director (Independent) Amb. Sunday Dogonyaro Non-executive Director (Independent) Ms. Ngozi Edozien Non-executive Director (Independent) Dr. (Mrs.) Omobola Johnson Non-executive Director (Independent) Mr. Mark Sandys Non-executive Director Mr. Leo Breen Non-executive Director Mrs. Yemisi Ayeni Non-executive Director (Independent) Prof. Fabian Ajogwu, SAN Non-executive Director (Independent) Source: GNPLC

The Company’s Board of Directors operates through two committees namely; the Nominations, Governance and Remuneration Committee and Finance and Risk Committee. The Nominations, Governance and Remuneration Committee is chaired by Mr. John O’Keeffe, a non-executive director and supported by three other members. Mr. Bismark Rewane leads the Finance, Audit and Risk Committee consists of four other non-executive directors. The Statutory Audit Committee comprises seven members – three Shareholders’ representatives and four Directors’

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Guinness Nigeria Plc. representatives. Mazi Nnamdi Okwuadigbo (Shareholders’ representative) chairs the Statutory Board Audit Committee.

Operating Structure The Company operates from two brewery plants strategically located in Lagos State (Ogba Brewery) and Edo State (Benin Brewery), a logistics centre in Abia State (Aba Brewery) and has its head office situated at 24, Oba Akran Avenue, Ikeja. The plants have a combined installed production capacity of circa 5 million hectolitres and estimated total capacity utilization rate of 80% during FYE 2019. GNPLC has a wide and diverse product portfolio comprising Stout (Guinness Foreign Extra Stout and Guinness Smooth), (Harp and Satzenbrau), Malt (Malta Guinness and Dubic), Readdy to Drink Alcoholic Beverages (Smirnoff Ice, Smirnoff Ice Double Black with Guarana and Alvaro) and Spirits & Bitters (Orijin bitters, Smirnoff X1, Gordon’s Moringa and Baileys Delight).

Table 2: Product categorisation Premium Category Mainstream Category Value Category Guinness Foreign Extra Stout beer Dubic lager, Dubic malt, Dubic Ale Guinness Extra Smooth Malta Guinness Satzenbrau Baileys Orijin bitters Gordon’s Moringa Premium Spirits – Ciroc, Johnnie Smirnoff Ice, Smirnoff Ice Double Black with Guarana Walker Guinness Gold Alvaro

Source: GNPLC

The Company has an extensive network of retailers, wholesalers and distributors, with over 130 major distributors spread across Nigeria and one in the United Kingdom. Guinness Nigeria’s main competitors in Nigeria are Nigerian Breweries Plc and International Breweries Plc (member of the AB-Inbev Group)

Guinness Nigeria Plc maintains Technical Services Agreements and Trademark & Control Agreements with companies in the Diageo Group for various brewed products. The Company also sources some raw materials, engineering spares and fixed assets from other companies within the Group.

Other Information As at 30 June 2019, Guinness had total assets of ₦160.79 billion (2018: ₦132.3 billion), while shareholders’ funds stood at ₦89.1 billion, up from ₦87.6 billion the prior year. In the financial year ended 30 June 2019, the Company generated net revenue (turnover less excise duties) of ₦131.49 billion. In the same period, Guinness Nigeria’s staff strength dipped to 780 persons compared to 804 persons in prior year following the company-wide optimisation strategy.

Table 3 - Background Information

Authorised Share Capital: ₦2.5 billion Paid-up Capital: ₦2.19 billion Shareholders’ Funds: ₦89.09 billion Registered Office: The Ikeja Brewery, Oba Akran Avenue, Ikeja Principal Business: Brewery Auditors: PwC Source: GNPLC 2019 annual report

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Guinness Nigeria Plc. FINANCIAL CONDITION

ANALYSTS’ COMMENTS PROFITABILITY The Company’s principal business involves brewing, packaging, marketing and selling of alcoholic and non- alcoholic beverages, with flagship products such as Guinness Stout, Malta Guinness and Harp Lager beer. Similar to prior year, Nigeria remains the Company’s primary geographical segment accounting for 95% of sales. During the financial year ended 30 June 2019, Guinness Nigeria’s net sales4 contracted by 8% to ₦131.5 billion, owing to the increase in excise duty imposed on alcoholic beverages. In June 2018, the Federal Government of Nigeria implemented a new excise duty regime for alcoholic drinks, particularly beer & stout, wines and spirits of ₦0.30 per centiliter (CL) for beer & stout while and spirit was ₦1.25 and ₦1.5 respectively5. Thus, elevating the cost burden in the brewery industry, particularly as most operators were unable to pass on the additional costs to the final consumers, on account of the fierce competition in the industry. As a result, sales in the beer segment have remained depressed, offsetting the gains recorded in the adult premium non-alcoholic drinks (APNADs includes malt) and spirit segments. Nonetheless, management expect gains from the APNADs and spirit segments to drive demand in the near to medium term.

In the financial year ended 30 June 2019 (FYE 2019), GNPLC’s cost of sales to account for 69% of net sales (2018: 66%), resulting in a lower gross profit margin of 30% (2018:34%). Over 90% of the Company’s packaging materials are locally sourced; however, 63% of GNPLC’s raw materials are imported, an improvement from over 80% recorded over the last five years. We are of the view that Guinness Nigeria is exposed to volatility in the foreign exchange market which could potentially have an adverse impact on cost of imported raw materials. Management has disclosed the Company’s growing use of locally sourced raw materials following its collaboration with local grain farmers and suppliers across the country. We believe that GNPLC will continue to import certain critical raw materials in the international premium spirit category most of which are not available in the domestic market, thus exposing the earnings to downsides from potential currency devaluation, except if adequately hedged.

Figure 4: Operating profit margin (2019-2017) During the period under review, operating expenses to revenue ratio of 24% remained almost at par with the Guinness NB IBP 20% previous year, largely due to cost optimisation of 16% 15% advertising, marketing and distribution expenses. The 10.90% 11% Company moderated spending on lager, following the 8.9% 10% 6.5% 6.5% 7.4% intense competition in the segment but enhanced its 5% 2.0% marketing strategy in premium and mainstream spirit product segments. However, operating profit decreased 0% 2019 2018 2017 significantly by 33% to ₦8.5 billion, on the back of the -5% royalties and technical service fees (₦3.1 billion) paid to -10% its related parties for trademarks and technology -15% licenses which were previously unapproved by the -15.8% -20% National Office for Technology Acquisition and Promotion (NOTAP) two years ago and could not be accrued until a recent court ruling. As a result, the Company recorded an operating profit margin of 6.5% (2018: 8.9%) which was below our expectation and the three-year (2017

4 Net sales represents total revenue less excise duty charges. 5 The new excise duty regime was effective 4th June 2018 and also provides benchmark rates at ₦0.35 per CL in 2019 and 2020 for beer & stout products while the rates on wines and spirits will increase to ₦1.5 and ₦1.75 per CL respectively in 2019 and 2020 while excise duty on spirit will increase to ₦2 per CL.

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Guinness Nigeria Plc. – 2019) average of 7.6%. Nonetheless, when we the factor in the estimated portion to be paid in 2019, operating profit margin stood at 8.1%, higher than the 3-year average. In comparison, Guinness Nigeria’s operating profit margin was above one of its peer- International Breweries Plc (IBP) which reported an operating loss but below – Nigerian Breweries Plc (NB) of 10.9%6. Based on the unaudited figures for the six months ended 31 December 2019 (H1 2019), the Company’s operating profit margin dipped further to 5.2% (H1 2018: 6.8%), largely due to higher marketing and distribution expenses

Guinness Nigeria’s other income comprising operating lease income, interest income on bank deposits and other gains on foreign currency balances amounted to ₦1.2 billion during the FYE 2019. This resulted in a profit before interest and tax of ₦9.7 billion during the same period (2018: ₦15.6 billion). The Company’s interest expense to sales ratio declined to 2% - the lowest recorded in the last five years, due to the absence of foreign exchange loss on the back of the relative stability in the domestic currency. GNPLC’s interest expense to sales ratio is the lowest amongst its peers – IBP: 11.5% and NB:3.8%. However, going forward, we expect this ratio to increase in the near term though marginally, due to the Company’s FCY borrowings. Figure 5: Return on average Equity (2019-2017)

During the financial year ended 30 June 2019, Guinness Guinness NB Yield on T-Bill Nigeria’s pre-tax profit (PBT) declined significantly by 29% 30% 26.1% to ₦7.1 billion. GNPLC’s PBT margin of 5.4% is higher than 25% IBP with negative returns but lower than NB of 7.2%. In line 17.6% with the decline in pre-tax profit, the Company’s 20% 13.9% 15% profitability ratios trended downwards, with pre-tax 15% return on average assets of 6% and pre-tax return on 10% 8% 6% average equity of 8%, both ratios below its peer – NB of 5% 9.2% and 13.9% respectively and average yield on 364-day treasury certificate of 13.9%. Overall, Guinness Nigeria’s 0% 2019 2018 2017 profitability requires improvement.

Subsequent to the year end, the Company’s unaudited accounts for the six months ended 31 December 2019 showed a net sales of ₦68.3 billion, representing a marginal growth from the previous corresponding period. This was supported by the growth in malt and mainstream spirit segment which was moderated by the declining revenue in the beer category, owing to the sustained competition in the market which has resulted in several price wars amongst players. The Company’s profitability ratios dipped, with annualised ROA of 4.6% and annualised ROE of 4.4% respectively. Agusto & Co. expects the implementation of the next round of the graduated increase in excise duties to exert further pressure on profitability, should the competitive landscape remain unchanged.

Going forward, Management has enhanced its product offerings, following the adoption of a ‘total beverage alcohol’ portfolio strategy, which provides a good mix of innovative and value offerings to serve critical consumer segments of the market. Furthermore, the Company is also improving its route-to-market strategy on some of its innovative products while undergoing a channel optimisation strategy. As a result, GNPLC has commenced a transformation of its distributors’ model to aggressively push relatively higher margin products in the mainstream spirit and premium spirit categories. Therefore, management is optimistic that this strategy will propel business growth and increase market share in the near to medium term. In addition, Agusto & Co. is of the view that the continued price wars and fierce competition in the brewery industry is unsustainable in the medium to long term.

6 International Breweries Plc. and Nigerian Breweries Plc. are key players in the breweries industry and both companies financial year ends 31 December while Guinness Nigeria’s year end is 30 June.

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Guinness Nigeria Plc. CASH FLOW

Guinness Nigeria’s capacity to generate cash flow from operations is underpinned by favourable terms of trade with its customers, with sales largely on cash basis. However, the Company also offers credit sales to well-established and large distributors in line with its credit policy and grants an average credit period of 30 to 60 days, depending on the size, stocking capacity and track record of performance. Agusto & Co. notes that as competition in the brewery industry intensified, operators began offering extended credit period to gain market share. As at 30 June 2019, GNPLC trade debtors’ days stood at 57 days compared to 48 days recorded in the prior year. The Company has continued to enjoy favourable trade terms with its suppliers, on account of its strong brand reputation and length of relationship. Consequently, trade creditors days stood at 83 days from 77 days the prior year.

During the financial year ended 30 June 2019, Guinness Nigeria’s operating cash flow (OCF) grew by more than three folds to ₦8.9 billion. This is primarily due to the increase in trade creditors, amounts due to related parties, advance payments and deposits from customers and decrease in other debtors and prepayments. The Company’s OCF was sufficient to cover returns to providers of finance amounting to ₦6.7 billion, comprising interest payment (₦2.6 billion) and dividend (₦4.1 billion). Figure 6: Operating cash flow to sales (2019-2017)

In the FYE 2019, Guinness Nigeria’s operating cash flow 40% 35% as a percentage of sales inched up to 7% higher than the 35% previous year of 1%. Over the last three years (2017- 30% 2019), the Company’s OCF to sales averaged 14%, which 25% is within our benchmark. Furthermore, GNPLC’s operating cash flow as a percentage of returns to 20% providers of finance stood at 409% in 2019 and three- 15% year average of 226%, both better than our 10% 7% expectations. Overall, Agusto & Co. considers Guinness 5% 1% Nigeria’s cash flow profile to be good, largely supported 0% by favourable terms of trade with its customers and 2019 2018 2017 suppliers.

LIQUIDITY PROFILE As at 30 June 2019, the Company’s liquidity position comprised cash and cash equivalents of ₦7.7 billion and committed undrawn bank lines amounting to ₦31.4 billion (comprising local currency of ₦17.53 billion and foreign currency of $38.37 million). Guinness Nigeria’s undrawn bank lines are sourced from six deposit money banks including three international banks with domestic presence and have maturities ranging from 30 days to 12 months. The Company obtained a $99 million credit line from Diageo Finance at Libor plus 4.75%, of which about $49 million was converted to equity, while GNPLC has drawn $22.5 million from this facility and the balance of $23 million remains undrawn. Agusto & Co notes with concern the debt burden this FCY loan may have on the Company’s financial performance in the future, should the domestic currency continue to be devalued and the prolonged impact of Covid-19 on GNPLC’s output.

Agusto & Co. considers Guinness Nigeria’s liquidity profile to be satisfactory, underpinned by its sizeable cash balance and committed undrawn lines. Overall, we note that this demonstrates the Company’s good reputation in the money market and its ability to raise finance at short notice to meet maturing obligations in the short to medium term.

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Guinness Nigeria Plc. FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL

As at 30 June 2019, Guinness Nigeria’s working assets stood at ₦49.7 billion, up from ₦40 billion the prior year, largely due to the increase in inventories (particularly raw materials and finished products) and trade debtors. The Company strategically ramped up the purchase of raw materials given the incessant delays at the ports which could adversely affect its operations and hedge volatility of foreign exchange as well as commodity prices on the international market. Although we believe inventory holding cost could trend upwards in the near term, due to the impact of the Covid-19 pandemic and the disruption to supply chains. As at year end, GNPLC’s working assets comprised inventories (47%), trade debtors (41%), other debtors & prepayments (10%) and amount due from related parties (1%). Figure 7: Short term financing surplus (₦'billion) As at 2019-year end, Guinness Nigeria’s spontaneous financing (non-interest bearing liabilities) stood at ₦60.1 45 39.0 billion. As at the same date, spontaneous financing consisted 40 of trade creditors (34%), deferred taxation (23%), amounts 35 due to related parties (20%), other creditors & accruals (13%), 30 dividend payable (5%), taxation payable (3%), employee 25 19.3 benefits (2%) and advance payments & deposits from 20 customers (1%). The Company’s spontaneous financing was 15 more than sufficient to finance working assets, leaving a 10.3 10 short-term financing surplus of ₦10.3 billion as at year end. 5 Over the last decade, Guinness Nigeria has consistently 0 recorded short term financing surpluses on account of its 2019 2018 2017 favourable terms of trade, which we consider comparable with industry practice. Therefore, Agusto & Co. expects the Company to continue to benefit from financing surplus in the short term.

As at 30 June 2019, GNPLC’s long term assets stood at Figure 8: Long term financing need (₦'billion) ₦103.3 billion (2018: ₦101.7 billion) while long term funds 0 2019 2018 2017 comprising equity (94.6%) and long term borrowings (5.4%) -5 amounted to ₦94.1 billion (2018: ₦93.2 billion). As at year -10 -8.5 end, the Company’s long term funds were inadequate to -9.1 -15 finance the long term assets, thus leaving a long term -20 financing need of ₦9.1 billion. However, GNPLC’s short -25 term financing surplus of ₦10.3 billion sufficiently funded long term financing need as at year end. Agusto & Co. notes -30 that over the last five years, Guinness Nigeria has -35 consistently recorded long term financing need, largely -40 attributable to the continuous capacity expansion -45 programme, overhaul of its packaging line and expansion of -50 -46.0 its distribution infrastructure. In 2018, GNPLC had a ₦40 billion rights issue, of which cash receipts accounted for 62% while the balance was conversion of shareholders’ loan. This equity raise helped to reduce the historical long term financing need. Going forward, Management has disclosed plans to register a commercial paper program to address funding requirements, though we note that this is short term in nature. Agusto & Co. however believes that raising additional long term funds will aid in eliminating the long term financing need in the Company’s capital structure. Overall, Guinness Nigeria has a satisfactory working capital.

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Guinness Nigeria Plc. LEVERAGE

As at 30 June 2019, Guinness Nigeria’s total liabilities stood at ₦71.7 billion, representing a 9% growth from the prior year, due to an increase in both non-interest bearing and interest bearing liabilities. As at year end, non- interest bearing liabilities (NIBL) accounted for 84% of the Company’s total liabilities while interest bearing liabilities (IBL) represented the balance of 16%. As at same date, NIBL largely comprised trade creditors (34%), deferred taxation (23%), amounts due to related parties (20%), other creditors & accruals (13%) and dividend payable (5%) amongst others.

As at 30 June 2019, Guinness Nigeria’s interest bearing liabilities inched up to ₦11.6 billion, on account of additional bank loans obtained during the year under review. The breakdown of the Company’s IBL comprised short term borrowings (56%) and long term borrowings (44%), most of which are trade related facilities. Agusto & Co. notes that Guinness Nigeria recorded a net foreign currency (FCY) liability of ₦10.9 billion (2018: ₦10.4 billion), largely from its parent company – Diageo, as GNPLC has continued to benefit from related party transactions for sourcing of international premium spirits, sensitive raw materials, trademarks and technical support. We note that a further devaluation of the domestic currency will increase the value of the FCY liability. Figure 9: Interest expense to sales ratio During the FYE 2019, Guinness Nigeria’s interest expense declined significantly by 54% to ₦2.6 billion, on account of 9% 8% the relative stability in the exchange rate for the most part 8% of the financial year. In the prior year, GNPLC recorded a 7% foreign exchange loss on its FCY borrowings which elevated interest expense at the time. Agusto & Co. notes 6% that the Company’s interest expense accounted for 2% of 5% 4% sales – lowest recorded in the last five years and amongst 4% its peers. Following the decline in interest expense, interest 3% cover improved markedly to 3.42 times from less than one- 2% time the previous year, just above our benchmark of 3 2% times for companies operating in the breweries industry. 1% As at 30 June 2019, the Company’s total assets was funded 0% by shareholders’ funds (55.4%) and total liabilities (44.6%) 2019 2018 2017 depicting a good equity cushion for a large manufacturing company. Overall, we consider Guinness Nigeria’s leverage metrics low.

Subsequent to the year end, management has disclosed plans to issue commercial papers in the domestic market to reduce its dependence on FCY borrowings and fund trade related activities (working capital). Agusto & Co. notes that GNPLC has a strong reputation in the money market, given that Guinness Nigeria is part of a large global brand with strong market perception. As a result, the Company has substantial credit lines from commercial banks; therefore, we expect the funding raising exercise to be successful. Consequently, we estimate funding costs to remain low by FYE 2020, following the low yield interest environment in the money market.

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Guinness Nigeria Plc. OWNERSHIP, MANAGEMENT & STAFF

As at 30 June 2019, Guinness Nigeria Plc’s had over 68,000 shareholders with Diageo Group Plc holding 58.02% of the Company’s shares via its subsidiaries Guinness Overseas Limited and Atalantaf Limited. The remaining shares are held by other investors. Figure 10: Ownership structure of Guinness Nigeria Plc

Guinness Other Overseas shareholders Limited 41.98% 50.18%

Atalantaf Limited 7.84%

Source: GNPLC Annual Reports

As at 30 June 2019, the Company had a 13-member Board of Directors led by the Chairman, Mr. Babatunde Savage. The Chairman is supported by Mr. Baker Magunda (who has been the Managing Director/Chief Executive Officer since July 2018), an Executive Director and 10 Non-Executive Directors. During the year under review, Mrs. Yemisi Ayeni and Prof. Fabian Ajogwu were appointed to the Board as independent Directors, while Prof. Joe Irukwu, SAN retired and Mr. Paul Gallagher resigned from the Board.

Guinness Nigeria’s management team comprises nine members, each reporting directly to the MD/CEO. We note that majority of the management team have worked within the Diageo Group in various capacities and countries prior to the current positions in the Company. In addition, the members of the management team have relevant working experience with a number of multinationals. Agusto & Co. notes that GNPLC has experienced and qualified management team.

As at 30 June 2019, the Company had a staff strength of 780 employees (2018: 804) on its payroll, with majority working in Operations & Technical (46%), Sales (43%), Finance, IT and Human Resources (7%), Marketing (3%) and Legal & Corporate Affairs (1%). In the year under review, Guinness Nigeria’s average cost per employee decreased by 6% to ₦11.2 million (2018: ₦11.9 million). In the same period, operating profit before staff costs contribution per staff which stood at ₦22.2 million could cover average costs per employee 2 times, indicating satisfactory staff productivity but lower than our benchmark for a brewery operator.

Management Team Mr. Baker Magunda is the Managing Director and Chief Executive Officer following his appointment in July 2018. He has nearly twenty years’ experience in the consumer goods and alcohol industry and has worked across Africa in Uganda and Kenya as well as Ethiopia and the Sudan. Mr. Magunda started his career in sales and marketing at Coca-Cola Sabco in 1991 and rose to become the Head of Sales in 1996. He joined Diageo Group in 1999 as Marketing Manager, Uganda Breweries Limited and has held several strategic leadership roles including Managing Director Uganda Breweries Limited, Managing Director Kenya Breweries Limited and Managing Director Diageo Guinness Cameroon SA. Prior to joining Guinness Nigeria, Mr. Magunda was the Managing Director of Diageo

12 2020 Corporate Rating Report

Guinness Nigeria Plc. Ethiopia and the Indian Ocean Markets. He holds a Bachelor’s Degree in Economics from Makerere University Uganda.

Mr. Stanley Wanyoike Njoroge is the Chief Financial Officer (a position he has held since 2015) and was appointed to the Board as an Executive Director in March 2018. Mr. Njoroge’s initial experience was in tax advisory with Deloitte & Touche East Africa providing tax consultancy and managing tax clients in Kenya and Uganda. He joined Diageo Group in 2008 as the Tax Manager in East Africa Breweries Limited (EABL) and expanded his experience within the larger finance group of Diageo. Mr. Njoroge has held a number of key finance leadership roles across Asia and Africa including Financial Controller of Limited, Finance Director of PT Gitaswara Indonesia and Finance Director of Meta Abo Brewery SC/Diageo Ethiopia. In his most recent role as the Diageo Global Audit and Risk Director, Africa and Europe, he was responsible for providing assurance to the audit committee of Diageo Board of Directors on the management of key risks across Diageo’s businesses in Africa (Nigeria, East Africa, South Africa, and African Regional Markets) and across Europe markets. Mr. Njoroge is a Certified Public Accountant and a member of the Institute of Certified Accountants of Kenya (ICPAK). He is an alumnus of both the University of Nairobi and Strathmore University in Nairobi Kenya.

Other members of the Guinness Leadership team include:

Omatsola Barrow Commercial Director Viola Graham-Douglas Corporate Relations Director Adebayo Alli Director – IPS, Reserve & Key Accounts Adediran Aderemi Human Resources Director Rotimi Odusola Legal Director/ Company Secretary Adenike Adebola Marketing & Innovation Director Colman Hanna Supply Chain Director Source: GNPLC

13 2020 Corporate Rating Report

Guinness Nigeria Plc. OUTLOOK Over the last three years, the domestic brewery industry has evolved, with competition intensifying, owing to the entry of a global player through acquisitions. As a result, there has been a drastic shift in product pricing regime, resulting in frequent price wars particularly in the beer segment, redesigning of product packaging as well as an expansion in the product portfolio of operators. During the period under review, aggressive competition amidst weak consumer wallets coupled with the regulatory headwinds of higher sin tax imposed on alcoholic beverage and declining volumes from the beer segment muted growth in Guinness Nigeria’s net revenue. Despite the gains recorded from cost cutting initiatives, the Company’s operating margin remained depressed, on the back of the outstanding royalties and technical service fees which was accrued for 2017 and 2018.

In response to the more challenging operating environment, management has adopted a ‘total beverage alcohol’ portfolio strategy, following its wide and well-diversified product offerings targeted at different consumer segments of the market. This strategy seeks to shift the Company’s focus to spirit business segment (mainstream spirits and international premium spirits) which are known to have relatively higher margins across the spectrum of alcoholic beverages. Therefore, management is projecting the contribution from the spirit category between 25 to 30%, just above 20% recorded in FYE 2019. Agusto & Co. believes this forecast may not be achievable, with the cancellation of sporting activities and social gathering well into Q2 2020, owing to the Covid-19 pandemic. Furthermore, management is optimistic that the APNADs segment which has flagship brands in the malt category (Malta Guinness and Dubic Malt) will continue to gain traction and aid in fuelling business growth in the near term. Agusto & Co. believes that this move should help cushion the effect of the contraction in the beer segment.

The Company has commenced a route-to-market optimisation strategy which seeks to transform its distribution model and expand its channels to aggressively drive volumes in the mainstream spirit and premium spirit categories. Going forward, Management intends to continue to effectively deploy resources to remain top of mind for the consumers and drive volume on value products as well as flagship products in the stout segment – Guinness Extra Stout which appeals to large number of consumers.

Management has disclosed plans to register a commercial paper programme to address working capital needs which could help in tempering exposure to FCY risks. Agusto & Co. believes that there is legroom for moderation in finance cost, following the low yield environment in the money market coupled with the fact that the market is awash with liquidity. Notwithstanding, we are of the view that moderating FCY exposures is critical in the face of further currency devaluation and devastating impact from a prolonged Covid-19 pandemic. Agusto & Co. therefore believes that raising long term funding will eliminate this risk.

Overall, we expect profitability to remain low in the near term, on account of negative macroeconomic headwinds, declining consumption and weakening of consumer wallets which will adversely impact demand generally. However, should the pandemic moderate in the short term, we expect the Company’s profitability to gradually recover in the medium term, boosted by an aggressive volume growth in the spirit and APNADs segment, sustained improvement in cost and operational efficiencies as well as enhanced route-to-market strategy that seeks to push its innovative product offerings. Agusto & Co. expects operating cash flow to remain positive and working capital to moderate, particularly as GNPLC continues to enjoy favourable terms of trade with customers, suppliers and related parties. We expect leverage to remain low and believe that the Company will continue to enjoy strong parental support from Diageo Plc. Based on the aforementioned, we have attached a stable outlook to Guinness Nigeria Plc.

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Guinness Nigeria Plc. FINANCIAL SUMMARY

STATEMENT OF FINANCIAL POSITION AS AT 30-Jun-19 30-Jun-18 30-Jun-17 ₦'000 ₦'000 ₦'000 ASSETS IDLE CASH 4,727,627 2.9% 7,422,130 4.8% 6,565,580 4.5% MARKETABLE SECURITIES & TIME DEPOSITS 3,020,907 1.9% 3,389,654 2.2% 3,367,285 2.3% CASH & EQUIVALENTS 7,748,534 4.8% 10,811,784 7.1% 9,932,865 6.8%

FX PURCHASED FOR IMPORTS ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS STOCKS 23,366,310 14.5% 15,978,064 10.4% 19,930,619 13.6% TRADE DEBTORS 20,551,681 12.8% 18,610,741 12.1% 16,299,545 11.2% DUE FROM RELATED PARTIES 698,689 0.4% 525,623 0.3% 5,103,628 3.5% OTHER DEBTORS & PREPAYMENTS 5,171, 169 3.2% 5,672,225 3.7% 2,918,713 2.0%

TOTAL TRADING ASSETS 49,787,849 31.0% 40,786,653 26.6% 44,252,505 30.3%

INVESTMENT PROPERTIES OTHER NON-CURRENT INVESTMENTS PROPERTY, PLANT & EQUIPMENT 100,801,064 62.7% 97,602,019 63.7% 87,324,546 59.8% SPARE PARTS, RETURNABLE CONTAINERS, ETC 1,814,121 1.1% 3,054,298 2.0% 3,163,880 2.2% GOODWILL, INTANGIBLES & OTHER L T ASSETS 641,059 0.4% 1,000,214 0.7% 1,364,420 0.9%

TOTAL LONG TERM ASSETS 103,256,244 64.2% 101,656,531 66.3 % 91,852,846 62.9%

TOTAL ASSETS 160,792,627 100.0% 153,254,968 100.0% 146,038,216 100.0% Growth 4.9% 4.9% 6.6%

LIABILITIES & EQUITY

SHORT TERM BORROWINGS 6,545,014 4.1% 7,537,760 5.2% CURRENT PORTION OF LONG TERM - - 9,339,005 6.4% BORROWINGS LONG-TERM BORROWINGS 5,086,325 3.2% 5,572,958 3.6% 2,953,539 2.0% TOTAL INTEREST BEARING LIABILITIES (TIBL) 11,631,339 7.2% 5,572,958 3.6% 19,830,304 13.6% TRADE CREDITORS 20,717,912 12.9% 20,029,198 13.1% 20,514,653 14.0% DUE TO RELATED PARTIES 11,720,956 7.3% 10,128,500 6.6% 35,492,298 24.3% ADVANCE PAYMENTS AND DEPOSITS FROM 433,457 0.3% CUSTOMERS OTHER CREDITORS AND ACCRUALS 7,777,525 4.8% 9,179,942 6.0% 9,138,162 6.3% TAXATION PAYABLE 1,685,791 1.0% 2,841,607 1.9% 150,756 0.1% DIVIDEND PAYABLE 2,994,076 1.9% 3,211,277 2.1% 3,482,928 2.4% DEFERRED TAXATION 13,800,562 8.6% 13,598,563 8.9% 13,506,315 9.2% OBLIGATIONS UNDER UNFUNDED PENSION 970,547 0.6% 1,104,749 0.7% 979,785 0.7% SCHEMES MINORITY INTEREST REDEEMABLE PREFERENCE SHARES TOTAL NON-INTEREST BEARING LIABILITIES 60,100,826 37.4% 60,093,836 39.2% 83,264,897 57.0% TOTAL LIABILITIES 71,732,165 44.6% 65,666,794 42.8% 103,095,201 70.6% SHARE CAPITAL 1,095,191 0.7% 1,095,191 0.7% 752,944 0.5% SHARE PREMIUM 47,447,029 29.5% 47,447,029 31.0% 8,961,346 6.1% IRREDEEMABLE DEBENTURES REVALUATION SURPLUS OTHER NON-DISTRIBUTABLE RESERVES - - REVENUE RESERVE 40,518,242 25.2% 39,045,954 25.5% 33,228,725 22.8% SHAREHOLDERS' EQUITY 89,060,462 55.4% 87,588,174 57.2% 42,943,015 29.4% TOTAL LIABILITIES & EQUITY 160,792,627 100.0% 153,254,968 100.0% 146,038,216 100.0%

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Guinness Nigeria Plc.

STATEMENT OF COMPREHENSIVE INCOME FOR 30-Jun-19 30-Jun-18 30-Jun-17 THE YEAR ENDED ₦'000 ₦'000 ₦'000 TURNOVER 131,498,373 100.0% 142,975,792 100.0% 125,919,817 100.0% COST OF SALES (91,369,145) -69.5% (94,350,387) -66.0% (77,604,513) -61.6% GROSS PROFIT 40,129,228 30.5% 48,625,405 34.0% 48,315,304 38.4% OTHER OPERATING EXPENSES (31,608,803) -24.0% (35,907,520) -25.1% (38,976,307) -31.0% OPERATING PROFIT 8,520,425 6.5% 12,717,885 8.9% 9,338,997 7.4% OTHER INCOME/(EXPENSES) 1,196,514 0.9% 2,869,839 2.0% 3,100,718 2.5% PROFIT BEFORE INTEREST & TAXATION 9,716,939 7.4% 15,587,724 10.9% 12,439,715 9.9% INTEREST EXPENSE (2,613,309) -2.0% (5,644,560) -3.9% (9,777,634) -7.8%

PROFIT BEFORE TAXATION 7,103,630 5.4% 9,943,164 7.0% 2,662,081 2.1% TAX (EXPENSE) BENEFIT (1,619,898) -1.2% (3,225,559) -2.3% (738,361) -0.6% PROFIT AFTER TAXATION 5,483,732 4.2% 6,717,605 4.7% 1,923,720 1.5% NON-RECURRING ITEMS (NET OF TAX) 2,090 0.0% (32,584) 0.0% (35,333) 0.0% MINORITY INTERESTS IN GROUP PAT PROFIT AFTER TAX & MINORITY INTERESTS 5,485,822 4.2% 6,685,021 4.7% 1,888,387 1.5% DIVIDEND (3,884,573) -3.0% (867,792) -0.6% (605,977) -0.5% PROFIT RETAINED FOR THE YEAR 1,601,249 1.2% 5,817,229 4.1% 1,282,410 1.0% SCRIP ISSUES OTHER APPROPRIATIONS/ ADJUSTMENTS (128,961) PROFIT RETAINED B/FWD 39,045,954 33,228,725 31,946,315 PROFIT RETAINED C/FWD 40,518,242 39,045,954 33,228,725 - - -

ADDITIONAL INFORMATION 30-Jun -19 30-Jun -18 30-Jun -17 Staff costs (₦'000) 8,769,401 9,599,511 11,545,819 Average number of staff 780 804 951 Staff costs per employee (₦'000) 11,243 11,940 12,141 Staff costs/Turnover 6.7% 6.7% 9.2% Capital expenditure (₦'000) 13,083,278 19,276,014 9,111,757 Depreciation expense - current year (₦'000) 9,734,548 8,874,523 8,635,004 (Profit)/Loss on sale of assets (₦'000) - - -

Number of 50 kobo shares in issue at year end ('₦'000) 2,190,382 2,190,382 1,505,888 Market value per share of 50 kobo (year end) 4,765 9,705 7,150 Market capitalisation (₦'000) 753,627,212 677,666,954 418,805,523 Market/Book value multiple 8.5 7.7 9.8

Non-operating assets at balance sheet date (=N='000) - - - Market value of tradeable assets (=N='000) Revaluation date - Investment properties Revaluation date - Other properties Average age of depreciable assets (years) 10 9 8 Sales at constant prices - base year 1985 (=N='000) 382,194 462,132 452,767 Auditors PWC PWC PWC Opinion CLEAN CLEAN CLEAN

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Guinness Nigeria Plc.

CASH FLOW STATEMENT FOR Y/E 30-Jun-19 30-Jun-18 30-Jun-17 =N='000 =N='000 =N='000

OPERATING ACTIVITIES Profit after tax 5,483,732 6,717,605 1,923,720 ADJUSTMENTS Interest expense 2,613,309 5,644,560 9,777,634 Minority interests in Group PAT - - - Depreciation 9,734,548 8,874,523 8,635,004 (Profit)/Loss on sale of assets - - - Other non-cash items -128,961 Potential operating cash flow 17,702,628 21,236,68 8 20,336,358 INCREASE/(DECREASE) IN SPONTANEOUS FINANCING: Trade creditors 688,714 (485,455) 2,346,690 Due to related parties 1,592,456 (25,363,798) 24,571,323 Advance payments and deposits from customers 433,457 - - Other creditors & accruals (1,402,417) 41,780 697,119 Taxation payable (1,155,816) 2,690,851 (434,968) Deferred taxation 201,999 92,248 565,500 Obligations under unfunded pension schemes (134,202) 124,964 (267,071) Minority interest - - - Cash from (used by) spontaneous financing 224,191 -22,899,410 27,478,593

(INCREASE)/DECREASE IN WORKING ASSETS: FX purchased for imports - - - Advance payments and deposits to suppliers - - - Stocks (7,388,246) 3,952,555 (8,630,483) Trade debtors (1,940,940) (2,311,196) 7,749,554 Due from related parties (173,066) 4,578,005 (4,357,148) Other debtors & prepayments 501,056 (2,753,512) 1,470,589 Cash from (used by) working assets (9,001,196) 3,465,852 (3,767,488) CASH FROM (USED IN) OPERATING ACTIVITIES 8,925,623 1,803,130 44,047,463

RETURNS TO PROVIDERS OF FINANCING Interest paid (2,613,309) (5,644,560) (9,777,634) Dividend paid -4,101,774 -1,139,443 -983,524 CASH USED IN PROVIDING RETURNS ON FINANCING (6,715,083) (6,784,003) (10,761,158) OPERATING CASH FLOW AFTER PAYMENTS TO PROVIDERS OF FINANCING 2,210,540 (4,980,873) 33,286,305

NON-RECURRING ACTIVITIES Non-recurring items (net of tax) 2,090 (32,584) (35,333) CASH FROM (USED IN) NON-RECURRING ACTIVITIES 2,090 (32,584) (35,333)

INVESTING ACTIVITIES Capital expenditure (13,083,278) (19,276,014) (9,111,757) Sale of assets 149,685 124,018 385,191 Purchase of other long term assets (net) -1,098,381 Sale of other long term assets (net) 1,599,332 473,788 -

CASH FROM (USED IN) INVESTING ACTIVITIES (11,334,261) (18,678,208) (9,824,947)

FINANCING ACTIVITIES Increase/(Decrease) in short term borrowings 6,545,014 (7,537,760) (6,670,347) Increase/(Decrease) in long term borrowings (486,633) (6,719,586) (12,667,337) Proceeds of shares issued - 38,827,930 - CASH FROM (USED IN) FINANCING ACTIVITIES 6,058,381 24,570,584 (19,337,684)

CHANGE IN CASH INC/(DEC) (3,063,250) 878,919 4,088,341 OPENING CASH & MARKETABLE SECURITIES 10,811,784 9,932,86 5 5,844,524

CLOSING CASH & MARKETABLE SECURITIES 7,748,534 10,811,784 9,932,865

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Guinness Nigeria Plc.

STATEMENT OF CASH FLOW FOR THE YEAR ENDED 30-Jun-19 30-Jun-18 30-Jun-17 ₦'000 ₦'000 ₦'000 Operating cash flow (OCF) 8,925,623 1,803,130 44,047,463 Less: Returns to providers of finance (6,715,083) (6,784,003) (10,761,158) OCF after returns to providers of finance 2,210,540 (4,980,873) 33,286,305 Non-recurring items 2 (33) (35,333) Free cash flow 2,210,542 (4,980,906) 33,250,972 Investing activities (11,334,261) (18,678,208) (9,824,947) Financing activities 6,058,381 24,570,584 (19,337,684) Change in cash (3,065,338) 911,470 4,088,341

PROFITABILITY PBT as % of Turnover 5% 7% 2% Return on equity 8% 15% 6% Sales growth -8.0% 13.5% 23.5%

CASH FLOW Interest cover (times) 3.4 0.3 4.5 Principal payback (years) - - 1.0

WORKING CAPITAL Working capital need (days) 5 - - Working capital deficiency (days) - - 20

LEVERAGE Interest bearing debt to Equity 4% 0% 23% Total debt to Equity 72% 63% 217%

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Guinness Nigeria Plc.

RATING DEFINITIONS Aaa This is the highest rating category. It indicates a company with impeccable financial condition and overwhelming ability to meet obligations as and when they fall due.

Aa This is a company that possesses very strong financial condition and very strong capacity to meet obligations as and when they fall due. However, the risk factors are somewhat higher than for Aaa obligors.

A This is a company with good financial condition and strong capacity to repay obligations on a timely basis.

Bbb This refers to companies with satisfactory financial condition and adequate capacity to meet obligations as and when they fall due.

Bb This refers to companies with satisfactory financial condition but capacity to meet obligations as and when they fall due may be contingent upon refinancing. The company may have one or more major weakness (es).

B This refers to a company that has weak financial condition and capacity to meet obligations in a timely manner is contingent on refinancing.

C This refers to an obligor with very weak financial condition and weak capacity to meet obligations in a timely manner.

D In default.

Rating Category Modifiers A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category. Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the - (minus) sign.

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