Agusto & Co. Guinness Nigeria

Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT

Guinness Nigeria Plc

Issuer Rating: A company with good financial condition and strong capacity A- to meet obligations

Outlook: Stable RATING RATIONALE Issue Date: November 2014 Expiry Date: December 2015 Guinness Nigeria Plc (“Guinness” or “the Company”) is one of the two Previous Rating: None leading alcoholic beverage companies in Nigeria with the largest market

share in the stout segment. The Company‟s large market share in the Industry: Brewery brewing market is supported by its strong brand name, technical assistance from its parent company (Diageo Plc) and an improved

distribution network. INSIDE THIS REPORT Rationale 1 We have assigned an “A-” rating to Guinness Nigeria Plc. The rating Nigerian Brewery Industry 3 Company Profile 4 assigned reflects Guinness‟ good profitability, good cash flow and Financial Condition 6 moderate leverage. The rating also reflects the explicit support of Diageo Ownership, Mgt & Staff 11 Outlook 13 Plc which controls 54.32% of the Company‟s shareholding. However, the Financial Summary 16 Company‟s rating is tempered by inadequate working capital. Rating Definition 17 Diageo Plc is one of the global leaders in alcoholic beverage, with strong

presence in more than 180 countries with total assets in excess of £22,964 Analysts: million as at 30 June 2014. Diageo Plc offers technical, product quality Ikechukwu Iheagwam and operations support to Guinness Nigeria Plc. [email protected] During the year under review, Guinness‟ profitability dipped due to low Isaac Babatunde patronage arising from changing consumer patterns, increased pricing, [email protected] poor distribution infrastructure, which was further exacerbated by higher Agusto & Co. Limited operational expense and finance costs. Nevertheless, Guinness recorded a UBA House (5th Floor) satisfactory profit before tax to sales ratio of 11% and a return on equity 57, Marina of 26%, which is significantly above the average yield on treasury Lagos Nigeria certificates.

Guinness has favourable terms of trade with its customers and suppliers; www.agusto.com hence the Company has over the past three years recorded sufficient

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

spontaneous financing to cover its working assets. Nonetheless, the long

term funds are inadequate to cover the long term assets; hence the Company record working capital deficiency which was financed with short term borrowing.

The Company‟s operating cash flow reduced significantly by 29% from prior year largely on account of increased receivables in respect of export expansion grant from the Federal Government. Nonetheless, Agusto & Co. believes that the launch of Guinness‟ new products (Orijin bitters, Master‟s choice spirits and Alvaro) should improve sales which could translate to improved operating cash flow in the short to medium term.

Guinness plans to further expand its Aba Brewery plant to support its Orijin bitters product manufacture; optimize the Ikeja warehouse and upgrade its logistics center in Aba, through debt financing in the near term. The performance of the Company dipped over the last two years, owing to growing competition, low consumer spending and inefficient distribution network. However, we expect the huge capital expenditure of ₦52 billion on expansion and improved distribution network over the last two years and recent innovative products to strengthen the Company‟s performance going forward.

Based on the aforementioned, we have attached a stable outlook to Guinness Nigeria Plc.

Strengths

•Well established and diverse brands •Qualified management team •Strong support from parent company - Diageo Plc •Dominant leader in the stout market •Good profitability •Good cash flow

Weakness

•Inadequate working capital

Challenges

•Stiff competition for products in the value segments •Sub-optimal distribution network in rural areas

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

THE NIGERIAN BREWERY INDUSTRY Brewing is classified under the Food, Beverage and Tobacco (FBT) industry in Nigeria. The Industry is one of the largest subset accounting for 53% of the rebased manufacturing sectors‟ contribution to Gross Domestic Product in 2013. Nigeria‟s FBT industry is largely dominated by the beer and carbonated soft drink (CSD) categories, however, packaged Juice, Spirit, Wine and Other „ready-to-drink‟ beverages (RTDs) are increasing market penetration and share.

The brewery industry has been largely dominated by two companies over the last five decades, however it is gradually moving from a duopoly industry, to an oligopolistic one. Heineken, one of the big four brewing giants in the world has a 71% market volume share in the Nigerian Brewery Industry, through its two subsidiaries, Nigerian Breweries Plc (61%) and Consolidated Breweries (10%). Diageo, another prominent brewery has a 27% market volume share through its stake in Guinness Nigeria Plc. South African Breweries Miller (SAB Miller), a new entrant to the market has a growing stake in the industry through the acquisition of two regional brewing companies, Pabod Breweries in Port Harcourt and International Breweries with plants in Ilesha and Onitsha.

Notably, Nigerian Breweries Plc has the largest capacity and coverage, with about ten brewing and malting plants located across the country, estimated to have total capacity of 15.4 million hectolitres (mhl). Guinness Nigeria Plc operates three brewing plants with estimated total beer capacity of 6.5mhl and mainstream spirit capacity of 1.6 million equivalent units (EU), Consolidated Breweries has estimated capacity of 3.7mhl, while SABM has built up its capacity to approximately 1.8mhl.

As at 2012 year end, the volume of the Nigerian beer market was estimated at 20mhl, with an estimated annual growth rate of 5 - 7% until 2020. However, as a result of high cost of living, reduced disposable income and insecurity challenges, the sectors‟ performance declined by an estimated 2.5% in 2013. A further breakdown of the Nigerian beer market indicates that Lager beer accounts for 58% of the total market share; Stout has 27% and the balance of 15% attributable to spirits, wines and RTDs. In the malt segment, Nigerian Breweries controls 61.4% of the market share while Guinness controls 30.1%, leaving the balance (8.5%) to the other breweries. The Nigerian brewery industry is also categorized into the premium, mainstream and value product segment.

The introduction of Alomo bitters by Kasapreko Company Limited, an alcoholic herbal drink in 2010, challenged the dominance of all other alcoholic spirit drinks including beer, thus posing a great competition in the spirit segment of the alcoholic drink market. The product was favoured by the majority as a result of the perceived medicinal benefits accorded to herbal products. Growth in consumption of spirit consumers, prominent among is Alomo bitters, was partly responsible for the drag in the performance of beer in 2012 and 2013. Consequently, Guinness Nigeria Plc, recently launched Orijin bitters and Orijin RTD - a blend of herbs and fruits with bitter-sweet flavor.

We believe the long-term prospects for growth of the Nigerian Brewing Industry remain attractive and we anticipate further acquisitions of smaller and inoperative brewery plants by larger plants, in order to consolidate and compete in the value segments. 3 ©Agusto & Co. 2014 Corporate Rating

Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

PROFILE Guinness Nigeria Plc was incorporated on 29 April 1950 as a trading company importing Guinness Stout from Dublin, under the name Guinness Nigeria Ltd. In 1963, the Company commenced production in Nigeria and was listed on the Nigerian Stock Exchange (NSE) in 1965.

Guinness is an integral part of Diageo Group Plc, the world‟s leading premium drinks, trading in over 180 countries around the world, with an outstanding collection of beverages and alcoholic brands across spirits, wines and beer categories such as Johnnie Walker, Smirnoff, J&B, Baileys, Tanquery, Captain Morgan, Guinness Foreign Extra Stout, Beaulem Vineyard and Sterling Vineyard wines.

Guinness Nigeria Plc is primarily engaged in the brewing, packaging and marketing of alcoholic and non- alcoholic beverages, comprising Stout (Guinness Foreign Extra Stout and Guinness Extra Smooth), Lager (Harp, Satzenbrau Pilsner and Dubic), Malt (Malta Guinness, Malta Guinness Low Sugar, TopMalt), Flavoured Alcoholic Beverages (Smirnoff Ice, Snapp and Alvaro) and Spirits & Bitters (Master‟s Choice, Orijin ready to drink and Orijin bitters).

During the financial year ended 30 June 2014 (FYE 2014), the Company launched Orijin Bitters and Orijin RTD – premium drink with herbal extracts, Master‟s Choice Spirits – premium spirit with whisky flavors and Alvaro non-alcoholic malt based drink.

Guinness Nigeria Plc maintains Technical Services Agreement and Trademark and Control Agreement with companies in the Diageo Group for various brewed products. In addition, the Company sources some of its raw materials, engineering spares and fixed assets from other related companies within the Group.

Guinness Nigeria Plc‟s head office is situated at 24, Oba Akran Avenue, Ikeja, while its 3 brewery plants are located in Lagos, Benin and Aba. The plants have a combined beer production capacity of 6.5 million hectolitres and production capacity of 1.6 million EU for mainstream spirits.

The Ogba Brewery (Beer Capacity: 3.2 mhl & Spirit Capacity: 0.6 million EU) The Ogba brewery located at Acme Road, Industrial Estate, Ogba, Ikeja was commissioned in 1963. The brewery has undergone various expansions & upgrades and currently produces the following products – Foreign Extra Stout, Malta Guinness (classic and low sugar), Harp Lager beer, Orijin RTD, Snapp, Alvaro, Dubic, Satzenbrau, Smirnoff Ice, Dubic Malt, Master‟s Choice, Orijin bitters and Orijin RTD.

The Benin Brewery (Beer capacity: 3 mhl) The Benin Brewery located at Benin/Asaba Road, Benin City was commissioned in 1973 and currently produces, Foreign Extra Stout, Harp Extra Smooth, Dubic and Malta Guinness (classic and low sugar).

The Aba Brewery (Beer capacity: 0.3 mhl & spirit capacity: 1.0 million EU) The Aba brewery is located at Osisioma Industrial Layout, Aba. It was commissioned in 2004 to further increase capacity to meet increasing demands and serve the eastern part of the Country. The plant currently

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

produces Malta Guinness and would commence production of Orijin bitters in Q4‟2014.

The Company‟s products are sold through several distributors spread across the country and one in the United Kingdom. Guinness‟ main competitor is Nigerian Breweries Plc.

Diageo Plc is the largest shareholder of the Company with 54.32% equity holding through its subsidiaries, Guinness Overseas Limited (46.48%) and Atalantaf Limited (7.84%). The balance of 45.68% is held by Nigerian shareholders comprising individuals, associations and organizations.

Guinness has a twelve member Board of Directors consisting of ten non-executives and two executive directors. The Company‟s Board is headed by Mr. B. A. Savage as Chairman, while the management team is led by Mr. Seni Adetu, who is due to leave office by November 2014 and will be replaced by Mr. John O‟Keeffe, currently a non-executive director. During the financial year ended, 30 June 2014, Messrs Bitrus Edward Gwadah and M. A. Taylor resigned from the Board, while Mr. A. Fennell was appointed to the Board. Subsequent to financial year end, Ms. Lisa Gillian Nichols also resigned from the Board, while Messrs S. T. Dogonyaro and C. A. Afebuameh were appointed to the Board.

Table 1 - Current Directors

Mr. Babatunde Abayomi Savage Chairman Dr. Nick Blazquez Vice Chairman Mr. Seni Adetu Managing Director/Chief Executive Officer (leaves office in Nov 2014) Mr. Cephas Afebuameh Executive Director Prof. J. O. Irukwu, SAN Non-executive Director Mr. Bismarck Jemide Rewane Non-executive Director Mrs. Zainab Abdurrahman Non-executive Director Mr. Rory John O‟Keeffe Non-executive Director (Managing Director – Designate) Mr. Philip John Jenkins Non-executive Director Ms. Yvonne Ike Non-executive Director Amb. S.T. Dogonyaro Non-executive Director Mr. Andy Fennell Non-executive Director During the financial year ended 30 June 2014, Guinness employed an average of 1,368 persons (2012: 1,406 persons) with 55% working in operations & technical unit and 34% in the sales & distribution units.

As at 30 June 2014, Guinness Nigeria Plc had total assets of ₦132 billion. The Company generated ₦109 billion turnover and recorded profit after tax of ₦9.6 billion during the financial year.

Table 2 - Background Information

Authorized Share Capital: ₦1.25 billion Paid-up Capital: ₦752 million Shareholders‟ Funds: ₦45 billion Registered Office: The Ikeja Brewery, Oba Akran Avenue, Ikeja Principal Business: Brewery Auditors: KPMG Professional Services

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

ANALYSTS’ COMMENTS PROFITABILITY

Guinness Nigeria Plc generates revenue from the sale of alcoholic and non-alcoholic beverages. The Company‟s products are distributed through a network of 130 major distributors spread across Nigeria and in the United Kingdom.

During the year ended 30 June 2014 (FYE 2014), Guinness‟ revenue declined by 11% to ₦109 billion, on account of low patronage of products due to the increasing competition, pricing disadvantage, distribution inefficiencies and heightened insecurity in the north-eastern part of the Country. The Company‟s flagship products - Guinness Stout, Malta Guinness and Harp Lager beer accounted for 86% of revenue during the review period, while the balance of 14% was accounted for by other products. Nigeria is the Company‟s primary geographical segment accounting for 98% of revenue.

Figure 1: Revenue Contribution - Location The Company imports about 66% of its raw materials, while the balance is sourced locally. Export 2% Following the relative stability in the exchange rate during the review period, Guinness recorded a slight improvement in its cost of sales to turnover ratio of 53% (FYE 2013: 54%). This resulted in a better gross profit margin of 47% (FYE 2013: 46%). Nigeria 98% Guinness‟ operating expenses to sales increased to 33% in 2014, from 29% recorded in prior year largely due to increased administrative expenses during the financial year. In addition, large manufacturing companies including Guinness Nigeria Plc, expend substantial amount on Figure 2: Operating Profit / PBT to Sales marketing, advertising and administrative expenses 20% year-on-year. The thrust of such expenses is to 18% endear consumers to Company‟s products, albeit 16% 14% carrying out promotional events and reward loyal 12% consumers during the year. 10% 8% The Company‟s operating profit margin has been 6% on a downward trajectory over the last three years, 4% standing at 14% in FYE 2014 (FYE 2013: 16%), due 2% to increased operating expenses. Though this is still 0% within our expectation, it is lower than its peer 2014 2013 2012 Nigerian Breweries‟ operating profit margin of 25%. Operating Profit Margin PBT to Sales

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

Guinness‟ net other income of ₦1 billion was mainly generated from leased plant & machinery and motor vehicles to third parties in the course of the year (53%). Also contributing to the Company‟s other income is interest income generated on bank deposits (30%) and sale of scraps (17%). This culminated to a profit before interest and tax of ₦16.4 billion during the FYE 2014. In our view, Guinness‟ other income is sustainable evidenced by a three year average other income of ₦1.1 billion.

The Company‟s borrowing increased during the financial year ended 30 June 2014, thus resulting in an increase in interest expenses to 4.4% of revenue (FYE 2013: 3.4%), which we consider high when compared to our expectation. Although, Guinness Nigeria Plc recorded a satisfactory profit before tax to sales ratio of 11% (FYE 2013: 14%), it is lower than Nigerian Breweries‟ profit before tax to sales ratio of 23.2%.

Figure 3: Return on Asset Guinness‟ strategy to strengthen and accelerate premium core brands, consolidate sales in the value segment, 30% promote its new brands, drive cost efficiencies and modify its 25% distribution process – Route to Customer (RtC) - should in our view improve the Company‟s overall performance in the 20% short to medium term. 15% Despite the reduction in profit absolute terms in FYE 2014, 10% Guinness‟ return on asset (ROA) of 12% is still within our expectation, albeit lower than Nigerian Breweries‟ ROA of 5% 28%. Also, the Company‟s return on equity (ROE) of 26%, provides significant premium above the average yield on 0% treasury bills over the same period. Over a three year period 2014 2013 2012 Guinness NB (2012 – 2014), Guinness‟ average ROA and ROE at 16% and Figure 4: Return on Equity 34% respectively are in line with our benchmarks. 80% In our opinion, Guinness Nigeria Plc‟s profitability is good 70% and we expect to see gains from the expansion and 60% innovative value products in the short to medium term.

50% 40%

30% 20%

10%

2014 2013 2012

Guinness NB

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

CASH FLOW

During the financial year ended 30 June 2014, Guinness Nigeria Plc‟s operating cash flow (OCF) amounted to ₦17.2 billion, representing a 29% decrease from prior year. This was mainly due to a decline in profit as well as an increase in trade receivables on account of an outstanding export expansion grant from the Federal Government. The Company‟s OCF in FYE 2014 was sufficient to pay returns to providers of finance of ₦15.7 billion, comprising dividend (70%) and interest payment (30%). However, the net OCF was insufficient to cover estimated mandatory capital expenditure. Barring the high dividend payout ratio, the Company‟s net OCF will be sufficient to meet estimated amortized loan principal of ₦9.3 billion.

Over the last three years (2012 - 2014), Guinness recorded cumulative OCF of ₦64.4 billion, which was only sufficient to cover payment to providers of finance amounting ₦47.9 billion. The three year cumulative net OCF was insufficient to cover either the three year estimated mandatory capital expenditure of ₦35.4 billion or the three year amortized estimated loan principal of ₦20.8 billion.

Guinness‟ huge capital expenditure in plant expansion and Figure 5: OCF to Sales strategic implementation of its Route to Customer 25% initiative campaign should contribute to improving the Company‟s performance in the short term. 20%

Although Guinness‟ OCF to sales ratio at 16% in FYE 2014 15% is lower than prior year ratio of 20%, it still falls within our expectation. 10%

In our opinion, the Company‟s cash flow is good. 5%

0% 2014 2013 2012

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL

As at 30 June 2014, Guinness Nigeria Plc‟s working assets stood at ₦34.2 billion – a 22% marked increase from FYE 2013. The growth in working assets is largely attributable to the increase in the volume of receivables on account of an outstanding export expansion grant from the Federal Government. The Company offers trade credits of between 21 to 49 days to its customers based on the internal assessment of each customer using the Company‟s credit policy. The credit policy of Guinness takes into account, individual characteristics, client base, default risk of the industry and operating environment before establishing a credit limit for each customer, which represents the maximum open amount available. As at 30 June 2014, the Company‟s spontaneous financing amounted to ₦52 billion, showing a 4% decline from prior year. Guinness‟ spontaneous financing comprised mainly of trade creditors (39%), deferred taxation (24%) and other creditors & accruals (12%). The Company‟s spontaneous financing was adequate to cover working assets, leaving a short term financing surplus of ₦17.8 billion. Over the last three years, Guinness has consistently recorded short term financing surpluses. Figure 6: Short Term Financing Surplus &

Long Term Financing Need (₦’Billion) As at 30 June 2014, Guinness‟ long term assets comprising property, plant & equipment, intangible assets and engineering spares, stood 40 at ₦91.8 billion; a 3% increase from prior year. As at the same date, 35 30 the Company‟s long term funds of ₦72.5 billion, comprising equity 25 (62%) and long term borrowing (38%), were insufficient to finance 20 its long term assets, leaving a long term financing need of ₦19.3 15 billion. Over the last three years, the Company has persistently 10 recorded long term financing needs owing to its huge capital 5 expenditure on capacity expansion and distribution infrastructure. 0 2014 2013 2012 In FYE 2014, Guinness‟ short term working financing surplus of ₦17.8 Figure 7: Working Capital Deficiency (₦’Billion) could not cover the long term financing need of ₦19.3 billion, thus 10 resulting in a working capital deficiency of ₦1.5 billion, which was covered with short term borrowings. 8

6 In our opinion, the Company‟s working capital is inadequate.

4 Guinness has approached the Bank of Industry for a concessionary term loan, which when approved, would be used to fund the 2 proposed Aba Brewery plant expansion and support the Company‟s 0 long term funding requirements. Agusto & Co believes that without 2014 2013 2012 fresh injection of long term funds, Guinness‟ working capital deficiency will persist.

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

LEVERAGE

As at 30 June 2014, Guinness‟ total liabilities stood at ₦87.3 billion, comprising non-interest bearing debt (60%) and interest bearing debt (40%). The Company‟s total liabilities as at the same date was 16% higher than the prior year, mainly on account of new term loans drawn from commercial banks to fund capital expenditure related to the Aba brewery plant expansion. The term loans have an outstanding balance of ₦21.6 billion as at 30 September 2014, with a maximum tenor of five years, inclusive of a two year moratorium on principal. In addition, the new term loans are unsecured and attract annual interest rate at NIBOR minus 3.5%. Figure 8: IBD as a % of Equity Guinness‟ non-interest bearing debt (NIBD) largely comprised 90% trade creditors (39%) and deferred taxation (24%). The 80% Company‟s interest bearing debt (IBD) grew significantly by 70% 67%, from prior year to represent 40% of total liabilities in FYE 60% 2014 (FYE 2013: 28%). The growth in IBD is mainly attributable 50% to increased borrowings to finance the Company‟s expansion 40% projects. 30% 20% Nevertheless, the Company‟s IBD to equity ratio of 78% as at 10% financial year end of 30 June 2014 (FYE 2013: 46%) is still 0% within our expectation. Following the increase in IBD in FYE 2014 2013 2012 2014, the Company‟s interest expense to sales ratio increased Figure 9: Interest Expense to Sales (%) to 4.4%, which we consider high. Nonetheless, Guinness‟ 5

operating cash flow is sufficient to cover interest 4 times, which 4 in our opinion is satisfactory. 3 As at 30 June 2014, the Company‟s net debt (total debt less 2 cash) as a percentage of total assets at 66% is slightly above our threshold. 1

In our view, Guinness Nigeria Plc has a moderate leverage. 0 2014 2013 2012

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

OWNERSHIP, MANAGEMENT & S TAFF

Guinness Nigeria Plc‟s ownership base comprises over Figure 10: Shareholding Structure 70,000 shareholders. Diageo Group Plc owns 54.32% of

the Company‟s shares via its subsidiaries Guinness Other Guinness Overseas Limited and Atalantaf Limited. investors Overseas 46% Limited 46% Guinness has a twelve member Board of Directors headed by Mr. B. A. Savage as Chairman. Messrs B. E. Gwadah and M. A. Taylor resigned from the Board as non-executive Atalantaf directors in the course of the financial year, while Mr. A. Limited Fennell was appointed to the Board in September 2013 as 8% a non-executive director. Subsequent to the FYE 2014, Ms. L. G. Nichols, the erstwhile commercial director, resigned her appointment. In September 2014, Mr. S. T. Dogonyaro was appointed as a non-executive director while Mr. C. A. Afebuameh was appointed as an executive director in charge of supply chain division.

Guinness‟ management otherwise known as the Guinness Leadership Team (GLT) comprises 10 members, each reporting to the Managing Director. The Company has an experienced leadership team that comprises both Nigerians and expatriates with broad experience within the Diageo group. The average experience of the members of the management team is fifteen years. In our opinion, Guinness‟ leadership team is qualified.

Subsequent to year end, the Board of Directors announced a change in the leadership of the management team, as Mr. Seni Adetu, the erstwhile Managing Director will be stepping down in November 2014 and would be replaced by Mr. John O‟Keeffe, currently a non-executive director.

Mr. Rory John O’Keeffe is the Managing Director/Chief Executive Officer designate of Guinness Nigeria Plc. John has been in Diageo for over 20 years. John started his career as a graduate trainee for Guinness Ireland, holding many marketing roles in Ireland before moving to Jamaica as Marketing Director. Following this, John moved to the Nordics where he held his first Managing Director role, and then moved to Athens where he spent 2 years as the Europe Marketing Director for Johnnie Walker. After this, John became the Managing Director, Russia & Eastern Europe based in Russia before returning to Ireland, to take-up his current role as Global Head of Diageo Innovation and Global Head of Beer & Baileys. He has been a Board Member of Guinness Nigeria Plc for the past two years. John has a Bachelor of Commerce (Hons) in Economics & Marketing from Cork University. He will be appointed as Managing Director at the next Board meeting in November, and will officially commence in the role from Friday, 14 November 2014

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Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

Mr. Cephas Afebuameh is the Executive Director in charge of Supply Chain division at Guinness Nigeria Plc.

He holds a Bachelor of Engineering degree from the Federal University of Agriculture, Makurdi and an MBA from the University of Benin. He has attended several management courses at the Lagos Business School among other renowned management schools. Cephas joined Guinness Nigeria Plc in 2002 and has worked in various capacities in the Benin brewery, Lagos brewery and East African Brewery, Kenya, where he was the operation director until he was appointed the Supply Chain Director in 2012.

Other members of the Guinness Leadership team include:

Sesan Sobowale Director, Corporate Relations/Company Secretary Monica A. Peach Director, Human Resources Mohammad Iqbal Acting Finance and Strategy Director Ojielo Chizoba Henry Regional Sales Director, East & North East Eyitemi A. Taire Customer Marketing Director Afeez Ajibowu Regional Sales Director, West & North West Gavin Pike Marketing & Innovation Director

The recruitment of the management team as well as other staff personnel is guided by the Company‟s resourcing policy, which promotes a transparent and consistent process of selecting the best candidate with the appropriate skills and experience, devoid of discrimination. The non-management staff of Guinness Nigeria Plc belongs to the National Union of Food and Beverages & Tobacco Employees, while the management staff belong to Food Beverages & Tabacco Senior Staff Association.

Guinness Nigeria Plc has a series of incentive packages for its employees, which includes but is not limited to; Annual incentive plan - this plan pays out an annual bonus to employees on the basis of organisational performance as well as the individual‟s performance, DELTIP - this scheme awards Diageo stock options to top management as well as strong performing senior managers on a yearly basis and VESS - the company encourages employees to save and in doing this matches 5% of the employees Annual Basic Salary, subject to an annual maximum when the employee opts in for the savings scheme. These incentives and its competitiveness in rewarding its employees are what earned Guinness Nigeria Plc (for the second year running), as one of the top 5 best places to work in Nigeria in 2014 by “Great Place to Work in Nigeria”, an affiliate of Great Place to Work Institute, San Francisco.

In the year under review, Guinness‟ average cost per employee amounted to ₦6.9 million. The Company‟s net earnings per staff at ₦8.5 million is 1.3 times the average cost per employee. This is lower than Nigerian Breweries of 2.3 times.

Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

OUTLOOK

The growth recorded in the brewery industry in Nigeria in recent years slowed down in 2014 as a result of irregular power supply, heightened insecurity in some parts of the Country and the overall challenging economic environment, which has reduced consumers‟ disposable income.

There was a change in consumers‟ consumption pattern which resulted in a shift in demand from mainstream and premium products to value products. Most Guinness products are premium and mainstream, while its competitors, SAB miller and Nigerian Breweries, have stronger presence in the value segment. Consequently, Guinness launched new products - Orijin bitters, Orijin ready-to drink, Master‟s choice spirits and Alvaro and re-introduced Satzenbrau and Dubic lager in order to compete effectively in the value segment.

In our view, introduction of new products as well as the re-introduction of value products should improve Guinness‟ sales in the short term. We believe that the Company‟s earnings are sustainable given its strong brands and good product diversification.

Guinness Nigeria Plc has approached the Bank of Industry for a concessionary term loan which it plans to utilize to expand its spirit manufacturing by setting up a 10,000 bph Orijin bitters 20cl plant in Aba. The introduction of Orijin bitters variant will help the Company compete effectively with Kasapreko‟s Alomo bitters, which has gained significant market acceptance over the last three years. In addition, Guinness plans to create an additional 1,500 bph cube optimization packaging plant and add extra packaging line of 2,500 bph capacity to the Aba Plant in the near term. Agusto & Co. believes that this expansion will enable the Company compete in the value segment in the eastern Nigeria, which is where SAB Miller has a stronghold.

The Company also intends to optimise the Ikeja warehouse and upgrade the Aba Logistics center in the medium term. In our view, successful implementation of the expansion projects at the Aba Plant should increase revenue in the medium term.

Guinness‟ unaudited accounts for the three months period ended 30 September 2014 recorded a 5% decline in turnover to peg at ₦21 billion. However, the Company‟s profit before tax rose by 6% to ₦1.96 billion (Q1‟2014: ₦1.87 billion) in the same period.

In addition, we believe Guinness Nigeria Plc will continue to enjoy favourable terms of trade with customers, suppliers and related parties, which in turn will impact positively on cash flow. In our view, the Company‟s working capital inadequacy will persist unless additional long term funding is injected.

In our opinion, Guinness has a stable outlook.

Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

FINANCIAL SUMMARY

STATEMENT OF FINANCIAL POSITION AS AT 30-Jun-14 30-Jun-13 30-Jun-12 ₦'000 ₦'000 ₦'000 ASSETS IDLE CASH 3,061,648 2.3% 1,507,947 1.2% 3,028,744 2.9% MARKETABLE SECURITIES & TIME DEPOSITS 3,228,934 2.4% 1,681,292 1.4% 1,743,410 1.6% CASH & EQUIVALENTS 6,290,582 4.8% 3,189,239 2.6% 4,772,154 4.5% FX PURCHASED FOR IMPORTS ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS STOCKS 12,906,673 9.8% 11,252,341 9.3% 11,955,613 11.3% TRADE DEBTORS 15,491,921 9,066,066 4,471,619 DUE FROM RELATED PARTIES 396,772 930,910 233,497 OTHER DEBTORS & PREPAYMENTS 5,388,207 4.1% 6,782,681 5.6% 6,364,992 6.0% TOTAL TRADING ASSETS 34,183,573 25.8% 28,031,998 23.2% 23,025,721 21.7% INVESTMENT PROPERTIES OTHER NON-CURRENT INVESTMENTS PROPERTY, PLANT & EQUIPMENT 90,683,405 68.5% 88,112,582 72.8% 76,293,851 72.0% SPARE PARTS, RETURNABLE CONTAINERS, ETC 562,575 0.4% 1,148,031 0.9% 1,238,149 1.2% GOODWILL, INTANGIBLES & OTHER L T ASSETS 608,138 0.5% 578,771 0.5% 679,792 0.6% TOTAL LONG TERM ASSETS 91,854,118 69.4% 89,839,384 74.2% 78,211,792 73.8% TOTAL ASSETS 132,328,273 100.0% 121,060,621 100.0% 106,009,667 100.0% Growth 9.3% 14.2% 11.1% LIABILITIES & EQUITY SHORT TERM BORROWINGS 4,680,225 3.5% 3,747,585 3.1% 4,928,916 4.6% CURRENT PORTION OF LONG TERM BORROWINGS 3,148,882 2.4% 8,557,059 7.1% 3,272,478 3.1% LONG-TERM BORROWINGS 27,429,985 20.7% 8,796,183 7.3% 8,513,058 8.0% TOTAL INTEREST BEARING LIABILITIES (TIBL) 35,259,092 26.6% 21,100,827 17.4% 16,714,452 15.8% TRADE CREDITORS 20,404,418 15.4% 20,899,579 17.3% 18,489,324 17.4% DUE TO RELATED PARTIES 3,966,071 3.0% 3,282,923 2.7% 2,466,937 2.3% ADVANCE PAYMENTS AND DEPOSITS FROM CUSTOMERS OTHER CREDITORS AND ACCRUALS 6,353,088 4.8% 6,250,852 5.2% 6,399,991 6.0% TAXATION PAYABLE 1,585,320 1.2% 4,050,356 3.3% 5,189,181 4.9% DIVIDEND PAYABLE 4,110,475 3.1% 4,486,743 3.7% 4,452,710 4.2% DEFERRED TAXATION 12,559,441 9.5% 11,955,673 9.9% 10,902,749 10.3% OBLIGATIONS UNDER UNFUNDED PENSION SCHEMES 3,028,651 2.3% 2,994,557 2.5% 2,782,809 2.6% MINORITY INTEREST REDEEMABLE PREFERENCE SHARES TOTAL NON-INTEREST BEARING LIABILITIES 52,007,464 39.3% 53,920,683 44.5% 50,683,701 47.8% TOTAL LIABILITIES 87,266,556 65.9% 75,021,510 62.0% 67,398,153 63.6% SHARE CAPITAL 752,944 0.6% 752,944 0.6% 737,463 0.7% SHARE PREMIUM 8,961,346 6.8% 8,961,346 7.4% 1,545,787 1.5% IRREDEEMABLE DEBENTURES REVALUATION SURPLUS OTHER NON-DISTRIBUTABLE RESERVES 18,582 0.0% 18,582 0.0% 62,308 0.1% REVENUE RESERVE 35,328,845 26.7% 36,306,239 30.0% 36,265,956 34.2% SHAREHOLDERS' EQUITY 45,061,717 34.1% 46,039,111 38.0% 38,611,514 36.4% TOTAL LIABILITIES & EQUITY 132,328,273 100.0% 121,060,621 100.0% 106,009,667 100.0%

Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30-Jun-14 30-Jun-13 30-Jun-12 ₦'000 ₦'000 ₦'000 TURNOVER 109,202,120 100.0% 122,463,538 100.0% 116,461,882 100.0% COST OF SALES (57,868,906) -53.0% (66,385,104) -54.2% (61,278,681) -52.6% GROSS PROFIT 51,333,214 47.0% 56,078,434 45.8% 55,183,201 47.4% OTHER OPERATING EXPENSES (35,944,182) -32.9% (35,960,323) -29.4% (34,035,655) -29.2% OPERATING PROFIT 15,389,032 14.1% 20,118,111 16.4% 21,147,546 18.2% OTHER INCOME/(EXPENSES) 1,054,087 1.0% 1,016,690 0.8% 1,329,075 1.1% PROFIT BEFORE INTEREST & TAXATION 16,443,119 15.1% 21,134,801 22,476,621 19.3% INTEREST EXPENSE (4,761,559) -4.4% (4,125,926) -3.4% (2,093,463) -1.8% PROFIT BEFORE TAXATION 11,681,560 10.7% 17,008,875 -3.4% 20,383,158 17.5% TAX (EXPENSE) BENEFIT (2,108,080) -1.9% (5,145,149) -4.2% (6,168,538) -5.3% PROFIT AFTER TAXATION 9,573,480 8.8% 11,863,726 9.7% 14,214,620 12.2% NON-RECURRING ITEMS (NET OF TAX) MINORITY INTERESTS IN GROUP PAT PROFIT AFTER TAX & MINORITY INTERESTS 9,573,480 8.8% 11,863,726 9.7% 14,214,620 12.2% DIVIDEND (10,541,217) -9.7% (11,799,404) -9.6% (14,749,255) -12.7% PROFIT RETAINED FOR THE YEAR (967,737) -0.9% 64,322 0.1% (534,635) -0.5% SCRIP ISSUES OTHER APPROPRIATIONS/ ADJUSTMENTS (9,657) (24,039) 233,883 PROFIT RETAINED B/FWD 36,306,239 36,265,956 36,566,708 PROFIT RETAINED C/FWD 35,328,845 36,306,239 36,265,956

ADDITIONAL INFORMATION 30-Jun-14 30-Jun-13 30-Jun-12 Staff costs (₦'000) 9,527,408 8,899,803 8,340,142 Average number of staff 1,368 1,433 1,406 Staff costs per employee (₦'000) 6,964 6,211 5,932 Staff costs/Turnover 8.7% 7.3% 7.2% Capital expenditure (₦'000) 13,512,308 22,926,310 25,914,752 Depreciation expense - current year (₦'000) 10,525,929 9,995,054 7,571,997 (Profit)/Loss on sale of assets (₦'000) - - - Number of 50 kobo shares in issue at year end ('₦'000) 1,505,888 1,505,888 1,474,926 Market value per share of 50 kobo (year end) 20,000 25,107 22,800 Market capitalisation (₦'000) 283,650,570 262,190,160 237,004,384 Market/Book value multiple 6.3 5.7 6.1 Auditors KPMG KPMG KPMG Opinion CLEAN CLEAN CLEAN

Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

STATEMENT OF CASH FLOW FOR THE YEAR ENDED 30-Jun-14 30-Jun-13 30-Jun-12 ₦'000 ₦'000 ₦'000 Operating cash flow (OCF) 17,162,515 24,113,883 23,092,734 Less: Returns to providers of finance (15,679,044) (15,891,297) (16,311,656) OCF after returns to providers of finance 1,483,471 8,222,586 6,781,078 Non-recurring items - - - Free cash flow 1,483,471 8,222,586 6,781,078 Investing activities (12,540,393) (21,622,916) (25,573,750) Financing activities 14,158,265 11,817,415 14,710,236 Change in cash 3,101,343 (1,582,915) (4,082,436)

PROFITABILITY PBT as % of Turnover 11% 14% 18% Return on equity 26% 40% 53% Real sales growth -17.6% -3.0% -16.5% CASH FLOW Interest cover (times) 3.6 5.8 11.0 Principal payback (years) - - -

WORKING CAPITAL Working capital need (days) - - - Working capital deficiency (days) 5 27 11

LEVERAGE Interest bearing debt to Equity 64% 39% 31% Total debt to Equity 180% 156% 162%

Agusto & Co. RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT Guinness Nigeria Plc

RATING DEFINITIONS

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

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 Aa somewhat higher than for Aaa obligors.

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

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

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 Bb company may have one or more major weakness (es).

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

This refers to an obligor with very weak financial condition and weak capacity to meet C 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.