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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 to meet obligations A- 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 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. 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 2 ©Agusto & Co. 2014 Corporate Rating 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),
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