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Guinness Nigeria Plc Issuer Rating a Company with Good Financial Condition and Strong Capacity to Meet A- Obligations As and When They Fall Due

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Guinness Nigeria Plc Issuer Rating a Company with Good Financial Condition and Strong Capacity to Meet A- Obligations As and When They Fall Due 2015 Corporate Rating Review Report Guinness Nigeria Plc Issuer Rating A company with good financial condition and strong capacity to meet A- obligations as and when they fall due Outlook: Stable ATING ATIONALE Issue Date: 11 March 2016 R R Expiry Date: 31 December 2016 Agusto & Co. affirms the “A-“ rating assigned to Guinness Nigeria Plc Previous Rating: A- (“Guinness”, “GNPLC” or “the Company”). The rating assigned takes into cognisance Guinness’ good cash flow and improved leverage position as well as the overt support of the parent company (Diageo Plc) which controls Industry: Brewery 54.32% of the Company’s equity. Nevertheless, the Company’s rating is tempered by inadequate working capital and declining profitability. Outline Page Rationale 1 Guinness is one of the leading alcoholic and non-alcoholic beverage Company Profile 3 companies in Nigeria with the dominant market share in the stout segment. Financial Condition 5 The Company’s strong market share in the brewing industry in Nigeria is Ownership, Mgt & Staff 10 supported by a good brand name, technical & product quality assistance from Outlook 12 Financial Summary 14 its parent company and an improved Route To Market (RTM) strategy. Rating Definition 18 Although Guinness’ turnover grew by 9% during the financial year ended 30 June 2015 (FYE 2015), the six months unaudited figures for the period ended Analysts: 31 December 2015 showed a 10% decline in top line growth when compared Ikechukwu Iheagwam with corresponding figures of 2014. We consider this a rating concern on [email protected] account of the current weak macroeconomic environment and declining consumers’ effective disposable income. Despite the uptick in revenue growth Isaac Babatunde [email protected] during FYE 2015, higher operating and finance expenses eroded the gains thus resulting in a lower profit before tax margin of 9% (FYE 2014: 11%). Agusto & Co. Limited However, GNPLC recorded a satisfactory return on equity of 22% (FYE 2014: UBA House (5th Floor) 26%) which is above the average yield on treasury certificate in the same 57, Marina period. Lagos Nigeria Subsequent to year end, there has been changes in senior management with a view to turn around the fortunes of the Company as well as improve cost www.agusto.com management amidst the challenging operating environment. Though GNPLC expected gains from these initiatives, a review of the unaudited accounts for the six months ended 31 December 2015 showed a 65% decline in profit before tax when compared with corresponding figures of 2014. In our view, Guinness’ profitability is declining and requires improvement. In FYE 2015, Guinness optimized its stock of raw materials to meet manufacturing demand as opposed to yearly build-up of raw materials as well 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 as improved its receivable collection period to 38 days from 52 days in the prior year. These initiatives, amongst others resulted in a significant increase in the Company’s operating cash flow (OCF) by 96% in the period under review. Going forward, the Company intends to implement the Just in Time (JIT) procurement and inventory system as well as collaborate with local producers for cheaper input materials with a view to sustain the improved cash flow position. Guinness enjoys favourable terms of trade with its customers and suppliers; hence the Company has over the past three years recorded sufficient spontaneous financing which was adequate to cover its working assets. Nonetheless, GNPLC’s long term funds are inadequate to cover the long term assets; hence the Company recorded working capital deficiency which was financed with short term borrowing. Subsequent to year end, Guinness acquired the rights to distribute Diageo Plc’s International Premium Spirits (IPS) brands as well as United Spirits Limited’s McDowell in Nigeria. In addition, the Company plans to deepen its distribution and sales of value products across the Country. In our opinion, quick penetration of these products into the market will make Guinness more competitive in the spirits and value segment of the Industry. Guinness plans to expand its Aba Brewery plant to support its Orijin bitters product manufacture as well as upgrade the Aba Logistics center in the short to medium term. In addition, the Company also plans to expand infrastructure to cover the optimization of the warehouse in Ikeja. Agusto & Co. believes that the successful implementation of the expansion projects will drive growth in the medium term. We have attached a stable outlook to Guinness Nigeria Plc. Table 1: Strengths, Weaknesses and Challenges Strengths •Well established and diverse brands •Qualified management team •Strong support from parent company - Diageo Plc •Dominant leader in the stout market •Good cash flow Weaknesses •Inadequate working capital •Declining profitability that requires improvement Challenges •Weak operating environment •Higher raw material cost as a result of devaluation of the local currency •Stiff competition for products in the value segments •Lower consumers’ effective disposable income 2 2015 Corporate Rating Review Report Guinness Nigeria Plc COMPANY 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 part of Diageo Group, the world’s leading premium drinks business, trading in over 180 countries around the world. Diageo has a wide array of beverages and alcoholic brands spanning across spirits, wines and beer categories including 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, Dubic), Flavoured Alcoholic Beverages (Smirnoff Ice, Smirnoff Ice Double Black with Guarana, Snapp and Alvaro) and Spirits & Bitters (Master’s choice, Orijin mixed drink and Orijin bitters). Guinness Nigeria Plc’s head office is situated at 24, Oba Akran Avenue, Ikeja, while the Company’s 3 brewery plants are located in Lagos State (Ogba Brewery), Edo State (Benin Brewery) and Abia State (Aba Brewery). The plants have a combined installed production capacity of 6 million hectolitres and estimated total capacity utilization rate was 74% during FYE 2015. Table 2: Product categorization Premium Category Mainstream Category Value Category Guinness Foreign Extra Stout Harp Lager beer Dubic lager, Dubic malt, Dubic Ale Guinness Extra Smooth Malta Guinness, Malta Guinness Low Sugar Satzenbrau Pilsner Master’s choice Orijin bitters, Orijin ready to drink Premium Spirits Smirnoff Ice, Smirnoff Ice Double Black with Guarana Alvaro, Snapp Source: GNPLC The Company’s products are sold through over 130 major distributors spread across Nigeria and one in the United Kingdom. Guinness’ main competitors in Nigeria are Nigerian Breweries Plc and SAB Miller. Diageo Plc is the Company’s largest shareholder with a 54.32% equity holding through subsidiaries; Guinness Overseas Limited (46.48%) and Atalantaf Limited (7.84%). The balance of 45.68% is held by other individuals, associations and organizations. Guinness Nigeria Plc maintains Technical Services Agreements and Trademark and 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. 3 2015 Corporate Rating Review Report Guinness Nigeria Plc Guinness has a thirteen member Board of Directors consisting of eleven non-executives and three executive directors. The Company’s Board is headed by Mr. B. A. Savage as Chairman, while the management team is led by Mr. Peter Ndegwa, who was appointed subsequent to year end. During the financial year ended 30 June 2015, Mr. Seni Adetu, the erstwhile Managing Director resigned his appointment and was replaced by Mr. John O’Keeffe, a non-executive director. In the same review period, Messers Andy Fennel and Lisa Nichols resigned from the Board while Mr. R.C. Plumridge and Mr. Cephas Afebuameh were appointed as executive directors, while Amb. S.T Dogonyaro was appointed as a non-executive director. In June 2015, Mr. S.G. Lauridsen was appointed to the Board as Managing Director to replace Mr. John O’Keeffe, who was elevated to the role of President Diageo Africa and remains a non-executive director in the Company. In the same month Mr. S.G. Lauridsen resigned as Managing Director. Subsequent to year end, Ms. Ngozi Edozien and Dr. (Mrs.) Omobola Johnson were appointed to the board as non-executive directors, while Ms. Yvonne Ike resigned her appointment from the board as a non-executive director. Table 3 - Current Directors Mr. Babatunde Abayomi Savage Chairman Dr. Nick Blazquez Vice Chairman Mr. Peter Ndegwa Managing Director/Chief Executive Officer (appointed 4 September 2015) Mr. Cephas Afebuameh Executive Director – Supply Chain Mr. Ronald Plumridge Executive Director – Finance & Strategy Prof. J. O. Irukwu, SAN Non-executive Director Mr. Bismarck Jemide Rewane Non-executive Director Mrs. Zainab Abdurrahman Non-executive Director Mr.
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