ARM Research

[email protected] +234 1 270 1652 Equity Research Guinness Nigeria Plc 15 December 2015

Stock Update : Guinness to become sole distributor of Diag eo’s premium spirits in Nigeria Recommendation: NEUTRAL (N139.20)

• Yesterday, Guinness Nigeria Plc (Guinness) announced Income Statement Data that it has agreed the acquisition of the distribution 2016 – 3M 'm 2015 – 3M 'm %chg

rights to the International Premium Spirits (IPS) brands Revenue 21,742 21,048 3% PBT 518 1,962 -74% of Diageo Plc, its parent company, in Nigeria. This Tax 155 478 -67% transaction will also see Guinness Nigeria take over PAT 362 1,485 -76% Balance Sheet Data various assets (including current inventory) of Diageo 2016 -Sep 'm 2015 -Jun 'm %chg

Brands Nigeria Limited, the wholly-owned Diageo Fixed Assets 85,863 87,754 -2% business which currently distributes and markets the IPS Stocks 11,084 10,751 3% Trade Debtors 21,323 16,956 26% brands in Nigeria. This transaction is expected to be Trade Creditors 25,414 31,482 -19%

concluded by 31 December 2015 and the new Cash & Bank bal 6,583 5,805 13% Net Assets 48,704 48,341 1% distribution agreement for the IPS brands will become Stock Data effective on 1 January 2016 subject to receiving all Price N127.45 52 week range N106 – N192 regulatory approvals. Guinness is expected to cough out Market Cap. (N'm) 191,925.45 approximately N2.35 billion for this transaction. 1-month Avg. Vol 2,252,555 Curr. PE 24.6x Bloomberg Ticker GUINNESS: NL Reuters Ticker GUINNES.LG • Three months ago, Diageo Plc announced its intention Guinness Nigeria Plc - Share Price Trend to increase its holdings in Guinness to a maximum of 180 70% from current 54.3% stake, indicating it could 160 launch a partial tender offer at a maximum price of 140 N175 per share for Guinness while still maintaining the 120 100 company’s listing on the Nigerian Stock Exchange. We … 15 15 - -

strongly believe that Guinness’ acquisition of Aug- Jun Apr Oct-15 Feb-15 Dec-14 Dec-15 distribution rights to Diageo’s IPS brands is not Analyst(s) unconnected to Diageo’s earlier announcement of a Temitope Oladimeji

stake hike. [email protected]

Table 1: Product Brands of Guinness and Diageo Nigeria GUINNESS NIGERIA PLC DIAGEO BRANDS NIGERIA LIMITED BEERS SPIRITS Guinness Foreign Extra Johnnie Walker Stout Guinness Extra Smooth Crown Royal Harp JεB Dubic Buchanan ’s Whisky Satzenbrau Windsor Smirnoff READY-TO-DRINK Cîroc Smirnoff Ice Ketel One Vodka Snapp Captain Morgan Orijin Baileys Don Julio NON-ALCHOLIC Tanqueray Malta Guinness Malta Guinness Low Sugar

SPIRITS Johnnie Walker Black Johnnie Walker Red Johnnie Walker Blue Baileys Smirnoff Vodka Ciroc Orijin Bitters Master ’s Choice Source: Companies, ARM Research

• Diageo’s spirits brands currently accounts for about 73% of the firm’s global revenue. According to Diageo, international premium spirits net sales in Nigeria, which has grown at an average of 27%, were £20million (N6 billion) in FY 15. That is 5% of Guinness FY 15 net sales. As the premium segment continues to experience weaker consumer demand amidst a shift in market preference to value brands, we expect this acquisition to add Orijin’s momentum in driving top-line growth.

• Spirits has typically grown much faster and we think that this move is to co-opt that faster growth into a Guinness business that has struggled recently. Reciprocally, bringing the spirit business onto the bigger Guinness distribution platform might help Diageo actualize greater prospects of growth for that segment of the business. On balance, the higher margin on spirit sales should provide some measure of support to earnings, which has struggled in recent quarters. Thus far in FY 16, Guinness has reported a 76% YoY decline in PAT to N363 million. Whilst Guinness has N6.6 billion in cash as at FQ1 16, working capital is negative (-N10.1 billion), suggesting that Guinness might have to raise debts or cut back on dividend payment to fund the transaction.

• In sum, we view the transaction as mildly positive for Guinness as it connects them to a rapidly growing high-margin segment. We will be engaging management in the coming days to gain greater clarity on how they intend to fund this transaction as well as other details.

Figure 1: Guinness Share Price

Guinness 180 170 160 150 140 130 120 110 100 15 15 15 15 15 15 15 ------Jul Jul-15 Jan Jan-15 Jun-15 Apr Oct Oct-15 Feb-15 Sep-15 Dec-14 Dec-15 Mar-15 Mar-15 Nov Aug May-15 May

Source: Bloomberg, ARM Research

• Guinness currently trades at a current PE of 24.6x relative to domestic peers Nigerian Breweries Plc and International Breweries Plc at 24.3x and 32.2x respectively. The stock has declined 24.20% YTD in line with downswing in Breweries sector (-26.92% YTD). Last trading price is at an 8.4% discount to our FVE (N139.20) for the stock which changes our rating to NEUTRAL from previous UNDERWEIGHT.

ARM ratings and recommendations ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of to p 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitu tes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitaliza tion. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:

TOP 20 NON-TOP 20 Rating Deviation Rating Deviation STRONG BUY >20% BUY >20% OVERWEIGHT 10% — 20 % NEUTRAL 5% — 20 % NEUTRAL 0% — 10 % SELL <5% UNDERWEIGHT -5% — 0% SELL <-5%

RECOMMENDATION KEY Rating Recommenda tion BUY Accumulate security to a substantial extent constrained only by portfolio diversification considerations OVERWEIGHT Accumulate security to an extent moderated by cognizance of its benchmark weight Maintain status quo for security with respect to current holding —i.e. keep if already holding and don ’t buy otherwise — NEUTRAL subject to reasonable portfolio constraints UNDERWEIGHT Minimise exposure to security taking cognizance of its index weighting SELL Sell -off security completely from portfol io

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