Guinness Nigeria 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 . Guinness Nigeria Plc (‘Guinness Nigeria’, ‘GNPLC’ or ‘the Company’) is a Previous Rating: A- (expired member of the Diageo Group (‘Diageo’ or the ‘Group’) – one of the world’s December 2016) leading manufacturers of spirits, beers and wines. 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 Lagos beverage companies in Nigeria, with a dominant market share in the stout 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 2 2020 Corporate Rating Report 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 beer 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 3 2020 Corporate Rating Report Guinness Nigeria Plc. COMPANY PROFILE Overview & Background Guinness Nigeria Plc. was incorporated on 29 April 1950 as a trading company importing Guinness Stout from Dublin, Ireland 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 Guinness brewery 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.