According to management, Guinness Nigeria Plc (GUINNESS) will likely sustain the transfer of cost burden to consumers in the near term despite potential negative implications for volumes. In our view, the net positive impact of this strong pricing resolve, which cascaded to the 15.8% YoY expansion in gross profit in H1’22/23, could be supported by the company’s aggressive e-commerce penetration and marketing campaigns, driving our forecast FY’22/23 revenue of N233.3 billion ahead of the expected increase in excise duty. This revenue projection also captures our expectation for an increase in election-related spending, which may place a floor on volume contractions and boost management’s confidence in its current pricing strategy.
However, the strong passthrough of higher prices on earnings could be eroded by the combined drag from higher personnel expenses and FXinduced finance cost pressures. Per our estimate, these factors will likely result in a 45.7% plunge in FY’22/23 EPS to N3.90.
Furthermore, a potential naira depreciation to between N550/$ and N600/ $ in FY‘22/23 (vs a mean of N428.0/$ in FY’21/22) could bloat the cost of debt and worsen interest coverage to 1.9x vs 11.2x in FY’21/22. To further elucidate the materiality of this drag, we note that the company even had to recently pause repayment on part of its gross borrowings, which is entirely foreign currency denominated, due to naira weaknesses and FX illiquidity.
That said, we like the company’s continued commitment to the local sourcing of raw materials, which adds to the positive impact of favourable prices on gross margins. Though commendable, the gains of this strategy may be masked by the recent increase in personnel expenses and the negative impact of higher diesel & freight costs in the first half.
