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Agusto & Co.

RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT

Guinness Nigeria Plc

Issuer Rating:

A- A company with good financial condition and strong capacity

to meet obligations

Outlook: Stable

Issue Date: November 2014

Expiry Date: December 2015

Previous Rating: None

Industry: Brewery

INSIDE THIS REPORT

Rationale 1

Nigerian Brewery Industry 3

Company Profile 4

Financial Condition 6

Ownership, Mgt & Staff 11

Outlook 13

Financial Summary 16

Rating Definition 17

Analysts:

Ikechukwu Iheagwam

[email protected]

Isaac Babatunde

[email protected]

Agusto & Co. Limited

UBA House (5th Floor)

57, Marina

Lagos

Nigeria

www.agusto.com

RATING RATIONALE Guinness Nigeria Plc (“Guinness” or “the Company”) is one of the two

leading alcoholic beverage companies in Nigeria with the largest market

share in the stout segment. The Company‟s large market share in the

brewing market is supported by its strong brand name, technical

assistance from its parent company (Diageo Plc) and an improved

distribution network.

We have assigned an “A-” rating to Guinness Nigeria Plc. The rating

assigned reflects Guinness‟ good profitability, good cash flow and

moderate leverage. The rating also reflects the explicit support of Diageo

Plc which controls 54.32% of the Company‟s shareholding. However, the

Company‟s rating is tempered by inadequate working capital.

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

million as at 30 June 2014. Diageo Plc offers technical, product quality

and operations support to Guinness Nigeria Plc.

During the year under review, Guinness‟ profitability dipped due to low

patronage arising from changing consumer patterns, increased pricing,

poor distribution infrastructure, which was further exacerbated by higher

operational expense and finance costs. Nevertheless, Guinness recorded a

satisfactory profit before tax to sales ratio of 11% and a return on equity

of 26%, which is significantly above the average yield on treasury

certificates.

Guinness has favourable terms of trade with its customers and suppliers;

hence the Company has over the past three years recorded sufficient

2 ©Agusto & Co. 2014 Corporate Rating

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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.

•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

Strengths

•Inadequate working capital

Weakness

•Stiff competition for products in the value segments

•Sub-optimal distribution network in rural areas

Challenges

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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.

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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), the Company launched Orijin Bitters and Orijin

RTD – premium drink with herbal extracts, Master‟s Choice Spirits – premium spirit with whisky flavors and

Alvaro non-alcoholic malt based drink.

Guinness Nigeria Plc maintains Technical Services Agreement and Trademark and Control Agreement with

companies in the Diageo Group for various brewed products. In addition, the Company sources some of its

raw materials, engineering spares and fixed assets from other related companies within the Group.

Guinness Nigeria Plc‟s head office is situated at 24, Oba Akran Avenue, Ikeja, while its 3 brewery plants are

located in Lagos, Benin and Aba. The plants have a combined beer production capacity of 6.5 million

hectolitres and production capacity of 1.6 million EU for mainstream spirits.

The Ogba Brewery (Beer Capacity: 3.2 mhl & Spirit Capacity: 0.6 million EU)

The Ogba brewery located at Acme Road, Industrial Estate, Ogba, Ikeja was commissioned in 1963. The

brewery has undergone various expansions & upgrades and currently produces the following products –

Foreign Extra Stout, Malta Guinness (classic and low sugar), Harp Lager beer, Orijin RTD, Snapp, Alvaro,

Dubic, Satzenbrau, Smirnoff Ice, Dubic Malt, Master‟s Choice, Orijin bitters and Orijin RTD.

The Benin Brewery (Beer capacity: 3 mhl)

The Benin Brewery located at Benin/Asaba Road, Benin City was commissioned in 1973 and currently

produces, Foreign Extra Stout, Harp Extra Smooth, Dubic and Malta Guinness (classic and low sugar).

The Aba Brewery (Beer capacity: 0.3 mhl & spirit capacity: 1.0 million EU)

The Aba brewery is located at Osisioma Industrial Layout, Aba. It was commissioned in 2004 to further

increase capacity to meet increasing demands and serve the eastern part of the Country. The plant currently

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produces Malta Guinness and would commence production of Orijin bitters in Q4‟2014.

The Company‟s products are sold through several distributors spread across the country and one in the

United Kingdom. Guinness‟ main competitor is Nigerian Breweries Plc.

Diageo Plc is the largest shareholder of the Company with 54.32% equity holding through its subsidiaries,

Guinness Overseas Limited (46.48%) and Atalantaf Limited (7.84%). The balance of 45.68% is held by

Nigerian shareholders comprising individuals, associations and organizations.

Guinness has a twelve member Board of Directors consisting of ten non-executives and two executive

directors. The Company‟s Board is headed by Mr. B. A. Savage as Chairman, while the management team is

led by Mr. Seni Adetu, who is due to leave office by November 2014 and will be replaced by Mr. John

O‟Keeffe, currently a non-executive director. During the financial year ended, 30 June 2014, Messrs Bitrus

Edward Gwadah and M. A. Taylor resigned from the Board, while Mr. A. Fennell was appointed to the Board.

Subsequent to financial year end, Ms. Lisa Gillian Nichols also resigned from the Board, while Messrs S. T.

Dogonyaro and C. A. Afebuameh were appointed to the Board.

Table 1 - Current Directors

Mr. Babatunde Abayomi Savage Chairman

Dr. Nick Blazquez Vice Chairman

Mr. Seni Adetu Managing Director/Chief Executive Officer (leaves office in Nov 2014)

Mr. Cephas Afebuameh Executive Director

Prof. J. O. Irukwu, SAN Non-executive Director

Mr. Bismarck Jemide Rewane Non-executive Director

Mrs. Zainab Abdurrahman Non-executive Director

Mr. Rory John O‟Keeffe Non-executive Director (Managing Director – Designate)

Mr. Philip John Jenkins Non-executive Director

Ms. Yvonne Ike Non-executive Director

Amb. S.T. Dogonyaro Non-executive Director

Mr. Andy Fennell Non-executive Director

During the financial year ended 30 June 2014, Guinness employed an average of 1,368 persons (2012: 1,406

persons) with 55% working in operations & technical unit and 34% in the sales & distribution units.

As at 30 June 2014, Guinness Nigeria Plc had total assets of ₦132 billion. The Company generated ₦109

billion turnover and recorded profit after tax of ₦9.6 billion during the financial year.

Table 2 - Background Information

Authorized Share Capital: ₦1.25 billion

Paid-up Capital: ₦752 million

Shareholders‟ Funds: ₦45 billion

Registered Office: The Ikeja Brewery, Oba Akran Avenue, Ikeja

Principal Business: Brewery

Auditors: KPMG Professional Services

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ANALYSTS’ COMMENTS

PROFITABILITY

Guinness Nigeria Plc generates revenue from the sale of alcoholic and non-alcoholic beverages. The

Company‟s products are distributed through a network of 130 major distributors spread across Nigeria and

in the United Kingdom.

During the year ended 30 June 2014 (FYE 2014), Guinness‟ revenue declined by 11% to ₦109 billion, on

account of low patronage of products due to the increasing competition, pricing disadvantage, distribution

inefficiencies and heightened insecurity in the north-eastern part of the Country. The Company‟s flagship

products - Guinness Stout, Malta Guinness and Harp Lager beer accounted for 86% of revenue during the

review period, while the balance of 14% was accounted for by other products. Nigeria is the Company‟s

primary geographical segment accounting for 98% of revenue.

The Company imports about 66% of its raw

materials, while the balance is sourced locally.

Following the relative stability in the exchange rate

during the review period, Guinness recorded a

slight improvement in its cost of sales to turnover

ratio of 53% (FYE 2013: 54%). This resulted in a

better gross profit margin of 47% (FYE 2013: 46%).

Guinness‟ operating expenses to sales increased to

33% in 2014, from 29% recorded in prior year

largely due to increased administrative expenses

during the financial year. In addition, large

manufacturing companies including Guinness

Nigeria Plc, expend substantial amount on

marketing, advertising and administrative expenses

year-on-year. The thrust of such expenses is to

endear consumers to Company‟s products, albeit

carrying out promotional events and reward loyal

consumers during the year.

The Company‟s operating profit margin has been

on a downward trajectory over the last three years,

standing at 14% in FYE 2014 (FYE 2013: 16%), due

to increased operating expenses. Though this is still

within our expectation, it is lower than its peer

Nigerian Breweries‟ operating profit margin of 25%.

Figure 1: Revenue Contribution - Location

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Operating Profit Margin PBT to Sales

Figure 2: Operating Profit / PBT to Sales

Nigeria 98%

Export 2%

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Guinness‟ net other income of ₦1 billion was mainly generated from leased plant & machinery and motor

vehicles to third parties in the course of the year (53%). Also contributing to the Company‟s other income is

interest income generated on bank deposits (30%) and sale of scraps (17%). This culminated to a profit

before interest and tax of ₦16.4 billion during the FYE 2014. In our view, Guinness‟ other income is

sustainable evidenced by a three year average other income of ₦1.1 billion.

The Company‟s borrowing increased during the financial year ended 30 June 2014, thus resulting in an

increase in interest expenses to 4.4% of revenue (FYE 2013: 3.4%), which we consider high when compared

to our expectation. Although, Guinness Nigeria Plc recorded a satisfactory profit before tax to sales ratio of

11% (FYE 2013: 14%), it is lower than Nigerian Breweries‟ profit before tax to sales ratio of 23.2%.

Guinness‟ strategy to strengthen and accelerate premium

core brands, consolidate sales in the value segment,

promote its new brands, drive cost efficiencies and modify its

distribution process – Route to Customer (RtC) - should in

our view improve the Company‟s overall performance in the

short to medium term.

Despite the reduction in profit absolute terms in FYE 2014,

Guinness‟ return on asset (ROA) of 12% is still within our

expectation, albeit lower than Nigerian Breweries‟ ROA of

28%. Also, the Company‟s return on equity (ROE) of 26%,

provides significant premium above the average yield on

treasury bills over the same period. Over a three year period

(2012 – 2014), Guinness‟ average ROA and ROE at 16% and

34% respectively are in line with our benchmarks.

In our opinion, Guinness Nigeria Plc‟s profitability is good

and we expect to see gains from the expansion and

innovative value products in the short to medium term.

Figure 3: Return on Asset

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Figure 4: Return on Equity

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CASH FLOW

During the financial year ended 30 June 2014, Guinness Nigeria Plc‟s operating cash flow (OCF) amounted

to ₦17.2 billion, representing a 29% decrease from prior year. This was mainly due to a decline in profit as

well as an increase in trade receivables on account of an outstanding export expansion grant from the

Federal Government. The Company‟s OCF in FYE 2014 was sufficient to pay returns to providers of finance

of ₦15.7 billion, comprising dividend (70%) and interest payment (30%). However, the net OCF was

insufficient to cover estimated mandatory capital expenditure. Barring the high dividend payout ratio, the

Company‟s net OCF will be sufficient to meet estimated amortized loan principal of ₦9.3 billion.

Over the last three years (2012 - 2014), Guinness recorded cumulative OCF of ₦64.4 billion, which was only

sufficient to cover payment to providers of finance amounting ₦47.9 billion. The three year cumulative net

OCF was insufficient to cover either the three year estimated mandatory capital expenditure of ₦35.4 billion

or the three year amortized estimated loan principal of ₦20.8 billion.

Guinness‟ huge capital expenditure in plant expansion and

strategic implementation of its Route to Customer

initiative campaign should contribute to improving the

Company‟s performance in the short term.

Although Guinness‟ OCF to sales ratio at 16% in FYE 2014

is lower than prior year ratio of 20%, it still falls within our

expectation.

In our opinion, the Company‟s cash flow is good.

Figure 5: OCF to Sales

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2014 2013 2012


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FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL

As at 30 June 2014, Guinness Nigeria Plc‟s working assets stood at ₦34.2 billion – a 22% marked increase

from FYE 2013. The growth in working assets is largely attributable to the increase in the volume of

receivables on account of an outstanding export expansion grant from the Federal Government. The

Company offers trade credits of between 21 to 49 days to its customers based on the internal assessment of

each customer using the Company‟s credit policy. The credit policy of Guinness takes into account,

individual characteristics, client base, default risk of the industry and operating environment before

establishing a credit limit for each customer, which represents the maximum open amount available.

As at 30 June 2014, the Company‟s spontaneous financing amounted to ₦52 billion, showing a 4% decline

from prior year. Guinness‟ spontaneous financing comprised mainly of trade creditors (39%), deferred

taxation (24%) and other creditors & accruals (12%). The Company‟s spontaneous financing was adequate

to cover working assets, leaving a short term financing surplus of ₦17.8 billion. Over the last three years,

Guinness has consistently recorded short term financing surpluses.

As at 30 June 2014, Guinness‟ long term assets comprising property,

plant & equipment, intangible assets and engineering spares, stood

at ₦91.8 billion; a 3% increase from prior year. As at the same date,

the Company‟s long term funds of ₦72.5 billion, comprising equity

(62%) and long term borrowing (38%), were insufficient to finance

its long term assets, leaving a long term financing need of ₦19.3

billion. Over the last three years, the Company has persistently

recorded long term financing needs owing to its huge capital

expenditure on capacity expansion and distribution infrastructure.

In FYE 2014, Guinness‟ short term working financing surplus of ₦17.8

could not cover the long term financing need of ₦19.3 billion, thus

resulting in a working capital deficiency of ₦1.5 billion, which was

covered with short term borrowings.

In our opinion, the Company‟s working capital is inadequate.

Guinness has approached the Bank of Industry for a concessionary

term loan, which when approved, would be used to fund the

proposed Aba Brewery plant expansion and support the Company‟s

long term funding requirements. Agusto & Co believes that without

fresh injection of long term funds, Guinness‟ working capital

deficiency will persist.

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Figure 6: Short Term Financing Surplus &

Long Term Financing Need (₦’Billion)

Figure 7: Working Capital Deficiency (₦’Billion)


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LEVERAGE

As at 30 June 2014, Guinness‟ total liabilities stood at ₦87.3 billion, comprising non-interest bearing debt

(60%) and interest bearing debt (40%). The Company‟s total liabilities as at the same date was 16% higher

than the prior year, mainly on account of new term loans drawn from commercial banks to fund capital

expenditure related to the Aba brewery plant expansion. The term loans have an outstanding balance of

₦21.6 billion as at 30 September 2014, with a maximum tenor of five years, inclusive of a two year

moratorium on principal. In addition, the new term loans are unsecured and attract annual interest rate at

NIBOR minus 3.5%.

Guinness‟ non-interest bearing debt (NIBD) largely comprised

trade creditors (39%) and deferred taxation (24%). The

Company‟s interest bearing debt (IBD) grew significantly by

67%, from prior year to represent 40% of total liabilities in FYE

2014 (FYE 2013: 28%). The growth in IBD is mainly attributable

to increased borrowings to finance the Company‟s expansion

projects.

Nevertheless, the Company‟s IBD to equity ratio of 78% as at

financial year end of 30 June 2014 (FYE 2013: 46%) is still

within our expectation. Following the increase in IBD in FYE

2014, the Company‟s interest expense to sales ratio increased

to 4.4%, which we consider high. Nonetheless, Guinness‟

operating cash flow is sufficient to cover interest 4 times, which

in our opinion is satisfactory.

As at 30 June 2014, the Company‟s net debt (total debt less

cash) as a percentage of total assets at 66% is slightly above

our threshold.

In our view, Guinness Nigeria Plc has a moderate leverage.

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Figure 8: IBD as a % of Equity

Figure 9: Interest Expense to Sales (%)


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OWNERSHIP, MANAGEMENT & STAFF

Guinness Nigeria Plc‟s ownership base comprises over

70,000 shareholders. Diageo Group Plc owns 54.32% of

the Company‟s shares via its subsidiaries Guinness

Overseas Limited and Atalantaf Limited.

Guinness has a twelve member Board of Directors headed

by Mr. B. A. Savage as Chairman. Messrs B. E. Gwadah and

M. A. Taylor resigned from the Board as non-executive

directors in the course of the financial year, while Mr. A.

Fennell was appointed to the Board in September 2013 as

a non-executive director. Subsequent to the FYE 2014, Ms. L. G. Nichols, the erstwhile commercial director,

resigned her appointment. In September 2014, Mr. S. T. Dogonyaro was appointed as a non-executive

director while Mr. C. A. Afebuameh was appointed as an executive director in charge of supply chain

division.

Guinness‟ management otherwise known as the Guinness Leadership Team (GLT) comprises 10 members,

each reporting to the Managing Director. The Company has an experienced leadership team that comprises

both Nigerians and expatriates with broad experience within the Diageo group. The average experience of

the members of the management team is fifteen years. In our opinion, Guinness‟ leadership team is

qualified.

Subsequent to year end, the Board of Directors announced a change in the leadership of the management

team, as Mr. Seni Adetu, the erstwhile Managing Director will be stepping down in November 2014 and

would be replaced by Mr. John O‟Keeffe, currently a non-executive director.

Mr. Rory John O’Keeffe is the Managing Director/Chief Executive Officer designate of Guinness Nigeria

Plc. John has been in Diageo for over 20 years. John started his career as a graduate trainee for Guinness

Ireland, holding many marketing roles in Ireland before moving to Jamaica as Marketing Director. Following

this, John moved to the Nordics where he held his first Managing Director role, and then moved to Athens

where he spent 2 years as the Europe Marketing Director for Johnnie Walker. After this, John became the

Managing Director, Russia & Eastern Europe based in Russia before returning to Ireland, to take-up his

current role as Global Head of Diageo Innovation and Global Head of Beer & Baileys. He has been a Board

Member of Guinness Nigeria Plc for the past two years. John has a Bachelor of Commerce (Hons) in

Economics & Marketing from Cork University. He will be appointed as Managing Director at the next Board

meeting in November, and will officially commence in the role from Friday, 14 November 2014

Figure 10: Shareholding Structure

Guinness Overseas Limited

46%

Atalantaf Limited

8%

Other investors

46%


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Mr. Cephas Afebuameh is the Executive Director in charge of Supply Chain division at Guinness Nigeria Plc.

He holds a Bachelor of Engineering degree from the Federal University of Agriculture, Makurdi and an MBA

from the University of Benin. He has attended several management courses at the Lagos Business School

among other renowned management schools. Cephas joined Guinness Nigeria Plc in 2002 and has worked

in various capacities in the Benin brewery, Lagos brewery and East African Brewery, Kenya, where he was the

operation director until he was appointed the Supply Chain Director in 2012.

Other members of the Guinness Leadership team include:

Sesan Sobowale Director, Corporate Relations/Company Secretary

Monica A. Peach Director, Human Resources

Mohammad Iqbal Acting Finance and Strategy Director

Ojielo Chizoba Henry Regional Sales Director, East & North East

Eyitemi A. Taire Customer Marketing Director

Afeez Ajibowu Regional Sales Director, West & North West

Gavin Pike Marketing & Innovation Director

The recruitment of the management team as well as other staff personnel is guided by the Company‟s

resourcing policy, which promotes a transparent and consistent process of selecting the best candidate with

the appropriate skills and experience, devoid of discrimination. The non-management staff of Guinness

Nigeria Plc belongs to the National Union of Food and Beverages & Tobacco Employees, while the

management staff belong to Food Beverages & Tabacco Senior Staff Association.

Guinness Nigeria Plc has a series of incentive packages for its employees, which includes but is not limited

to; Annual incentive plan - this plan pays out an annual bonus to employees on the basis of organisational

performance as well as the individual‟s performance, DELTIP - this scheme awards Diageo stock options to

top management as well as strong performing senior managers on a yearly basis and VESS - the company

encourages employees to save and in doing this matches 5% of the employees Annual Basic Salary, subject

to an annual maximum when the employee opts in for the savings scheme. These incentives and its

competitiveness in rewarding its employees are what earned Guinness Nigeria Plc (for the second year

running), as one of the top 5 best places to work in Nigeria in 2014 by “Great Place to Work in Nigeria”, an

affiliate of Great Place to Work Institute, San Francisco.

In the year under review, Guinness‟ average cost per employee amounted to ₦6.9 million. The Company‟s

net earnings per staff at ₦8.5 million is 1.3 times the average cost per employee. This is lower than Nigerian

Breweries of 2.3 times.


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OUTLOOK

The growth recorded in the brewery industry in Nigeria in recent years slowed down in 2014 as a result of

irregular power supply, heightened insecurity in some parts of the Country and the overall challenging

economic environment, which has reduced consumers‟ disposable income.

There was a change in consumers‟ consumption pattern which resulted in a shift in demand from

mainstream and premium products to value products. Most Guinness products are premium and

mainstream, while its competitors, SAB miller and Nigerian Breweries, have stronger presence in the value

segment. Consequently, Guinness launched new products - Orijin bitters, Orijin ready-to drink, Master‟s

choice spirits and Alvaro and re-introduced Satzenbrau and Dubic lager in order to compete effectively in

the value segment.

In our view, introduction of new products as well as the re-introduction of value products should improve

Guinness‟ sales in the short term. We believe that the Company‟s earnings are sustainable given its strong

brands and good product diversification.

Guinness Nigeria Plc has approached the Bank of Industry for a concessionary term loan which it plans to

utilize to expand its spirit manufacturing by setting up a 10,000 bph Orijin bitters 20cl plant in Aba. The

introduction of Orijin bitters variant will help the Company compete effectively with Kasapreko‟s Alomo

bitters, which has gained significant market acceptance over the last three years. In addition, Guinness plans

to create an additional 1,500 bph cube optimization packaging plant and add extra packaging line of 2,500

bph capacity to the Aba Plant in the near term. Agusto & Co. believes that this expansion will enable the

Company compete in the value segment in the eastern Nigeria, which is where SAB Miller has a stronghold.

The Company also intends to optimise the Ikeja warehouse and upgrade the Aba Logistics center in the

medium term. In our view, successful implementation of the expansion projects at the Aba Plant should

increase revenue in the medium term.

Guinness‟ unaudited accounts for the three months period ended 30 September 2014 recorded a 5%

decline in turnover to peg at ₦21 billion. However, the Company‟s profit before tax rose by 6% to ₦1.96

billion (Q1‟2014: ₦1.87 billion) in the same period.

In addition, we believe Guinness Nigeria Plc will continue to enjoy favourable terms of trade with customers,

suppliers and related parties, which in turn will impact positively on cash flow. In our view, the Company‟s

working capital inadequacy will persist unless additional long term funding is injected.

In our opinion, Guinness has a stable outlook.


Agusto & Co.


FINANCIAL SUMMARY STATEMENT OF FINANCIAL POSITION AS AT 30-Jun-14 30-Jun-13 30-Jun-12

₦'000 ₦'000 ₦'000

ASSETS

IDLE CASH 3,061,648 2.3% 1,507,947 1.2% 3,028,744 2.9%

MARKETABLE SECURITIES & TIME DEPOSITS 3,228,934 2.4% 1,681,292 1.4% 1,743,410 1.6%

CASH & EQUIVALENTS 6,290,582 4.8% 3,189,239 2.6% 4,772,154 4.5%

FX PURCHASED FOR IMPORTS

ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS

STOCKS 12,906,673 9.8% 11,252,341 9.3% 11,955,613 11.3%

TRADE DEBTORS 15,491,921 9,066,066 4,471,619

DUE FROM RELATED PARTIES 396,772 930,910 233,497

OTHER DEBTORS & PREPAYMENTS 5,388,207 4.1% 6,782,681 5.6% 6,364,992 6.0%

TOTAL TRADING ASSETS 34,183,573 25.8% 28,031,998 23.2% 23,025,721 21.7%

INVESTMENT PROPERTIES

OTHER NON-CURRENT INVESTMENTS

PROPERTY, PLANT & EQUIPMENT 90,683,405 68.5% 88,112,582 72.8% 76,293,851 72.0%

SPARE PARTS, RETURNABLE CONTAINERS, ETC 562,575 0.4% 1,148,031 0.9% 1,238,149 1.2%

GOODWILL, INTANGIBLES & OTHER L T ASSETS 608,138 0.5% 578,771 0.5% 679,792 0.6%

TOTAL LONG TERM ASSETS 91,854,118 69.4% 89,839,384 74.2% 78,211,792 73.8%

TOTAL ASSETS 132,328,273 100.0% 121,060,621 100.0% 106,009,667 100.0%

Growth 9.3% 14.2% 11.1%

LIABILITIES & EQUITY

SHORT TERM BORROWINGS 4,680,225 3.5% 3,747,585 3.1% 4,928,916 4.6%

CURRENT PORTION OF LONG TERM BORROWINGS 3,148,882 2.4% 8,557,059 7.1% 3,272,478 3.1%

LONG-TERM BORROWINGS 27,429,985 20.7% 8,796,183 7.3% 8,513,058 8.0%

TOTAL INTEREST BEARING LIABILITIES (TIBL) 35,259,092 26.6% 21,100,827 17.4% 16,714,452 15.8%

TRADE CREDITORS 20,404,418 15.4% 20,899,579 17.3% 18,489,324 17.4%

DUE TO RELATED PARTIES 3,966,071 3.0% 3,282,923 2.7% 2,466,937 2.3%

ADVANCE PAYMENTS AND DEPOSITS FROM CUSTOMERS

OTHER CREDITORS AND ACCRUALS 6,353,088 4.8% 6,250,852 5.2% 6,399,991 6.0%

TAXATION PAYABLE 1,585,320 1.2% 4,050,356 3.3% 5,189,181 4.9%

DIVIDEND PAYABLE 4,110,475 3.1% 4,486,743 3.7% 4,452,710 4.2%

DEFERRED TAXATION 12,559,441 9.5% 11,955,673 9.9% 10,902,749 10.3%

OBLIGATIONS UNDER UNFUNDED PENSION SCHEMES 3,028,651 2.3% 2,994,557 2.5% 2,782,809 2.6%

MINORITY INTEREST

REDEEMABLE PREFERENCE SHARES

TOTAL NON-INTEREST BEARING LIABILITIES 52,007,464 39.3% 53,920,683 44.5% 50,683,701 47.8%

TOTAL LIABILITIES 87,266,556 65.9% 75,021,510 62.0% 67,398,153 63.6%

SHARE CAPITAL 752,944 0.6% 752,944 0.6% 737,463 0.7%

SHARE PREMIUM 8,961,346 6.8% 8,961,346 7.4% 1,545,787 1.5%

IRREDEEMABLE DEBENTURES

REVALUATION SURPLUS

OTHER NON-DISTRIBUTABLE RESERVES 18,582 0.0% 18,582 0.0% 62,308 0.1%

REVENUE RESERVE 35,328,845 26.7% 36,306,239 30.0% 36,265,956 34.2%

SHAREHOLDERS' EQUITY 45,061,717 34.1% 46,039,111 38.0% 38,611,514 36.4%

TOTAL LIABILITIES & EQUITY 132,328,273 100.0% 121,060,621 100.0% 106,009,667 100.0%


Agusto & Co.


STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30-Jun-14 30-Jun-13 30-Jun-12

₦'000 ₦'000 ₦'000

TURNOVER 109,202,120 100.0% 122,463,538 100.0% 116,461,882 100.0%

COST OF SALES (57,868,906) -53.0% (66,385,104) -54.2% (61,278,681) -52.6%

GROSS PROFIT 51,333,214 47.0% 56,078,434 45.8% 55,183,201 47.4%

OTHER OPERATING EXPENSES (35,944,182) -32.9% (35,960,323) -29.4% (34,035,655) -29.2%

OPERATING PROFIT 15,389,032 14.1% 20,118,111 16.4% 21,147,546 18.2%

OTHER INCOME/(EXPENSES) 1,054,087 1.0% 1,016,690 0.8% 1,329,075 1.1%

PROFIT BEFORE INTEREST & TAXATION 16,443,119 15.1% 21,134,801 22,476,621 19.3%

INTEREST EXPENSE (4,761,559) -4.4% (4,125,926) -3.4% (2,093,463) -1.8%

PROFIT BEFORE TAXATION 11,681,560 10.7% 17,008,875 -3.4% 20,383,158 17.5%

TAX (EXPENSE) BENEFIT (2,108,080) -1.9% (5,145,149) -4.2% (6,168,538) -5.3%

PROFIT AFTER TAXATION 9,573,480 8.8% 11,863,726 9.7% 14,214,620 12.2%

NON-RECURRING ITEMS (NET OF TAX)

MINORITY INTERESTS IN GROUP PAT

PROFIT AFTER TAX & MINORITY INTERESTS 9,573,480 8.8% 11,863,726 9.7% 14,214,620 12.2%

DIVIDEND (10,541,217) -9.7% (11,799,404) -9.6% (14,749,255) -12.7%

PROFIT RETAINED FOR THE YEAR (967,737) -0.9% 64,322 0.1% (534,635) -0.5%

SCRIP ISSUES

OTHER APPROPRIATIONS/ ADJUSTMENTS (9,657) (24,039) 233,883

PROFIT RETAINED B/FWD 36,306,239 36,265,956 36,566,708

PROFIT RETAINED C/FWD 35,328,845 36,306,239 36,265,956

ADDITIONAL INFORMATION 30-Jun-14 30-Jun-13 30-Jun-12

Staff costs (₦'000) 9,527,408 8,899,803 8,340,142

Average number of staff 1,368 1,433 1,406

Staff costs per employee (₦'000) 6,964 6,211 5,932

Staff costs/Turnover 8.7% 7.3% 7.2%

Capital expenditure (₦'000) 13,512,308 22,926,310 25,914,752

Depreciation expense - current year (₦'000) 10,525,929 9,995,054 7,571,997

(Profit)/Loss on sale of assets (₦'000) - - -

Number of 50 kobo shares in issue at year end ('₦'000) 1,505,888 1,505,888 1,474,926

Market value per share of 50 kobo (year end) 20,000 25,107 22,800

Market capitalisation (₦'000) 283,650,570 262,190,160 237,004,384

Market/Book value multiple 6.3 5.7 6.1

Auditors KPMG KPMG KPMG

Opinion CLEAN CLEAN CLEAN


Agusto & Co.


STATEMENT OF CASH FLOW FOR THE YEAR ENDED

30-Jun-14 30-Jun-13 30-Jun-12

₦'000 ₦'000 ₦'000

Operating cash flow (OCF) 17,162,515 24,113,883 23,092,734

Less: Returns to providers of finance (15,679,044) (15,891,297) (16,311,656)

OCF after returns to providers of finance 1,483,471 8,222,586 6,781,078

Non-recurring items - - -

Free cash flow 1,483,471 8,222,586 6,781,078

Investing activities (12,540,393) (21,622,916) (25,573,750)

Financing activities 14,158,265 11,817,415 14,710,236

Change in cash 3,101,343 (1,582,915) (4,082,436)

PROFITABILITY

PBT as % of Turnover 11% 14% 18%

Return on equity 26% 40% 53%

Real sales growth -17.6% -3.0% -16.5%

CASH FLOW

Interest cover (times) 3.6 5.8 11.0

Principal payback (years) - - -

WORKING CAPITAL

Working capital need (days) - - -

Working capital deficiency (days) 5 27 11

LEVERAGE

Interest bearing debt to Equity 64% 39% 31%

Total debt to Equity 180% 156% 162%


Agusto & Co.


RATING DEFINITIONS

Aaa This is the highest rating category. It indicates a company with impeccable financial

condition and overwhelming ability to meet obligations as and when they fall due.

Aa

This is a company that possesses very strong financial condition and very strong

capacity to meet obligations as and when they fall due. However, the risk factors are

somewhat higher than for Aaa obligors.

A

This is a company with good financial condition and strong capacity to repay

obligations on a timely basis.

Bbb

This refers to companies with satisfactory financial condition and adequate capacity

to meet obligations as and when they fall due.

Bb

This refers to companies with satisfactory financial condition but capacity to meet

obligations as and when they fall due may be contingent upon refinancing. The

company may have one or more major weakness (es).

B

This refers to a company that has weak financial condition and capacity to meet

obligations in a timely manner is contingent on refinancing.

C

This refers to an obligor with very weak financial condition and weak capacity to meet

obligations in a timely manner.

D In default.

Rating Category Modifiers

A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category.

Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a

rating with the - (minus) sign.

agusto & co. - fmdq group · annual growth rate of 5 - 7% until 2020. however, as a result of...

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