TheCable

Guinness Nigeria recorded a significantly improved second quarter though the brewing company is still losing sales revenue and profit in the current financial year. Sales revenue accelerated from N21.74 billion in the first quarter to N49.83 billion in the second quarter ended December 2015. The company’s profit outlook brightened during the period with a big leap forward from a net profit of only N362 million in the first quarter to N1.17 billion at the end of the second quarter.

Despite the improved performance in the second quarter, the company is still facing the challenges of slowly moving sales that has created a rise and fall pattern in sales revenue over the past five years. The current financial year ending June 2016 still looks like one of a major downturn in earnings performance for the company.

Guinness Nigeria has suffered a profit drop every year for the past three years and it is presently headed for the lowest profit figure in many years. At the end of the company’s second quarter operations in December, sales revenue was down 10% year-on-year. While this is worse than the 3% improvement in the first quarter, the earnings picture has improved on annualized basis.

Further improvement in sales revenue growth still looks likely for the company in the course of the financial year. Based on the accelerated growth rate in the second quarter, sales revenue is projected at N101.7 billion for Guinness Nigeria in 2016. This will mean a drop of over 14% in sales revenue for the company in the year and a return to a declining trend in revenue that was interrupted by an improvement of 8.5% in the 2015 financial year.

An accelerated growth in after tax profit brightened the company’s gloomy earnings picture painted at the end of the first quarter. Against a drop of 76% in after tax profit to N362 million in the first quarter, second quarter trading ended with an after tax profit of N1.17 billion. That still represented a drop of 66% in profit on year-on-year basis.

Based on the improved second quarter growth rate, the company’s full year profit is projected at N2.45 billion for the 2015/16 financial year. That would be a sharp drop from the full year profit figure of N7.79 billion the company reported in the prior year. It will be the lowest profit figure that Guinness Nigeria would earn in decades. The company has lost profit every year after attaining a profit peak of N14.93 billion in 2011.

The problem is from the top to the bottom lines. Revenue losses leave an insufficient space to manage cost and defend profit. Full year revenue projected for the current financial year is about the figure the company earned as far back as 2010. With rising costs, profit margin has thinned down well below those of competitors.

Two main cost lines – cost of sales and distribution/administrative expenses, are encroaching on revenue. They declined less rapidly than sales revenue, resulting in a drop in gross profit margin from 46.6% to 42.9% over the review period. A drop of 41% in other income also constrained operating profit further.

A favourable behavior in the second quarter came from finance charges, which dropped by 26% to N1.72 billion. Another favourable development is a drop of 62% in tax liability during the review period. The two factors account for the accelerated growth in profit the company recorded in the second quarter.

The drop in interest expenses needs to be watched in terms of whether it will be sustained in the second half of the financial year. This is in view of a high rise in current financial liabilities of the company in the balance sheet. Short-term debts more than doubled at 108% to N25.64 billion over the closing figure for the preceding year. Long-term borrowings however went down by 36% to N7.85 billion over the same period.

Increased balance sheet borrowings are warranted by cash flow constraints facing the company. At the end of the second quarter, net cash generated from operating activities dropped by 90% to N769 million. This could not meet even one-half of the net cash requirements for investing activities during the period.

The company earned 78 kobo per share at the end of the second quarter, a drop of 66% from N2.26 in the same period last year. Earnings per share is projected to amount to N1.62 for Guinness Nigeria at full year. It had earned N5.17 per share in the preceding financial year and paid a cash dividend of N3.20 per share to shareholders.