Nigeria’s biggest-brewer, Guinness Nigeria Plc. on Wednesday released an impressive Full-year financials with bottom line pointing south when compared to the same period last year. The brewing giant is a major player in the lucrative beverage sector and has regularly posted profits for well over 5 years. With profits down this year, as compared to last, most investors will worry and hope this is just a blip. But why are profits down this year? Can their financials reveal much? Lets find out.

Revenue

The company posted a revenue of 126.288 billion naira ($80o.7 million) an increase of 2.1 percent from the same period last year. This rise is meagre when you consider that prior comparatives; in 2011 revenue was up by 13 percent, 23 percent in 2010 and 28 percent in 2009 respectively. A drop of 2.1 percent portends a market that is caving under the pressure of competition and discretionary consumer spending by Nigerians. Ironically, Nigerian Breweries, a major competitor,  posted a 23 percent rise in revenue for the half year and 21 percent for the year ended December 2011. Surely this must be worrying signs for Guinness Nigeria.

Operational profit

The company posted an operational profit of 22.8 billion naira ($145 million) for the year ended June 2012. This was a 14 percent decline when compared to the prior year. A further isight into this reveals a period marked with increased operational cost. The company spends 60 naira (38 cents) for every 100 naira  (63 cents) of Gross Profit generated a fact that weighs down heavily on efficiency. Advert and promotional expenses has a lot do with this has they alone chalked off 44 percent of Gross profit. All those ads on live football must have a lot to do with this. The year has also mostly being marked with high inflationary pressures due to the partial fuel subsidy removal and various security threats in major parts of the country. Without the buffer of increased top line revenue it is difficult to achieve improved efficiency with operating costs such as this. The company’s earnings from its line of product may well be heavily dependent on the famed Guinness Stout and less on the struggling Satzenbrau and the waning  influence of Gordon’s Spark.

Finance cost

The company’s borrowing is made up of finance lease and bank overdrafts totaling 13.4 billion naira ($85 million), a 908 percent rise from the prior year. With finance lease obligations taking up more than 60 percent of borrowings the impact of borrowings may be adverse for cash flow depending on the terms of the lease. Over drafts of almost 5 billion naira effectively puts the company in a negative cash flow territory. Despite this, the debt accounts for 32 naira for every 100 naira of Equity it has. Interest as a percentage of operational profit is just under 8 percent for the year, a figure that is well below NSE average. The only worry maybe that the company didn’t need any debt to post a pre-tax profit higher 14 percent higher than that of the year. The company may well put forward an argument of sacrifice for investing in the future even though lower margins may well be a clog to the wheel taking them there.

Profit

Guinness has consistently posted profits and this year surely isn’t an exception. With Return on Average Equity (ROE) of 36 percent, one can hardly break sweat for any of the set backs enumerated above. Very few Nigerian companies have the capacity to post yields higher than inflation. Guinness does just that leaving investors with a real return of 12 percent. It’s ROE down from the 44 percent posted in the prior year but may just beat their rivals NBL who already posted 32 percent for the first half of this year alone. The company has proposed an 8 naira dividend payment or a 1 for 33 Bonus issue following this result. As if to make matters worse, at the current market price of about N260 shareholders may be in for a dividend yield of just under 3 percent.

Bottom line

With a market cap of 383.4 billion naira ($2.4 billion), 26 percent of its sector and 4.75 percent of the total NSE market Cap, the company is listed among the elite NSE 30 (most capitalized stocks). Its current year high price of 260 naira ($2) puts it at a pricey 26X P.E ratio. For shareholders who bought the stocks this time last year and held on till date, that already gives them an instant 19 percent capital gains. For those seeking to invest now, the stock represents a hedging opportunity in a market that has witnessed volatility amidst feeble fundamentals. The company has sound fundamentals and look likely to make profits in the coming years. New entrants into the brewery sector pose a medium term threat just as the increase in spirits, champagne consumption and wines dent their share of the strained Nigerian consumers.