Guinness'profit may drop to the lowest in six years - THE CITIZEN

By The Citizen

Guinness Nigeria Plc has sustained a drop in profit for the third quarter running and the full year earnings outlook has moderated further. Sales revenue is still failing to step up and major cost lines of the company have continued to rise generally ahead of income.

At the end of the company's nine months of operations in March, sales revenue inched up by 3.1% to N94.93 billion and after tax profit dropped by 17.6% to N7.63 billion over the corresponding quarter in 2012. This is a slow down from an improvement of 4.5% in sales revenue in the second quarter.

The company's profit has been going down since the beginning of the current financial year.In the first quarter after tax profit fell by 28.5% and in the second quarter it went down by 15.7% from N7.62billion in the corresponding period in the 2011/12 financial year to N6.42 billion in December 2012.

Based on the third quarter growth rate, full year earnings projections are revised downwards for Guinness Nigeria in 2013. Sales revenue is forecast to be in the region of N128 billion at full year in June, down from an initial forecast of about N135 billion. That will be a marginal increase of 1.2% over the sales revenue figure in the preceding year.

The full year profit growth is also revised down for Guinness Nigeria based on the growth rate in the third quarter. The company is expected to close the financial year with an after tax profit of about N10.7 billion. This is a mark down from the initial after tax profit projection of N13.54 billion. The company's profit outlook is showing that the falling profit trend is likely to sustain to full year.

At N10.7 billion, the company's after tax profit will drop for the second year by 27% in 2013. After tax profit of Guinness Nigeria had gone down by about 2% at the end of its 2012 financial year from the all-time peak of N14.93 billion in 2011.The company has been unable to grow profit reasonably in the past five years and a likely drop in the current year could see the profit figure down to the lowest level in six years.

The company earned N5.07 per share at the end of the third quarter, down from N6.28 per share in the corresponding quarter in 2012. Based on the profit growth rate, the company's earnings per share is projected to come to N7.10 at the end of the financial year.This is a mark down from the N9.18 initial earnings per share projection based on the stronger growth rate in the second quarter.

The revised earnings per share figure is indicating a likely drop in earnings per share from N10.07 in 2012.The decline in earnings per share reflects both the drop in net profit and an increase in the volume of outstanding shares in the current financial year.The signals point to dividend pay-out weakness for the company in 2013.

Without an accelerated growth in profit and earnings per share in the final quarter, dividend per share for 2013 may be the lowest in five years. Guinness Nigeria paid a peak dividend of N10 per share in 2012 apart from its special dividend in 2008.

The summary of the company's current situation is that while its revenue is not growing the key cost elements in operation are not declining or moderating. The slow growth is sales revenue is despite the spending of about N5.66 billion in advertising and promotion as at the end of the second quarter. Rising cost is hindering the ability of the company to convert revenue into profit.

Cost of sales rose ahead of sales revenue in the third quarter at 6.6% compared to the 3.1% growth in sales revenue. This lowered gross profit margin from 46.8% of net sales revenue in 2012 to 45.5% in 2013.This is slightly better than the gross profit margin of 43.3% in the 2012 full year. Distribution/administrative cost moderated slightly relative to revenue at an increase of 1.6% during the review period.

Interest cost remains on the high rise, encroaching on sales revenueand eroding profit margin.Interest charges grew by 210% toN2.55 billion at the end of the third quarter. Its share of net revenue increased from about 1.0% in 2012 to 2.9% in 2013. Interest charges had risen by 188.4% to N1.86 billion in the second quarter.

The overall profit performance was also affected by a drop of 61% in other income during the review period.Net profit margin has continued to decline from 11.8% in the 2012 full year to 9.8% in the second and further to 8.0% in the third. It is also a decline from the net profit margin of 10% recorded in the corresponding quarter in the preceding year

Major developments observed in the company's balance sheet during the period include a zero movement in inventories against a minor reduction of 1.2% in the second quarter.The inventories figure, at N16.76 billion at the end of the third quarter, is about N6.6 billion higher than the closing figure for the 2012 full year. This seems to indicate that the increased advertising and promotion expenses incurred this year are still failing to prop up sales.

Trade and other receivables continues to grow at 45.9% in the second quarter and 38% in the third, indicatingthat additional credit inducements have to be used to achieve even the marginal growth in sales volume. This has continued to impact negatively on the cash flow situation of the company in the current year.

As happened in the second quarter, the company again tried to compensate for the increase in trade and other receivables with an increase of 30% in trade and other payables. The net effect is that it continues to give customers more trade credit than it receives, which has continued to affect the cash flow position of the company.

During the quarter, net cash generated from operating activities dropped by 40% to N8.15 billion and the overall net cash flow position grew by 80% in the negative figure at N10.79 billion. Cash balances at the end of the period dropped by 18% to N3.05 billion, down from N8.19 billion in the 2012 full year.

Other changes in the balance sheet during the period include a rise of 69% in current financial liabilities at N16.50 billion during the review period. There was also an increase of 26% in total current liabilities and 28% in non-current liabilities at N66.39 billion and N23.59 billion respectively. These are against increases of 15% in total current assetsand 31% in non-current assets to N42.84 billion and N89.03 billion respectively. Net assets per share improved from N23.18 in 2012 to N27.81 in 2013.