June 4, 2021/GCR Ratings

GCR Ratings (“GCR”) has upgraded the long-term and short-term Issuer ratings of Guinness Nigeria Plc to AA-_(NG) and A1+_(NG) respectively, with the Outlook accorded as Stable.

Rating Rationale

The ratings upgrades of Guinness Nigeria Plc (“Guinness” or “the Company”) are underpinned by its strong gearing metrics and robust cash flows, albeit somewhat tapered by the moderated earning performance in recent years.

Guinness ratings are also supported by its mid-to-strong position in the Nigerian brewing and alcohol industry, with a well-diversified product offering spanning most spirit categories, lager, stout, and non-alcoholic beverages, targeting different price segments. The Company also enjoys operational and strategic support from its parent, Diageo Plc (one of the world’s largest brewing companies), with operations in more than 150 countries. However, Guinness’ geographic diversification is limited, with earnings almost entirely generated in Nigeria. This is not anticipated to change.

A challenging operating environment, weakening consumers disposable income and rising competition has placed significant pressure on Guinness, with these trends worsened by the negative impact of the COVID-19 pandemic in FY20 (especially on the entertainment segment which is a key driver of alcohol consumption). Accordingly, revenue declined by 21% to N104bn at FY20 (FY19: N131bn, FY18: N143bn), with a similar decrease in EBITDA. Nevertheless, earnings at 9M FY21 evidenced a strong recovery, underpinned by higher pricing and volumes across product offerings. GCR expects improvement in earnings profile for full year FY21 as restrictions have been relaxed and economic activities resume. Over the longer term, expanding market penetration and a largely youthful population should support renewed revenue and earnings growth.

Guinness’ strong financial profile is supported by its moderate debt level. Gross debt reduced by almost half to N12bn at 9M FY21, following the repayment of all advances relating to letters of credit and full settlement of bank loans. Accordingly, Guinness now reports a net ungeared position, with operating cash flow coverage of debt at a review period high of 485%, and EBITDA coverage of net interest rising to 10.5x (FY20: 3.8x). GCR is of the view that Guinness will maintain a firm credit profile over the rating horizon on the back of the substantial cash holdings and lower debt.

Also supportive of the ratings is the strong liquidity profile, with sources vs. uses liquidity coverage of more than 2x over a 15-month period. This is predicated on expected moderate cash generation supported by robust cash holdings, as well as various credit facilities, which are available for utilisation and expected to sufficiently cover debt redemption and capex. In this regard, GCR expects much lower capex spend over the medium term, as the Company has largely completed its ongoing projects.

The liquidity assessment is somewhat constrained by the high level of trade creditors owed to Guinness’ parent company, which has continued to supply raw materials and other products despite foreign currency restrictions. GCR expects that these creditors will need to be repaid, creating some working capital pressure on the Company in the near future. Nevertheless, even factoring in some repayments, GCR expects liquidity coverage to remain within an intermediate range of 1.25x to 2x over a one-year period.

Outlook Statement

The Stable Outlook reflects GCR’s opinion that Guinness’s will achieve renewed earnings growth, which will support the continued robust gearing and liquidity profile.

Rating Triggers

Renewed sustainable growth in revenue and firmer margins that translate into more stable profitability and cash flows could trigger a rating upgrade. The ability to increase market share through introduction of new products, particularly affordable brands where it is under-represented, will be positively considered.

Conversely, negative rating movement could emanate from a continued erosion in market share that has negative implications for revenue. Furthermore, a meaningful increase in debt, and thus deterioration in credit protection metrics would be negatively viewed.

Ratings History

Guinness Nigeria Plc

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Guinness Nigeria Plc. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Guinness participated in the rating process via telephonic meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Guinness Nigeria Plc and other reliable third parties to accord the credit ratings included:

• 2020 audited annual financial statement, and prior four years annual financial statements;
• Nine-month management accounts to 31 March 2020;
• Internal and/or external management reports;
• Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties; and
• Information specific to the rated entity and/or industry was also received.