Lagos Nigeria, 5 June 2020 — Global Credit Ratings has assigned national scale issuer ratings of A+(NG) and A1(NG) in the long term and short term respectively to Guinness Nigeria Plc, with the outlook accorded as Stable. The ratings are valid until May 2021.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Guinness Nigeria Plc (“Guinness” or “the Company”) based on the following key criteria:
Guinness is one of the leading brewing companies in Nigeria, controlling around 22% of the market through a well-diversified portfolio of strong brands spanning lager, stout, spirits and non-alcoholic beverages. Guinness is a subsidiary of Diageo Plc, a global brewing company with operations in more than 180 countries. With Nigeria being one of its major markets, Diageo is committed to providing technical, strategic and funding support to Guinness.
The Company’s revenue growth to FY18 was supported by an increase in sales volume as international premium brands and some new local products were added to the portfolio. But heightened competitive pressure, coupled with the tough operating environment has since resulted in a decline. Like other industry players, Guinness has experienced rising margin pressure, triggered by the depreciation of the Naira, which has impacted the prices of imported raw materials and other locally sourced inputs. Cost pressures are expected to worsen in the medium term given the uncertainties in the Nigerian foreign exchange market, coupled with inability to fully pass on additional costs to consumers. This notwithstanding, management is confident that earnings margins will stabilise due to the efficiency initiatives, centred on cost rigour and high margin products, rather than volumes.
The spike in debt at FY16 and FY17 saw net gearing rise above 80% and net debt to EBITDA over 190%, from a low of 31.4% and 56.4% at FY15. However, gross debt has reduced substantially since FY18, following the conversions of intergroup loans to equity and part settlement of outstanding bank facilities. Thus, net debt to EBITDA moderated to 86.1% at end-March 2020 (“3Q FY20”), while net debt to equity registered below 18%, comparing favourably to its major peers. Interest coverage has improved to exceed 4x in FY19. Guinness plans to establish a Commercial Paper Issuance Programme during 2020 to refinance its maturing short term borrowings, as well as diversify sources of funding. Even when gross debt has been fairly elevated, Guinness has reported moderate gearing metrics.
Guinness evidences a favourable cash conversion cycle that facilitates strong cash generation and liquidity. Nevertheless, the uncertainties in the currency market has forced the Company to increase inventory holding to ensure sufficient raw materials are readily available. Access to liquidity remains strong with over N16bn in unutilised bank debt and USD23.1m of intercompany loans available.
Notwithstanding that GCR considers the brewing sector to evidence lower cyclicality, the COVID-19 crisis has elevated downside risks for the sector, given its reliance on hospitality and entertainment to drive volumes. Nevertheless, GCR expects Guinness to maintain its strong market position due to its entrenched brands.
An upward rating movement is contingent on a sustained growth in revenue and firmer margins that translates into more stable profitability and cash flows. Conversely, a worse than anticipated disruption to demand from COVID-19 and/or severe weakness in the consumer market, could see earnings fall substantially. Furthermore, excessive debt utilisation would see credit protection deteriorate, leading to a rating downgrade.
NATIONAL SCALE RATINGS HISTORY
Initial/new ratings (June 2020)
Rating outlook: Stable
Last rating: n/a
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios, February 2018
RATING LIMITATIONS AND DISCLAIMERS
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings are valid till May 2021.
Guinness Nigeria Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Guinness Nigeria Plc.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
The information received from Guinness Nigeria Plc and other reliable third parties to accord the credit ratings included:
– 2019 audited annual financial statement, and four years audited annual financial statements;
– A 9-month management accounts to 31 March 2020
– Internal and/or external management reports;
– A completed rating questionnaire containing additional information on Guinness Nigeria Plc;
– 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.