Guinness Commercial Paper: Big Leap Out Of Financial Challenge | Independent Newspapers Limited
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Guinness Commercial Paper: Big Leap Out Of Financial Challenge

Posted: Mar 6, 2016 at 6:58 am   /   by   /   comments (0)

Bamidele Ogunwusi, Lagos


Guinness Nigerian, one of the Nigeria’s leading brewers, became the first public owned company to raise capital with the listing of a N10 billion Commercial Paper from the fixed income market through the FMDQ OTC Securities Exchange, a Securities and Exchange Commission licensed over-the-counter market operator for fixed income securities. Bamidele Ogunwusi, examines the new instrument and the implication for growth.


The bold step taken by Guinness Nigeria towards exploring another window of accessing capital when it listed its N10 billion Series 2 and 3 Commercial Paper issuance  is seen by many stakeholders in the sector as one big leap to get out of the financial challenges facing the company.

A commercial paper by definition is basically the company borrowing money from the public to finance its short term financial needs. So, rather than take a bank lending that may require collateral and perhaps cost more, the company is seeking to finance its operations by borrowing directly from the public.

As good as the step may look but shareholders of the company are still not sure if the instrument can positively improve the fortune of the company.

The listing follows the establishment of a N10 billion CP Programme in April 2015 and the successful issuance of the combined N10 billion 182-day Series 2 and 268-day Series 3 issues in November 2015.

Guinness Nigeria is a part of Diageo, a global leader in beverage alcohol with an outstanding collection of brands across beer, spirits and wine categories.  These brands include Johnnie Walker, Don Julio, Tanqueray and Guinness. Guinness Nigeria is the manufacturer of recognised brands like Malta Guinness, Harp, Snapp and Orijin.


Speaking at the signing ceremony, Mr. Peter Ndegwa, the Managing Director/CEO of Guinness Nigeria, said: “We are very pleased with the successful quoting of this Commercial Paper issuance for Guinness Nigeria Plc and the support received from FMDQ OTC and our advisors to enable this. The quoting of this CP has allowed us to successfully diversify our short term funding sources at a reduced cost whilst delivering value to our shareholders. We will continue to access the CP markets for optimal funding as ideal windows open for Guinness Nigeria to access funds from a varied pool of investors.”

Commenting on the listing, Leke Ogunlewe, CEO of Standard Chartered Capital & Advisory Nigeria Limited said: Standard Chartered is proud to have sponsored this Commercial Paper listing on FMDQ OTC for Guinness Nigeria Plc.

“The listing follows the successful issuance of the Series 2 and 3 transactions in November and should herald improved liquidity for both instruments. We believe this is the beginning of many more opportunities to support institutional growth for our clients and the continuous development of the economy at large. This is clearly in line with our commitment to be ‘here for good’.”

Kobby Bentsi-Enchill, Executive Director and Head – Debt Capital Markets, of Stanbic IBTC Capital, stated that it is immensely rewarding to see more blue chip issuers emerging on the FMDQ’s “wall of fame” for quoted fixed income instruments, especially commercial paper.

His words: “Over the last couple of years, Stanbic IBTC has tirelessly championed the resurgence of commercial paper issues in Nigeria, and we are exceptionally pleased to see the results of our product innovation and development efforts taking shape, and more importantly for the opportunity to assist our valued clients, such as Guinness Nigeria, achieve their financing objectives. As many more eligible corporate issuers take advantage of this window to access the CP market for competitively priced funding, this can only be for the ultimate good and growth of the Nigerian capital markets.”

Guinness currently has a negative working capital of N10 billion. The amount includes short-term external loans as well as amounts owed to trade and other creditors. Ensuring working capital levels are maintained at the cheapest available cost is important for the company.

Guinness also reveals in its latest results that it had a total trade and other receivables of about N20 billion. Out of that amount N10 billion is owed to trade suppliers whilst another N6 billion is owed to other providers of services to the company. Guinness like its competitor Nigerian Breweries operates a form of credit financing of its operations relying on credit services from their suppliers and service providers. However, they do need to service some of those obligations and ensuring that another source of funding is available for them is crucial.

Guinness also owes a total external loan of about N38.1billion. N18.7billion of that money is owed to short-term creditors piling more pressure on the company to raise cash elsewhere. The total loan is also now 84 per cent of equity suggesting they may have hit a borrowing limit, at least for now. Paying off some of the overdrafts with its commercial paper funding also helps reduce its debt to equity ratio. The subordinate nature of commercial papers gives the company’s capital structure the flexibility it needs.

Despite seeing margins drop massively over the years, Guinness could probably still post a return on asset of over 10 per cent With indications that the CP may be priced at between 14 and 16 per cent discount, a high return on assets gives shareholders comfort that the company can generate enough return to cover debt cost.

However, shareholders will be a little worried considering the additional cost this issuance might bring to bottom line. An added layer of interest cost is not what they perhaps want at the moment. Except, of course they repay their short term loans with the cash flow from the CP.


Improved Financials

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 per cent year-on-year. While this is worse than the 3 per cent 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 per cent 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 per cent 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 per cent to 42.9 per cent over the review period. A drop of 41 per cent in other income also constrained operating profit further.

A favourable behaviour in the second quarter came from finance charges, which dropped by 26% to N1.72 billion. Another favourable development is a drop of 62 per cent 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 per cent to N25.64 billion over the closing figure for the preceding year. Long-term borrowings, however, went down by 36 per cent 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 per cent 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 per cent from N2.26 in the same period last year. However, earning 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.