Strong belief in the long term prospects of the Nigerian economy among others have been revealed as the reasons behind the Diageo’s plans through its wholly owned subsidiary, Guinness Overseas Limited to increase its stake in Guinness Nigeria Plc from 54.3% to about 70 per cent, despite significant decline in return on total assets, profit margin and other major financial parameters in recent years, according to analysis.
The proposed transaction indicated that Diageo will launch a partial tender offer at a price “not higher” than N175 per share in cash, and a price of N175 per share would represent a 36 per cent to the 30-day volume weighted average share price and 40 per cent to the company’s closing share price of Guinness Nigeria on Tuesday 8th September.
Commenting on this development, Mr. Abiola Rasaq a research analyst with UBA pointed out that Diageo are a long term investors, and have been in the Nigeria economy for more than 30 years, and “They believe in the long term prospects of the Nigerian Economy, hence their decision to increase their stake with Guinness Nigeria.”
Foresight Securities Stockbroker, Mr. Fakrogha Charles stated that: “Despite the harsh business environment, Nigeria still remains the investment destination for investors. That the parent company of Guinness Nigeria is trying to increase their stake to as high as 70 per cent, they are also mindful that the offer does not seems as an intention to delist.”
He explained that Diageo is fully confident of fruitful prospects in the Nigeria economy and that with 70 per cent, they are still going to be listed, of which they would not be infringed on any rules and regulation. This shows that local investors need to start seeing what foreign investors take note of.
“This is a good development; however the tender offer is not enough. For short term shareholders who come in and go out, Guinness which was trading less than 121 closed yesterday at N131.48, yet the offer is at a price of N175, a mouth watering offer.”
Mr. Fakrogha advised investors who need to make a profit from the offer to sell off a percentage of their shares and keep the rest to remain a shareholders of Guinness, saying that a shareholder who has about 5000 units can sell off 1000 units and keep 4000 units.
While Guinness Nigeria Plc. audited half year result for the year ended June 30th 2015 indicates revenue growth of 9 per cent from N109.2 billion recorded in H1 2014 to N118.5 billion in H1 2015, other major financial parameters have witnessed a significant decline.
The company’s operating expenses grew 14 per cent to N40.95 billion from N35.94 billion recorded in H1 2013, while operating income fell 3 per cent to N15.7 billion from N16.1 billion achieved in H1 2014, hence decreasing Profit before tax by 8 per cent to N10.8 billion and Profit after tax by 19 per cent to N7.8 billion from N9.6 billion recorded in H1 2014.
Further analysis on the company’s financials revealed a decline in Return on Total Assets (ROTAs) by one percent to 6 per cent from 7 per cent in H1 2014, an indication that the company’s assets are not effectively generating profits, indicating that the management of Guinness needs to deploy its assets (debt and equity) effectively.
Profit Margin- Guinness Nigeria Plc., had its net profit margin fall to 7 per cent in H1 2015 from 9 per cent achieved in the prior year while its gross profit margin remained unchanged at 47 per cent in spite of increased revenue, showing that an increased earning does not result to improved profit margin of a company, and an indication that costs need to be under better control.
Current Ratio- Guinness Nigeria Plc. recorded a current ratio of 0.73 in H1 2015 a 0.19 decline from 0.92 held in H1 2014. Although both ratios are lower than the industry standard requirement of 1, the capacity of the company to raise cash in order to settle its debts has waned over the years, a critical problem that should concern the management, as the reducing current ratio may mean that it has problems getting paid on its receivable or have long inventory turnover, both symptoms signifies that the company may not be efficiently using its current assets.
Total Assets Turn Over (TATO) – A measure of the ability of a company to use its assets to efficiently generate sales considers all assets, current and fixed, Guinness’ asset efficiency showed an increased sales pace as the ratio rose to 97 per cent from 83 per cent in H1 2014
Operating Profit Margin (OPM) – decreased to 13.2 per cent from 14.8 per cent demonstrating that the company is earning less per naira of sales. An increasing operating profit margin, is often preferred as it shows whether the fixed costs are too high for the production or sales volume.
Return on Equities (ROE) for Guinness Nigeria Plc dropped by 5.1per cent from 21.2 per cent in 2014 to 16.1 in 2015. This decline is an indication of profit decline especially on shareholder investments, highlighting the need to firm up the management of their resources as well as reserved earnings.
The ROE ratio is an important measure of a company’s earnings performance. The ROE tells common shareholders how effectively their money is being employed. In general, return on equity ratios in the 15-20% range is regarded attractive levels of investment quality.
Equity transactions on the shares of Guinness Nigeria Plc on Wdnesday shot up 5 per cent or N6.26 to close at N131.48 from previous day’s loss of 2.93 per cent or N3.78 to close at N125.22 per share. This is coming on the heels of Diageo’s announcement on its intention to make an offer to increase its stake in Guinness Nigeria Plc from 54.3 per cent to as much as 70 per cent.
The company’s market capitalization currently stands at N197.99 billion with 1.51 billion shares outstanding.
By Pita Ochai