27 July 2022

GGBL FY2021/22 Results: A Tale of Two Halves

In brief

Guinness Ghana Breweries (“GGBL”) released its unaudited FY2021/22 financial results yesterday, posting an 89.0% y/y reduction in net profit. This reduction, in our opinion, reflects the deteriorating 1H2022 economic environment characterized by rising inflationary pressures. Inflation soared to 29.8% in June 2022, from 7.8% in June 2021. Additionally, the Cedi depreciated by 22.7% against the Dollar in 1H2022 with fuel prices rising consistently, especially in 1Q2022. The increased cost of sales worsened margins and lowered profitability. Despite the challenging economic environment, we were impressed at the company’s success in containing OPEX, as OPEX increased at a relatively lower pace than inflation.

Performance: Net profit declines on rising cost of sales 

  • GGBL’s net profit declined by 89.0% y/y to GHS 7.9m on the back of a challenging 1H2022 economic environment, characterized by the continuous slide of the Cedi, soaring inflation and rising fuel costs
  • Cost of sales surged by 32.6% y/y to GHS 1.0b. Consequently, gross margin decreased by 9.0pps to 19.7%, despite achieving revenue growth of 17.6% y/y
  • Operating expenses increased by 11.9% y/y to GHS 218.7m, but decreased by 86.7% q/q in 4Q2021/22. Operating margin fell by 8.3pp y/y to 2.8%
  • Resultantly, net profit margin slumped by 5.9pp y/y to close the period at 0.6%

Outlook: Margin pressure to persist until rising inflation dissipates

  • Going forward, we expect GGBL’s cost of sales to remain elevated due to the prevailing inflationary pressures
  • We also expect OPEX to rise in the coming quarters due to management’s planned implementation of activation campaigns for ready-to-drink products, Star and the Smirnoff brands
  • In line with the rise in cost of sales and OPEX, we expect GGBL to implement upward price adjustments across its flagship products in the coming quarters
  • As a result, we expect margin pressure to persist in the coming quarters until the rising inflation dissipates
  • In spite of the above, we expect GGBL’s short-to-medium term revenue growth to be sustained on the back of the company’s large product portfolio, brand loyalty and investment in marketing campaigns
  • We anticipate that GGBL’s new sorghum brew house will increase the use of local raw materials, decreasing GGBL’s reliance on imported cereals and reduce the impact of the Cedi’s depreciation on cost

Valuation: Under Review 

  • We are in the process of re-initiating coverage on GGBL and have therefore placed our recommendation under review
  • GGBL is trading at a P/E of 89.8x and EV/EBITDA of 7.4x