Guinness Nigeria, East African Breweries: Same Ownership, Differing Loyalties | TimeTestedNews

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By Jude Fejokwu
A throwback to a thematic analysis I did looking at Diageo’s subsidiaries in Kenya and Nigeria in 2015 can be found below the dotted lines.  Five years later, nothing has significantly changed for the better.  Guinness Nigeria has sold its conscience to the Nigerian environment (opaqueness and self-serving decisions take center stage) while East African Breweries still tries to hold on to transparency and proper business management and this has reflected in its performance over the years.
Guinness Nigeria’s better days are behind it and current actions do not bode well for the future.  When transparency goes out the door, there is nothing left behind worth admiring.  I will pick on two simple things to reflect on.
1. Both companies made earnings expectation announcements to their respective stock exchanges for the fiscal year ended June 30, 2020 of a significantly negative performance relative to a year earlier.
East African Breweries wrote in part:
“Consequently, the Board of Directors of the Company hereby informs its shareholders and the general public that EABL’s current performance forecast indicates a decline in profit after tax of approximately 25% for the financial year ending 30 June 2020 versus prior year.
Guinness Nigeria wrote in part:
“Due to a combination of the impact of COVID-19 and the asset impairment, we expect the profitability of the Company for the Financial Year to 30th June 2020 to be impacted. The Company’s balance sheet however remains strong, and this gives the Board the confidence that the Company has the right resources to continue to deliver the strategy.”
You see the difference in how both companies communicated a negative event? When numbers are badly needed, none were found for Guinness Nigeria.   
 
2.  Guiness Nigeria stated that it pays royalties and technical service fees to its related parties.  The total figure as stated for FY2019 is N3.657B.  The annual report for the Nigerian subsidiary did not have any breakdown of the payments.  When approximately 3% of declining sales are spent on royalties, is this not more than worthy of a breakown?  East African Breweries says YES and has a breakdown, Guinness Nigeria says NO.   Furthermore, when there is a 625% increase in payments to related parties between FY 2018 – 2019, when sales declined 8% over the same period, and these payment numbers are supposedly drawn from net sales, transparency becomes a foe instead of a friend as can be seen with Guinness Nigeria.
It is very tough doing business in Nigeria especially when towing the straight and narrow path while embarking on a journey with many tempting and compelling curves and side streets with quick rewards to your bank account whie your conscience continues to gnaw away at you beneath the surface.  Guinness Nigeria has to become loyal once again to its shareholders and not the Nigerian way of doing things that typically brings short-term gain and long-term pain.  That pain is now in plain sight and has been on the horizon many years before COVID-19 as evidenced below.  The current board of Guinness Nigeria needs to work smart and not play smart.  Kudos to Peter Ndegwa who made significant strides in the three years he was at the helm of Guiness Nigeria.   He turned things around after the unsatisfactory performance by the Nigerian CEO before him.  He is now the CEO of Safaricom in Kenya.
Barely three (3) years ago, investors bought shares in Guinness Nigeria for N58.00 and now trading for just 1/4 (one-quarter) of that today and deservedly so!
 
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Kenya: Guinness net sales grew 19% in East Africa during FY 2014 as price increases drove sales growth supported by an increase in marketing spend.  Duty changes led to an 80% decline in the Senator keg brand during FY 2014.  Despite this, East African Breweries sales rose 4% (in Kenya shillings) and pre-tax income declined 6%.  The result was released on August 7th, 2014 by the Nairobi Stock Exchange which was recently demutualised.  The result was released approximately one week after the parent company Diageo released its global results to the London and New York Stock Exchanges.  Guinness Nigeria did not release its results till four weeks after its Kenyan counterpart.
Nigeria: Guinness sales declined in Nigeria due to a more price aware and sensitive consumer base which Diageo management referred to as “challenging marketing conditions”  Beer sales also declined in Nigeria where consumers traded down to value beer resulting in share losses according to the management of Diageo.  Nigeria is the third largest market for Guinness behind Great Britain and Ireland which it was ahead of just a few years ago.  Net sales in Nigeria declined 9% while sales declined 11% (in absolute Naira terms.)  A new product has been introduced into the market in 2014 called Orijin which is meant to appeal to the now more price aware and sensitive Nigerian alcoholic beverages consumer base.  We see this as a welcome development.

In a report prepared on Guinness in May 2012, we said  The company needs to create new brands that will attract a latent or passive consumer base so that sales can experience significant growth.  In our opinion, capacity expansion will not have the immediate impact management craves as the demand is not there for the increased capacity despite management saying otherwise.  The company is spending too much to generate minimal sales growth; it is time to look inward deeply and take steps that achieve more with less instead of doing more and achieving less.”
What do the markets think?  We assessed Diageo’s market value to operating profit (utilizing the LSE) as at June 30th, 2014.  A resultant multiple of 15X was achieved.
We did the same thing on the Nairobi Stock Exchange for East African Breweries (EABL); a resultant multiple of 14.85X was achieved.  This is approximately equal to how the more developed LSE views the parent company Diageo from a global market perspective.  On the Nigerian Stock Exchange, Guinness Nigeria achieved a resultant multiple of 19.4X.
Diageo’s EPS declined 8% while that of EABL declined 4% and Guinness Nigeria declined 20% all in local currency terms.  The Nigerian market company for Diageo still has a 29% higher multiple than its parent and 31% higher than EABL which ended the year on a more promising note than its counterpart in Nigeria.  Interestingly enough, The current CEO of Guinness Nigeria who came on board in July 2012 was the former CEO of East African Breweries.
FY 2014 pre-tax income margin for EABL is 17% and that of Guinness Nigeria is 10.7%.  Guinness Nigeria’s revenue for FY 2014 is $682,513,250 and that of EABL is $681,024,178.  In terms of pre-tax income EABL achieved $115,629,100 and Guinness Nigeria achieved $73,009,750.  EABL’s pre-tax income exceeded Guinness Nigeria’s by 58% for FY 2014 despite having an almost identical sales figure in dollar terms.
Meanwhile, the Nigerian market still prices the local arm of Diageo much higher than the Kenyan arm and the parent Diageo.  Interestingly enough, the Kenyan stock market index had risen 10% as at June 30th, 2014 and Nigeria 2.8%.

Jude Fejokwu, an analyst, wrote in from thaddeusinvestments@gmail.com