Performance: High OPEX counteracts revenue growth

• GGBL’s earnings declined by 56.2% y/y (-161.0% q/q) on the back of a challenging 1Q2022 operating environment
• OPEX increased by 51.2% y/y (+30.0% q/q), consequently driving operating margin down by 7.5pp y/y to 5.4%
• We are of the opinion that the Cedi which weakened by 20.5% against the Dollar in 1Q2022, combined with the soaring inflation and rising fuel cost accounted for the increase in operating expense
• GGBL’s revenue grew by 19.3% y/y to GHS 968.5m, as the company continued to drive sales through its activation campaigns
• Cost of sales outgrew revenue by 5.0pp, rising by 24.4% y/y to GHS 709.4m
• With GGBL outsourcing ~61.0% of inputs locally, the company’s forex exposure on COGS was mitigated, despite the continuous slide of the Cedi. However, the rising inflation and fuel cost contributed significantly to the increase in cost of sales
• Resultantly, gross margin dipped by 3.0pp to 26.7%, as did net profit margin, which worsened by 4.4pp to close the period at 2.5%

Outlook: Still positive

• Going forward, we anticipate OPEX to remain elevated due to a challenging operating environment and investments in activation campaigns for ready-to-drink products and Smirnoff brands
• To combat the rise in OPEX and weather the tough operating environment, we expect GGBL to implement upward price adjustments across flagship products in the coming quarter
• Nevertheless, we expect GGBL’s short-to-medium term revenue growth to be sustained on the back of the company’s relatively large brand portfolio, product innovation and investment in marketing campaigns
• Moreover, with the addition of locally produced international variants, such as Smirnoff Chocolate Vodka and Baileys delight, we expect GGBL’s margins to improve as these brands are high margin premium brands
• We also expect GGBL’s new sorghum processing brew house to drive the production of Guinness FES, Malta Guinness and Guinness Smooth, while reducing the company’s reliance on imported cereals and increasing the use of local inputs
• We consider the decision to source inputs from local farmers as strategic, and anticipate that GGBL will increase its use of local raw materials in the coming years

Valuation: Under Review 

• We are in the process of re-initiating coverage on GGBL and have therefore placed our recommendation under review
• GGBL is currently trading at a P/E of 28.3x and EV/EBITDA of 15.9x