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Initial View - Nestle Nigeria Plc - Absence of one-off cost magnifies gross profit

• Nestle Nigeria Plc (Nestle) released its Q1 19 results this afternoon, showing double-digit growth in gross profit to N31.5 billion (+22.2% YoY), to miss our estimate of N30.1 billion. The strong outing stemmed from increase in revenue (+5.2% YoY) and a much faster decline in cost (-5.3% YoY). Although the revenue growth was much slower than we expected (+9.2% YoY), the decline in cost was more surprising, as we had expected an expansion during the year (+4.4% YoY). Coupled with moderate growth in opex, which was largely in line with our estimate, PBT expanded 40.2% YoY to N19.1 billion and EPS for the year printed at N16.21 (+49.3% YoY).
• Given the strong numbers, we remain positive on the company’s resilience to drive its sales given its close competitor (Unilever) recorded a 25% decline in revenue from its food segment, when compared to the prior year. For context, while competition from smaller local and imported brands continue to encroach the market, Nestle’s Q1 result just shows its stronghold across key markets.
• Going by provided breakdown, the growth in sales was driven by both the food and beverage segment. Given our market survey reveals the retail prices of key products (Maggi: -2.1% YoY and Milo: -15% YoY) fell during the review period, we believe most of the gains emanated from higher volumes. Sales at the food segment increased by 5.7% YoY, while beverage sales expanded by 4.3% YoY. On cost, recall that Nestle’s H1 2018 production cost was impacted by the N4 billion (N3.4 billion in Q1 18) impairment charge on its Abaji Water Plant. With the absence of such one-off cost in Q1 19, cost of sales came in much lower. Coupled with the decline in raw sugar (-6% YoY), and maize (-18.2% YoY) prices, gross margin expanded by 620bps YoY to 44.3%.
• Though operating expense expanded by 10.2% YoY to N12.4 billion, the stronger margin left operating income higher by 31.5% YoY to N19.1 billion. Elsewhere, contrary to the net finance cost reported in the prior year, the company reported a finance income of N34.6 million, with PAT printing at N12.8 billion.
• Our last communicated FVE on Nestle is N1,411.29 which translates to a SELL rating on the stock. NESTLE trades at a current P/E of 25.5x relative to Bloomberg Mena peer average of 20.98x.

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