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Initial View - Nestle Nigeria Plc Q4 18 - Topline gains eroded by operating cost pressures

• Nestle Nigeria Plc (Nestle) released Q4 18 results, reporting 7.9% YoY decrease in EPS to N12.48 stemming from an increase in operating cost following promotional offers during the period. Earnings reported in the period was, however, weaker than our estimate of N15.11 majorly due to lower than expected revenue. For context, given that Q4 happens to be the strongest quarter, we expected a double-digit growth from its food business – similar to the trend in the last two quarters. Based on the lower than expected Q4 performance, Nestle’s EPS for FY 18 was up 27.5% YoY to N54.26, tracking below our estimate of N56.89. Accordingly, the company declared a final dividend of N38.50 (+40% YoY), split into N34.20 from its FY 18 earnings and N4.30 from its FY 09 earnings. Based on current pricing, the dividend yield stands at 2.5%.
• Revenue improves on volume growth. Revenue in the review quarter increased 7.2% YoY to N63.1 billion. On drivers, we note that a recovery in the beverage segment coupled with the improvement in food drove the increased revenue. Over Q4 18, revenue from the beverage segment expanded by 9.5% YoY to N24.0 billion (Q3 18: -1.3% YoY), while food grew by 5.8% YoY (below Q2 - Q3 YoY average growth of 11.7%) to N43.9 billion. For us, we believe the recovery in the beverage segment was largely supported by increased volumes as our price survey revealed a single digit decline in average product prices as the company embarked on promotional activities during the period. In the food segment, our survey revealed a 2.8% YoY price decline on flagship product “maggi”.
• Earnings drop, on higher operating expenses. Over the period, Nestle reported 11% YoY increase in gross profit while gross margin expanded 156bps YoY to 44%, driven by a slower increase in cost of sales (+4.3% YoY) relative to topline growth. The improvement in margin reflects moderation in the prices of its major inputs over Q4 18. Despite the positive outturn in gross margin, operating profit contracted by 11% to N11.3 billion, due to higher operating expense. For the period, opex to sales ratio increased by 510bps to 26.1% stemming from its selling and admin expenses as the company embarked on increased advertising and promotional offers during the period.
• Further down, the company recorded a net finance income of N381.6 million, compared to a net finance expense of N263.5 million. The improved financing line largely reflects a reversal of prior quarters finance cost over Q4 of N54 million coupled with a finance income of N327 million. Notwithstanding, given the weak operating performance, earnings for the period came in lower with PAT at N9.9 billion (-7.9% YoY).
• Overall, while EPS came in lower, we find the result decent as the company continues to grow its volumes amidst depressed consumer wallets. Our last communicated FVE on Nestle is N1,330.35 which translates to a SELL rating on the stock. NESTLE trades at a current P/E and EV/EBITDA of 27.8x and 18.4x relative to Bloomberg Mena peer average of 23.0x and 13.2x.
• More analysis to follow.

 See attached for full report

 

Maize (-6.2%), Sorghum (-11.1%) and Sugar (-15.7%)