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Equity Report - Nestle Nigeria Plc 9M 18 -Impressive earnings outlook, expensive valuation

• Nestle’s 9M 18 result was decent and broadly in line with our expectation. The only surprise was on the interest expense which came in higher than expectation and already tracking higher than our FY 18 estimate. Accordingly, we revise our FY 18E earnings forecast lower by 5% to N56.82 after adjusting interest expense higher for the rest of the year. Farther out, we raise our EPS expectation over our forecast horizon (FY 19-23F) by 2.6% on average following moderation to our cost of sales ratio. We have observed improvement in gross margin (excluding impairments) since Q1 18 helped by the stability in FX and moderation in domestic cereal prices.
• On Finance cost, Nestle’s total FCY debt currently stands at $41.2 million with $26 million due to be paid in 2018. With the FX debt already valued at ~ N360/$ on its balance sheet and our expectation of exchange rate stability, we do not envisage any material FX loss if the amount is fully settled in Q4 18. We further highlight that as at 9M 18, Nestle has a net position of N15.7 billion, indicating its ability to sufficiently meet its debt obligations. Given this alongside upward review of our interest expense forecast following the surprise in Q3 18, we project finance expense of N3.2 billion (FY 17: N15.1 billion) in FY 18E. With the exchange rate stability and sizeable moderation in FX debt (-60% since 9M 17), our expectation going forward is for finance costs to be more reflective of interest expense rather than FX losses which materially impacted on earnings in FY 16 and FY 17.
• Following adjustments and having rolled forward our model, we raised our FVE on Nestle to N1,330.35 (previous: N1,287.54) but maintain our SELL rating on the stock. On our numbers, Nestle trades at a 2019 P/E of 21.7x compared to 5-year historical average of 27.3x and Bloomberg MENA peer average of 24.7x.