Nestle Nigeria Plc - A compelling but expensive growth story
- Following a dismal 2016, when earnings fell to an eight-year low of N4 billion, Nestle Nigeria Plc (Nestle) returned strong in 2017, with earnings rising to a record N33 billion, a four-fold increase from the prior year. The big question now is, what happens next and are the drivers of 2017 earnings sustainable to deliver another sturdy earnings in 2018? In this note, we update our views on Nestle as well as revise our forecasts on the company.
- Going into 2018, we remain broadly positive on Nestle and expect the company to sustain earnings growth, albeit at a much slower pace than 2017. Specifically, we see volume induced revenue growth and lower FX losses as key drivers of earnings in FY 18. Irrespective, downside risk to earnings will likely emanate from a subsisting input cost pressure which will hurt margins and, by extension, earnings. In addition, a further rise in operating expenses, particularly administrative expenses also pose downside risk to earnings in 2018.
- In terms of equity market performance, Nestle is down 10% Year-to-Date (YTD), weaker than the return on the food sub-segment (-1.8% YTD) and NGSE All Share Index (+12.6% YTD). On our 2018 numbers, Nestle trades at a forward P/E of 26.4x relative to Bloomberg Middle-East and Africa peers of 20.5x. We retain our SELL rating on the stock with our revised FVE estimate of N21 (Previous: N879.62).
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ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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