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Nestle Nigeria Plc -Compelling Story but Valuation appears pricey

• Nestle Nigeria Plc had an impressive performance in 2018 with EPS expanding 28% YoY to N54.26, as the benefits of lower FX loss (-83% YoY to N2.6 billion) following the pay down of its FCY borrowings provided strong support for earnings growth. While, earnings was in line with our expectation of N56.89, the lower than expected numbers largely stemmed from elevated marketing & distribution expenses (+24% YoY to N43.5 billion) over 2018, without a corresponding translation into revenue (+9.1% YoY to N266.3 billion). Notably, our market survey revealed that the company embarked on series of promotional offers during the year targeted at both distributors and consumers – including the ‘NESCAFE Get Started’ promotion – and series of advertisements.
• Over 2019, we remain optimistic on the company’s earnings, driven by moderation in the prices of its key inputs – even with expectation of stable/declining product prices – which should translate into expansion in gross margin by 172bps YoY to 44.5%. However, with our forecast opex to sales maintained at same level with FY 18 of 20% (previous: 19%), we expect slower expansion in EBIT margin to 25% (previous: 27%) over 2019. Further down, with the company extinguishing ~71% of its FCY loans in 2018, which necessitated lower FX loss during the period, we see further moderation on that line in 2019. Overall, we lowered our EPS estimate to N65.58 (previous: N68.58) in 2019. That said, while we think earnings growth story is compelling, it looks expensive from a valuation standpoint. Accordingly, we maintain our SELL recommendation with  FVE of N1,411.29. On our numbers, Nestle trades at a 2019 P/E of 22.39x compared to 5-year historical average of 33.8x and Bloomberg MENA peer average of 18.7x.