EUR 3.48 For Business Accounts Only

Nestle Nigeria Plc Q3 17: Earnings growth momentum, scope for upside?

• We recently posed a salient question, “Is there still a strong case for a potential upside in Nestle[1]?” In this note, we update our views on the stock subsequent to the release of Nestle’s 9M result, revise our FY 17 estimate to incorporate recent developments as well as revise our forecast for the company beyond 2017 with a view to ascertaining the possibility of further upside. In our view, market timing remains a risky exercise, and especially in the case of the sentiment-driven rally where fundamentals speak otherwise.
• Over the nine-months of 2017 (9M 2017), Nestle posted EPS of N28.99 which is 46.4x higher YoY (9M 2016: N0.61) and reflects a strong turnaround story from 2016’s performance which was plagued with significant FX losses and persisting input cost inflation. For context, higher sales of N185.2 billion (43% YoY), mirroring price increases relative to last year, combined with 57% decline in net finance cost to underpin the sturdy performance.  In view of this, the company declared an interim dividend of N15^[2] (vs. nil in Q3 16), which translates to dividend yield of 1.2% using the stock’s last trading price of N1250.
• Price to support 2017 earnings: Going into the last quarter of 2017, the onset of harvest season should drive improved domestic cereal supplies. Thus, we expect the pace of input cost inflation to moderate over the last quarter of 2017 even though it is likely to remain higher on a YoY basis. In view of this, we have lowered our 2017 COGS projection to N145.8 billion (+37% YoY vs prior: N148.1 billion) while retaining our expectation for FY 17E revenue at N250.1 billion. Overall, these assumptions translate to gross profit of N104.3 billion (+38.6% YoY) with gross margin now at 42%.
• We have revised our projection for Nestle’s S&D expenses lower to N34.1 billion (+19% YoY) to capture the run rate over the nine-month period with projected OPEX and EBIT of N44.4 billion (+20% YoY) and N60 billion (+57%) respectively.  Similarly, we have revised our forecast finance expense higher to N17.6 billion (-16% YoY, prior estimate: N10.9 billion, 9M 17:  N14.9 billion) to capture the impact of higher than expected FX losses over 9M 17 and elevated interest payments relative to the prior year. Likewise, we have reviewed Nestle’s finance income lower to ₦7.3 billion (+79% YoY, prior estimate: N10.2 billion, 9M 17: N6.3billion) to capture our expectations for lower cash balances.  Net impact of these revisions translates to PBT and PAT of N49.7 billion (+2.3x YoY) and N33.8 billion (+4.3x YoY) respectively – EPS of N42.6 (previously N48.73) with final dividend expectation of N23
• As previously stated, beyond 2017, we view price-induced revenue growth as unsustainable and expect the company to tilt towards volume growth strategies over the rest of our forecast horizon (2018-2022). Hence, we project a 9% revenue CAGR over our forecast horizon (vs. 13% in the five years ending December 2015). Elsewhere, we project a slowdown in COGS (CAGR: +8%) over our forecast horizon as the transitory nature of transport-induced food inflation wanes. This deceleration of revenue growth should apply downward pressure on growth rate of gross profit although we expect gross margin to improve over our forecast period (average 44%) In addition, we have revised our projections for net finance expense lower as Nestle repays its outstanding FX debt to its parent (2017-2022 CAGR: -31% vs. 45% between 2010 and 2015). That said, leaving our OPEX growth unchanged at 14%, combined with benign topline growth, we project slower rise in earnings (2017-2022 CAGR: +10%) going forward.
• Nestle trades at a current P/E of 32.7x vs 26.3x for Bloomberg Middle East and Africa. We have a SELL rating on the stock with a FVE of N879.62.

 

[1] See our report titled “Nestle Nigeria Plc: Has the bull run its course?”

[2] N15 dividend comprises N13 from pioneer profit of the company as at 31 December 2015 and N2 from retained earnings as at same date.