Nestle and Unilever Nigeria | Resumption of Coverage | Feeding growth through investment

Nestlé has distinguished itself compared to Unilever by investing in Nigeria, leading to outsized returns. In our view, developing markets, creating scale and investing in local capacity will determine future returns for the FMCG players. Even though the Nigerian consumer has been under pressure for the last five years (HCE: 2.9% CAGR), Nestlé has invested c.USD176m of capex and grown earnings by 14% CAGR while delivering an average ROIC (42%) which is more than double its closest peer, Unilever (c.18%). Improved macro conditions will act as a tailwind to this performance, which will influence topline growth and margins. Nestlé sources 80% of its costs locally making it more immune to NGN volatility. We estimate that Nestlé will increase its operating margins c.140bps to 24.2% and accelerate earnings growth to a 17% CAGR for the next three years.

By contrast, Unilever has invested c.USD95m over the past five years. The Company is more exposed to an economic downturn due to its home and personal products thriving in a stronger consumer environment and NGN (Unilever imports c.57% of raw materials). Unilever has recently raised USD174m and currently has a substantial net cash position which we expect will be reinvested into the business. Given Nestlé's high ROIC, we expect Unilever to boost its return profile. Accordingly, we forecast increasing returns for Unilever, as it recovers margins and volumes due to a more favourable cycle, and as the Company extends its operations. We estimate Unilever to recover margins and forecast earnings growth of 21% over three years CAGR.