EUR 18.24 For Business Accounts Only

NESTLE NIGERIA PLC FY'16 - Tough 2016 sees weakest EPS since 2007

NESTLE released its FY’16 financial results showing a 67% y/y decline in PAT to ₦7.9 billion (Vetiva: ₦6.1 billion) despite a 20% y/y top line growth. Looking through the numbers, we highlight that the major pressure points were foreign exchange losses and a sizeable jump in income tax expense for the year. Whilst NESTLE had initially recorded FX loss of ₦19.4 billion as at 9M’16, FY’16 FX loss came to ₦16.3 billion (Vetiva: ₦21 billion) – we believe this must have been driven by the mild currency appreciation recorded in the interbank market in Q4’16. Furthermore, NESTLE recorded total tax expense of ₦13.6 billion for FY’16 following the expiration of a 5-year pioneer tax status on its New Flowergate factory in Sagamu on 31 December 2015. We highlight that profit before tax and the extraordinary item (FX loss) for FY’16 was up 29% y/y at ₦37.8 billion.

Maintaining the run rate from 9M’16, NESTLE reported revenue growth of 20% for FY’16. given that parent company Nestle S.A. stated that real internal growth (which strips out effect of price increase) remained positive in FY’16, we highlight the resilience in volume performance despite price increases. Unsurprisingly however, gross margin for the full year moderated 311bps y/y to 41% as higher input costs stemming from the currency depreciation outstripped price increases.

Whilst we remain optimistic for a sturdy growth trajectory for NESTLE, one major factor has clipped our confidence in FY’17 earnings – FX. As at FY’15, NESTLE had dollar denominated borrowings of ₦24.1 billion with 70% of these maturing in 2016. Following the c.55% currency depreciation, a tenor extension of the portion of the loans due for repayment, and a new 1-year c.₦11 billion working capital loan facility obtained during the year, dollar denominated borrowings amounted to ₦46.5 billion at the end of FY’16. Having reviewed our tax rate higher following the expiration of a 5-year pioneer tax status on some lines, our PAT estimates from FY’17 through to FY’20 have been revised lower by an average 10%. Overall, whilst we maintain our FY’17 revenue growth rate of 8%, we revise our bottom line estimate to ₦24.2 billion (Previous: ₦28.3 billion). With these changes, we revise our 12-month target price to ₦796.53 (Previous: ₦808.64). We maintain a BUY rating on the stock.