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NESTLE NIGERIA PLC H1'18 - Solid Earnings momentum, heading for record PAT

Solid earnings momentum, heading for record PAT                                                                                       

With a 2% q/q revenue growth in Q2’18, NESTLE reported an 11% y/y rise in top line to ₦135 billion in H1’18, marginally ahead of our ₦134 billion estimate. The growth was driven by strong performances in both the Food (+9%) and Beverages (+15%) segments. Given that prices are nearly flat y/y, we are more impressed by the double-digit growth of NESTLE’s “one-man” beverage brand portfolio (i.e. MILO) and partly attribute this to some benefits from the company’s launch of the Milo Ready-To-Drink variant. More surprising for Q2’18 is the sharp 578bps q/q expansion in gross margin to 44%, greater than our 41% estimate and the highest since Q4’16. Supported by this, H1’18 gross profit came in 15% and 4% higher y/y and above Vetiva estimates. Earnings in the period were further supported by a strong improvement in net finance expenses from ₦2.2 billion in H1’17 to ₦0.3 billion in H1’18 (Vetiva: ₦1.8 billion) amidst a notable moderation in foreign exchange losses y/y. Driven by these factors, H1’18 PAT printed 16% above our estimate at ₦21.5 billion, 30% higher y/y.                                                                                              

We maintain our revenue forecast of ₦281 billion for FY’18, with the usually stronger H2 period providing the required boost for a 19% y/y topline growth. Though the sustained moderation in some of NESTLE’s key raw materials supports the trend in margins, we are cautious on the sustainability of the Q2’18 figures and as such revise our margin estimate for FY’18 to 42% (Previous: 41%). Having also adjusted our finance expense estimate for the H1’18 run rate, our FY’18 profit after tax estimate is revised higher to ₦44 billion (Previous: ₦40 billion) – representing a 31% y/y growth and the highest revenue figure on record for the Food manufacturer. Further supported by an upward revision to our growth rate estimate, our 12-Month Target Price for NESTLE is revised higher to ₦1,455.44 (Previous: ₦1,275.76). Albeit, with a 12% downside to current market price, we maintain a SELL rating on the stock.                      
                                                                  
Nestle Nigeria PLC, a subsidiary of Nestle S.A., is one of Nigeria’s largest food and beverage companies. Nestle has been in operation in Nigeria since 1961 in the Food and Beverage Segments. The company produces and markets global brands including market leader Maggi seasoning cube, Milo and Nestle Pure Life Water.