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NESTLE NIGERIA PLC Q1'18 - Decent sales numbers, Q1 earnings mostly in line

Decent sales numbers, Q1 earnings mostly in line                                                                                          

NESTLE recently released its Q1’18 financial statements showing a 10% y/y rise in Revenue to ₦67.5 billion, ahead of our ₦63.6 billion estimate. We are impressed by the strong top line growth at the start of the year, especially given that Q1’17 was a high base. The growth was majorly driven by a 17% y/y rise in the beverage segment (MILO) as well as a 7% y/y growth from the Food segment. However, gross margin came in at the lowest level since Q1’17 at 38%, weaker than our 42% estimate (FY’17: 42%). On a positive note, Operating Expenses were more contained than we expected, with OPEX to Sales ratio registering at 17% (in line with Q1’17) and below our 19% estimate. Given the mixed margin performance, Operating Profit came in line with our estimate at ₦14.5 billion, albeit printing 10% higher y/y.                                                                                                

We revise our FY’18 Revenue estimate higher to ₦280.6 billion (Previous: ₦271.7 billion) to reflect the stronger than expected Q1’18 run rate. Whilst we revise our gross margin estimate lower to 41% (Previous: 42%), our OPEX to Sales ratio is also revised lower to 18% (Previous: 19%). As such, our FY’18 EBIT Margin estimate is relatively flat at 22%. Overall, after raising our tax rate marginally higher (following the Q1’18 surprise), we revise our FY’18 PAT to ₦40.2 billion (Previous: ₦40.8 billion) – implying a 19% y/y growth. Supported by our lower risk free rate assumption (following lower interest rate environment), our 12-Month Target Price is revised higher to ₦1,271.49 (Previous: ₦1,140.79). Hence, we maintain our SELL rating given the 19% downside to current market price.