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NESTLE NIGERIA PLC - 9M’16 EPS down 97% y/y as FX loss swells

• Unsurprisingly, foreign exchange losses continued to mount pressure on NESTLE’s earnings in Q3’16 as further currency weakness in the quarter ensured a second quarterly loss after tax of ₦51.1 million (Q2’16 LAT: ₦6.1 billion). Given the company’s exposure to FCY loans, NESTLE recorded an initial 376% y/y surge in net finance charges in Q2’16, which was majorly driven by ₦13.1 billion FX loss (following the c.42% currency devaluation). In 9M’16, this figure rose further to ₦19.4 billion, above our ₦16.0 billion estimate, amidst further naira depreciation in the third quarter. The second major earnings depressor in the quarter came from an unexpected deferred tax expense of ₦1.98 billion which put effective tax rate at 101% and wiped out a ₦4.6 billion PBT in Q3’16. We recall there was an initial rise in effective tax rate in Q1’16 to 23% (FY’15 average: 19%) following the expiration of a 5-year pioneer tax status on its ₦12 billion manufacturing complex, Flowergate Factory in Sagamu. Overall, PAT for the nine month period came to ₦485 million (9M’15: ₦17 billion). Stripping off the FX losses incurred in the year, NESTLE could have recorded 9M’16 PBT of ₦25 billion.
• Supported by increased patronage that accompanies the year end festivities, we estimate NESTLE will record a 12% q/q revenue growth (in line with historic average), thus putting FY’16 revenue at ₦184 billion (Previous: ₦162 billion). We expect to see a mild rise in FX losses in Q4 given our expectation for a further 5% q/q depreciation in the currency, and estimate FY’16 FX losses will come to c.₦21 billion. Given this, our FY’16 EPS estimate has been significantly revised lower to ₦3.74 (Previous: ₦10.22). Post-2017, we are optimistic about NESTLE’s performance given that a bulk of these dollar denominated loans mature this year (c.60% of total interest bearing liabilities as at 2015) and noting the company’s drive to increase domestic sourcing by accelerating several backward integration plans. Our 12-month target price is revised lower to ₦810.40 (Previous: ₦876.64).