Nestle Nigeria: In line to deliver strong earnings growth in 2017

FBNQuest Research

Neutral rating maintained

Nestle Nigeria (Nestle) posted earnings of N8.2bn compared with a loss of –N6.2bn in Q2 2016. We draw many positives from these results such as gross margin expansion and a strong interest income line, which was up by more than 600% y/y to N2.5bn during the quarter.

Gross margin which expanded by +717bps y/y to 40.9% – which we primarily attribute to relatively cheaper access to fx for imports – was the primary driver for improved profitability. Although negatives were few, the most significant was an fx-related loss of –N4.1bn.

It appears Nestle is more comfortable sourcing fx at the more liquid (but relatively costlier) NAFEX market, following the central bank’s intervention in H1.

Going forward, we expect a moderation is sales growth to around 20% y/y in H2 vs. 52% y/y delivered in H1.

Our views are premised on: 1) the impact of price increases which took place in 2016 is expected to ease off and 2) improved stability in the local fx market raises the likelihood of imported competition staging a comeback, hence, weighing on unit volume growth. We do not see material upward adjustments to pricing in H2.

Q2 earnings beat our estimate by 31%; as such, we have raised our EPS estimate over the 2017-18E period by around 24% on average. Additionally, we have rolled forward our valuation to 2018.

Our new price target of N952.0 represents an increase of 27%. From current levels, this new price target shows a downside potential of –7.3%. At current levels, Nestle shares are trading on a 2017E P/E multiple of 23.9x for 3% EPS growth in 2018. Year-to-date, Nestle shares have gained +22% vs. the ASI’s +38%. We have retained our Neutral rating on the stock.

Q2 PBT of N10.2bn boosted by 717bps y/y gross margin expansion
In Q2, sales were up 37% y/y to N60.8bn. PBT and PAT came in at N10.2bn and N8.2bn respectively, compared with losses before and after tax of –N7.8bn and –N6.2bn respectively.

Topline y/y growth was boosted by double-digit price increases which mainly occurred in Q4 2016. Sales for both Nestle’s Food and Beverage categories were up by around 40% y/y to N37.9bn and N22.9bn respectively.

Sequentially, while sales were flattish q/q, PBT declined by 29% q/q. An fx-related loss of –N4.1bn was the primary driver behind the PBT decline on a q/q basis.

PAT came in flattish q/q due to a lower effective tax rate of 19.5% in Q2 compared with 41.5% in Q1 2017.