We maintain our target price for Nestle Nigeria (Nestle NL) at NGN1,700. With an ETR of 34%, we reiterate our Buy recommendation.
Positive performance in Q2 19 with net income growing by 4% yoy to NGN13bn. The positive earnings stemmed from: 1) revenue growth (5% yoy), which was consistent across both food and beverage segments; 2) stronger operating margins reflecting improved operating efficiency; and 3) a 28% yoy decline in finance cost. Compared with Q1 19, net income was up by 4% while revenue was flat. On the downside, operating cash flow weakened in Q2.
Reiterate Buy with TP of NGN1,700.00 (ETR +34%). We maintain our positive view on Nestle Nigeria in light of this performance and we expect sustained volume growth and lower cost pressure to remain key drivers of earnings. Despite falling 12% ytd on weak market sentiment, Nestle continues to enjoy a premium pricing over frontier peers, which we believe is justified. It trades at P/E and EV/EBITDA multiples of 19.4x and 12.6x, respectively versus an average of 17.9x and 12.8x for frontier peers.
Upbeat operating performance. Nestle’s operating profit grew 21% yoy and 12% qoq, driven by the top line and single-digit cost inflation. Gross profit and EBIT margin improved by 4.8ppts and 4.1ppts yoy to 48.8% and 30.1%, respectively, far outperforming Unilever, which recorded margin compression in the same period.
Lower finance costs: Nestle further trimmed its borrowings by 5% qoq (63% yoy), which made a positive impact on finance costs (down 11% qoq, 28% yoy). The debt/equity ratio stayed flat at 0.1x similar to Q1 19, but lower than 0.4x in Q2 18 – a trend we expect to be sustained through H2.
Net operating cash flow was weaker, falling 56% yoy and 32% qoq despite the stronger operating profits. This was due to higher working capital needs, particularly as payables contracted 16% yoy and 12% qoq. Capital investments rose sharply with total capex growing 60% yoy. We are yet to get clarity on the spike in capex in Q2, which was on a downtrend previously.