Equity Analysis /

Nestle Nigeria: Solid results reflect sustained operational strength

    Eronmosele Aziba
    Eronmosele Aziba

    Equity Research Analyst, Consumers

    Tellimer Research
    6 May 2019
    Published by

    We maintain our target price for Nestle Nigeria (Nestle NL) at NGN1,700. With an ETR of 16% we reiterate our Buy rating.

    Q1 19 EPS was up 49% yoy to NGN16.12, trending ahead of our estimates for FY 19 earnings, which we expect to be up 21% yoy. Top line growth remained strong, expanding by 5% yoy and 12% qoq, due to sustained improvements in both the food and beverage segments. Likewise, net income grew 49% yoy and 30% qoq. Other positives include a decline in input costs, as well as a sharp drop in finance charges. 

    Reiterate our Buy rating with a TP of NGN1,700.00 and an ETR of 16%. We maintain our positive stance on Nestle Nigeria, following a stellar Q1 19 performance, as we expect the trend in volume growth and operating cost efficiency to be sustained. The newly approved minimum wage for federal government workers, if successfully implemented, should also be supportive of Nestle’s earnings, especially given its robust distribution network and brand strength. The stock continues to enjoy premium pricing in the market, which we believe is justified. It trades at 25.5x P/E and 16.1x EV/EBITDA, relative to our frontier consumers universe trading at an average of 24.3x and 14.1x respectively.

    Strong revenue growth was a key driver of the results. We attribute the revenue growth to: 

    • 1) increased volumes, especially on ‘single serve’ products that come in smaller packages, as prices remained relatively flat during the quarter.
    • 2) its robust distribution network, which continues to support its dominant position within the sector. 

    Reduced cost pressures also buoyed the bottom line. There was a dip in input costs (down 5% yoy) which we believe partly reflects the downtrend in global cocoa prices, while a sharp drop in finance charges (down 60% yoy) resulted in positive net finance income. These offset the impact of higher operating expenses (up 10% yoy).

    Margins improved significantly, further widening the gap over peers. Nestle’s margins remained upbeat, as gross profit and EBIT margin improved by 6.2ppts and 5.4ppts respectively to 44.3% and 27.9%, above the 33.4% and 14.4% respectively for our frontier consumer company universe. More specifically, the strength of Nestle’s margins is apparent in comparison with Nigerian peers, most of which recorded a contraction in margins during Q1 19 (see our Q1 19 results reports for Nigerian Breweries and Unilever Nigeria).