Economy
Stock Analysis: Nestle Nigeria Q1-18 EPS Behind Expectation; SELL
By Cordros Research
Nestle Nigeria Plc recently published Q1-18 result showing EPS grew by a marginal 3% y/y to NGN10.86, which is behind what the market expects for the period by 15%.
Compared to our estimate, the achieved EBIT was short by 1% while EPS missed by 25%, owing to significant variation (-161%) on the net finance cost line.
In-line revenue; 2018E estimate unchanged:
Q1-18 revenue grew by 10.3%, consistent with our 10% growth estimate for the period. Annualized, the achieved revenue is behind market expectation by only 2%. A 15% q/q revenue growth suggests volume recovered strongly from the slack in the Oct-Dec period of last year, although we estimate volume may have grown at low single digit relative to Q1-17. Food revenue grew by 7% y/y while Beverages –benefiting from a low base volume in our view – grew by a bigger 17% y/y.
Compared to Q4-17, both segments recorded 16% and 11% top-line growth respectively. Thus far from our routine checks, prices have been stable for most of NESTLE’s products compared with end-2017 levels, and although early – but we observed the gradually reducing on-the-shelve prices of consumer products across major outlets – reemphasizes our view on volume-led growth in 2018.
Our 10% revenue growth estimate for 2018E is unchanged.
Low Q1 gross margin; forming a trend?
Gross margin of 38.2% was achieved in Q1-18, slightly below the 39% we estimated for the period. Gross margin in Q1-17 was equally low (at least compared to Q4-16’s 45%) at 38.4%, before recovering to 42% average between Q2-Q4 of 2017.
We retain our 42% gross estimate for 2018E (vs. 41% in 2017FY), suggesting we expect recovery in subsequent quarters. Our estimate is in sync with the 41% gross margin the company had achieved historically before the bump to 45% in 2015FY. The major risks to our gross margin estimate are (1) lower selling price and (2) the increase we have observed thus far this year in the price of local maize. Although the risks are tempered by the (1) relatively lesser competition, given the strong loyalty that NESTLE’s brands enjoy, (2) stable and even improving currency exchange rate, and (3) softer prices of other raw material inputs such as sorghum, sugar, and dairy.
Q1-18 EBIT margin was lower by 8 bps y/y, driven majorly by the lower gross margin, and also because opex as a ratio of revenue only declined by a marginal 14 bps. We have 23% EBIT margin in our model for 2018E (the same 23% EBIT margin as in 2017FY), while noting that upside risks are almost the same as downsides.
Surprisingly high finance costs risk earnings growing below expectation:
The interest expense of NGN521 million (5% y/y and 158% q/q) and FX loss of NGN639 million (-38% y/y and 3118% q/q) reported in Q1-18 are both high in our view, considering NESTLE’s much reduced borrowings and the stable FX. We have consequently revised our finance cost estimate for 2018E higher by 105%, given that the amount reported in Q1 alone is more than half our prior estimate for the year. We should note that the expectation of a much lower finance cost carries significant weight both in our view, and the market’s of NESTLE’s earnings growth in 2018E. Gross loans as at end-march was NGN18.11 billion (vs. NGN48.7 billion in Mar, 2017 and NGN24.2 billion in Dec. 2017), the lowest since 2009FY.
Earnings estimate and valuation:
Compared to our previous estimate, we revise 2018E net profit lower by 6% to reflect the changes on the net finance cost line. On 2017FY results, our revised net profit estimate is higher by 37% (previously 46%). On our revised estimates, we have a DCF-based TP of NGN851.48 (previously NGN851.92) for NESTLE and maintain SELL rating. The stock is trading at forward (2018E) P/E and EV/EBITDA multiples of 27.4x and 18.3x respectively, at premium to Middle East and Africa peer averages of 18.7x and 12.4x.
By Adedapo Adesanya
Brent futures climbed $1.06 or 1.3 per cent to $83.55 a barrel on Friday amid ongoing uncertainty about the negotiations in progress that determine control of and reopening of the key shipping artery of the Strait of Hormuz.
In the same vein, the US West Texas Intermediate (WTI) futures finished at $78.18 a barrel after it chalked up 89 cents or 1.15 per cent.
Iran is reviewing a bill to ban American and Israeli vessels from the Strait of Hormuz, through which roughly a fifth of the world’s oil and liquefied natural gas normally passed before the war began at the end of February.
Market analysts noted that while this week’s signals on a potential deal have sent a roller-coaster ride in market sentiment, the market remains in the dark as to what needs to happen for the agreement to be clinched.
Part of the question being asked is whether the Iran-Oman agreement would allow a US-flagged vessel to transit the Strait of Hormuz or allow a vessel headed for an American port to go through.
Shipping through Hormuz remains heavily constrained as Middle East oil production is still well below pre-war levels while attacks on commercial vessels have continued even as negotiators discuss possible arrangements for the waterway.
Some also said that this week’s developments have signalled that hostilities between Iran and the US are not yet over. This is because the proposed deal is not easily workable because of sanctions and restrictive insurance clauses on any payments by the US government.
Iran is seeking fees of between 5 per cent and 7 per cent of the price of cargoes from ships using the strait, while Oman is discussing fees of about 3 per cent, while the Donald Trump administration wants no fees at all.
Citi has raised its third-quarter Brent crude forecast to $80 per barrel from $75 as the war drags on and repeated attempts at a deal fail to restore normal oil flows through the strait.
The bank still expects the conflict to be resolved, but the five-month war has lasted longer than Citi anticipated and kept more geopolitical risk in crude prices. Citi left its fourth-quarter Brent forecast unchanged at $70 per barrel and still sees the benchmark averaging $65 in 2027.
By Adedapo Adesanya
Nigerian businessman and chief executive of Dangote Industries Limited, Mr Aliko Dangote, has unveiled plans for a new phase of investments and acquisitions as the conglomerate pushes towards its target of generating $100 billion in annual revenue by 2030.
Mr Dangote disclosed this while receiving a delegation of senior executives from global investment banking and financial services firm Goldman Sachs, led by co-chief executive of Goldman Sachs International and Global Co-Head of Investment Banking, Mr Anthony Gutman, during a tour of the Dangote Petroleum Refinery & Petrochemicals and Dangote Fertiliser Limited complex in Lagos.
Speaking after the visit, Mr Dangote said the refinery and associated industrial facilities underscore the transformative impact of long-term investment in Africa, stressing that the group’s ambitions extend beyond its current strategic plan.
“No matter how we try to explain what we have built, you cannot fully appreciate it until you see it. But this is only the beginning. We need to look beyond 2030.
“The next phase of our journey will include new investments and acquisitions as we continue to scale the business,” he said.
He added that detailed internal modelling had reinforced management’s confidence that the Group’s target of generating $100 billion in annual revenue by 2030 was achievable.
According to him, the projections were based on conservative assumptions and had strengthened the company’s conviction to pursue an even more ambitious long-term growth strategy.
Mr Dangote also revealed that the strong participation of employees in the refinery’s recent private placement reflected growing internal confidence in the company’s long-term strategy and future prospects.
The Goldman Sachs delegation, after an extensive tour of the 700,000 barrels-per-day refinery, described the project as an extraordinary achievement.
“It is extraordinary what Mr Dangote and the whole organisation have achieved. The ambition, the scale of the project, the quality of the project and the culture of the people is very impressive,” the executives said.
According to a statement issued by Dangote Group on Friday, the delegation was led by Mr Anthony Gutman and included Mr Adib N. Zouein, Co-Head of EMEA Emerging Markets Regional Sales and Head of the Middle East and North Africa region for Global Banking & Markets Public; Mr Ryad Yousuf, Global Head of FICC Sales Strats and Structuring; and Mr Jimi Adesanya, Head of Sub-Saharan Africa Sales (excluding South Africa).
The visitors were received by Dangote; Group Vice President, Oil & Gas, Mr Devakumar Edwin; Managing Director and Chief Executive Officer of Dangote Petroleum Refinery & Petrochemicals, Mr David Bird; Group Executive Director, Oil & Gas, Ms Fatima Aliko Dangote; Chief of Staff to the President/CEO, Ibrahim Dikko; Group Chief Branding and Communication Officer, Mr Anthony Chiejina; Group Chief Economist, Mr Hassan Mahmud; Group Chief Strategy Officer, Mr Aliyu Suleiman; and Head of Administration, Dangote Petroleum Refinery & Petrochemicals, Mr Musa Bala, among other senior executives.
By Adedapo Adesanya
The Senate Public Accounts Committee has heard that Nigeria spent N1.16 trillion on fuel subsidy in 2021, while N1.20 trillion was deducted from federation crude oil sales proceeds during the same period.
The disclosure came from the Chairman of the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC), Mr Mohammed Bello Shehu, during the committee’s ongoing investigation into the 2021 to 2023 Nigeria Extractive Industries Transparency Initiative (NEITI) audit reports on the oil and gas sector.
According to the commission, crude and petroleum product losses cost N16.2 billion, pipeline repairs accounted for N22.05 billion, while strategic stock holding attracted N6.75 billion.
The revelations come against the backdrop of Nigeria’s long-running fuel subsidy regime, which successive governments maintained to keep the pump price of petrol artificially low despite mounting fiscal pressures.
Over the years, subsidy payments consumed trillions of Naira, significantly reducing revenues available to the three tiers of government and contributing to widening budget deficits.
The issue reached a turning point in May 2023 when President Bola Tinubu announced the removal of fuel subsidy during his inauguration speech, declaring that “fuel subsidy is gone.” The decision followed years of concerns over the rising cost of the programme, allegations of fraud, and repeated recommendations by fiscal authorities and international financial institutions that the subsidy had become unsustainable.
The removal triggered a sharp increase in the pump price of Premium Motor Spirit (petrol), leading to higher transportation and living costs across the country. In response, the federal government introduced a series of palliative measures, including cash transfers, support for mass transit, and wage-related interventions, while arguing that savings from the subsidy would be redirected to infrastructure, education, healthcare, and other critical sectors of the economy.
The commission also argued that the current method of calculating the 13 per cent derivation fund undermines the constitutional intention of the policy.
Meanwhile, the committee stood down the Niger Delta Development Commission’s presentation until next Wednesday to allow lawmakers review its submission.
The committee also expressed displeasure over the absence of the Auditor-General of the Federation, warning that he must appear before lawmakers next Tuesday or face compulsory appearance through the constitutional powers of the National Assembly.
