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
Food Concepts Plc neutralized the gains recorded by three securities, returning the NASD Over-the-Counter (OTC) Securities Exchange into the negative territory with a 0.27 per cent loss on Thursday, December 4.
Yesterday, the share price of the parent company of Chicken Republic and PieXpress declined by 34 Kobo to sell at N3.15 per unit compared with the previous day’s N3.49 per unit.
This shrank the market capitalisation of the OTC bourse by N5.72 billion to N2.136 billion from N2.142 trillion and weakened the NASD Unlisted Security Index (NSI) by 9.57 points to 3,571.53 points from 3,581.10 points.
Business Post reports that Central Securities Clearing System (CSCS) Plc went down by 50 Kobo to N38.50 per share from N38.00 per share, FrieslandCampina Wamco Nigeria Plc gained 29 Kobo to sell at N55.79 per unit versus N55.50 per unit, and Geo-Fluids Plc added 5 Kobo to close at N4.60 per share compared with Wednesday’s closing price of N4.55 per share.
Trading data indicated that the volume of securities recorded at the session surged by 6,885.3 per cent to 4.3 million units from the 61,570 units posted a day earlier, the value of securities increased by 10,301.7 per cent to N947.2 million from N3.3 million, and the number of deals went up by 146.7 per cent to 37 deals from the 15 deals achieved in the previous trading session.
At the close of business, Infrastructure Credit Guarantee Company (InfraCredit) Plc was the most traded stock by value on a year-to-date basis with the sale of 5.8 billion units for N16.4 billion, trailed by Okitipupa Plc with 170.4 million units worth N8.0 billion, and Air Liquide Plc with 507.5 million units valued at N4.2 billion.
InfraCredit Plc also finished the session as the most traded stock by volume on a year-to-date basis with 5.8 billion units transacted for N16.4 billion, followed by Industrial and General Insurance (IGI) Plc with 1.2 billion units sold for N420.2 million, and Impresit Bakolori Plc with 536.9 million units traded for N524.9 million.
By Dipo Olowookere
The upward trend witnessed at the Nigerian Exchange (NGX) Limited in recent sessions continued on Thursday as it further improved by 0.10 per cent.
This was despite investor sentiment turning bearish after the local equity market ended with 23 price gainers and 28 price gainers, indicating a negative market breadth index.
UAC Nigeria gained 10.00 per cent to finish at N88.00, Morison Industries appreciated by 9.94 per cent to N3.54, Ecobank rose by 8.53 per cent to N36.90, and Coronation Insurance grew by 8.47 per cent to N2.56.
On the flip side, Ellah Lakes depreciated by 10.00 per cent to N13.14, Eunisell Nigeria also shed 10.00 per cent to finish at N72.90, Transcorp Hotels slipped by 9.95 per cent to N157.50, Omatek shrank by 9.23 per cent to N1.18, and Guinea Insurance dipped by 8.46 per cent to N1.19.
Yesterday, the All-Share Index (ASI) went up by 152.28 points to 145,476.15 points from 145,323.87 points and the market capitalisation chalked up N97 billion to finish at N92.726 trillion compared with the previous day’s N92.629 trillion.
Customs Street was bubbling with activities on Thursday, though the trading volume and value slightly went down, according to data.
A total of 1.9 billion stocks worth N19.2 billion exchanged hands in 23,369 deals during the session versus the N2.3 billion valued at N21.0 billion traded in 21,513 deals a day earlier.
This showed that the number of deals increased by 8.63 per cent, the volume of transactions depleted by 17.39 per cent, and the value of trades decreased by 8.57 per cent.
For another trading day, eTranzact led the activity chart with 1.6 billion units sold for N6.4 billion, Fidelity Bank traded 31.0 million units worth N589.3 million, GTCO exchanged 28.3 million units valued at N2.5 billion, Zenith Bank transacted 27.1 million units for N1.6 billion, and Ecobank traded 21.9 million units worth N744.3 million.
By Adedapo Adesanya
The Naira marginally depreciated against the United States Dollar in the Nigerian Autonomous Foreign Exchange Market (NAFEM) on Thursday, December 4 amid renewed forex pressure associated with December.
At the official market yesterday, the Nigerian currency lost 0.01 per cent or 18 Kobo against the Dollar to close at N1,447.83/$1 compared with the previous day’s N1,447.65/$1.
It was not a different scenario with the local currency in the same market segment against the Pound Sterling as it further shed N15.43 to sell for N1,930.97/£1 versus Wednesday’s closing price of N1,925.08/£1 and declined against the Euro by 20 Kobo to finish at N1,688.74/€1 compared with the preceding session’s N1,688.54/€1.
Similarly, the Nigerian Naira lost N5 against the greenback in the black market to quote at N1,465/$1 compared with the previous day’s value of N1,460/$1 but closed flat against the Dollar at the GTBank FX counter at N1,453/$1.
Fluctuations in trading range is expected to continue during the festive season as traders expect the Nigerian currency to be stable, supported by intervention s by to the Central Bank of Nigeria (CBN)in the face of steady dollar demand.
Support is also expected in coming weeks as seasonal activities, particularly the stylised “Detty December” festivities, will see inflows that will give the Naira a boost after it depreciated mildly last month, according to a new report.
“As the festive Detty December season intensifies, inbound travel, tourism spending, and diaspora inflows are expected to provide moderate support for FX liquidity,” analysts at the research unit of FMDA said in its latest monthly report for November.
Traders cited by Reuters expect that the Naira will trade within a band of N1,443-N1,450 next week, buoyed by improved FX interventions by the apex bank.
Meanwhile, the crypto market was down as the US Federal Reserve’s preferred inflation gauge, core PCE, likely rose in September—moving in the wrong direction. However, volatility indices show no signs of major turbulence.
If the actual figure matches estimates, it would mark 55 straight months of inflation above the US central bank’s 2 per cent target. The sticky inflation would strengthen the hawkish policymakers, who are in favour of slower rate cuts.
Ripple (XRP) depreciated by 4.5 per cent to $2.08, Solana (SOL) went down by 3.8 per cent to $138.11, Litecoin (LTC) shrank by 3.1 per cent to $83.23, Dogecoin (DOGE) slid by 2.5 per cent to $0.1463, Cardano (ADA) declined by 2.1 per cent to $0.4368, Bitcoin (BTC) fell by 0.9 per cent to $91,975.45, Binance Coin (BNB) crumbled by 0.9 per cent to $899.41, and Ethereum (ETH) dropped by 0.7 per cent to $3,156.44, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) closed flat at $1.00 apiece.
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