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.
The blockchain brings new financing options to the business market. For example, Bitcoin Cash casino has adapted to only using cryptocurrency. This way, it makes it easier for their customers to deposit and withdraw in a BCH casino. Entrepreneurs have taken note of this and are looking to invest more in crypto than in fiat markets.
Like Our Facebook Page
Latest News on Business Post
- UK May Adopt Digital Currency April 19, 2021
- Leadway Assurance Seeks Cyber Insurance Acceptance April 19, 2021
- Explainer: The Controversy Around European Super League April 19, 2021
- Sub-Saharan Africa Must Embrace Data to Boost Growth—BCG April 19, 2021
- Experts to Discuss Tech, Digital Transformation at MSME Dialogue 3.0 April 19, 2021
- Ecobank Attracts Nigerians Abroad With Competitive Interest Rates April 19, 2021
- About Africa’s Overwhelming Dishonesty April 19, 2021
- 7 Top Financial Indicators You Should Monitor as a Business Owner April 19, 2021
- Arogundade Urges Companies to Emulate Rite Foods April 19, 2021
- Northern IPMAN Threatens Strike Over PEF Conflict April 19, 2021
Economy5 years ago
Kwara Disburses N1.7b For Projects
Technology4 months ago
How To Link Your MTN, Airtel, Glo, 9mobile Lines to NIN
Economy3 years ago
FAAC: FG, States, LGs Share N655.18b in January
Feature/OPED1 year ago
Davos was Different this year
Feature/OPED1 month ago
COVID and the Growth of Technology in Nigeria
Economy1 month ago
MBA Forex Blames CBN for Inability to Return Investors’ Funds
Banking3 years ago
Sort Codes of GTBank Branches in Nigeria
General2 years ago
Ikeja Electric Explains How to Get Prepaid Metres via MAP