August 30, 2016/InvestmentOne Research
Maintaining HOLD rating despite 82% cut to our EPS forecast on FX loss
Following Nestle’s Q22016 numbers, which showed a negative bottom-line position in spite of sustained uptick in volume, we have reviewed our forecast for the Consumer Goods player to reflect the impact of further weakness in Naira value on bottom-line growth for the rest of 2016. While we project topline growth of +13% in 2016 given the sustained growth in turnover in the last three quarters, we have however modelled PBT and PAT growth to decline by over -70% and -80% respectively. This is reflective of further impact of weakness in Naira value on finance costs.
However inspite of the cut to EPS, we arrived at a new target price (TP) of N836.20k for NESTLE which is +6.5% higher than our previous TP and offers a +1.3% upside at current levels. As such, we maintain our HOLD rating on the stocks of NESTLE. The 6% raise in our TP was influenced largely by over 200bps reduction in WACC from 18% to 16% (due to boost to debt-to-capital ratio from the extra c.N10bn facility obtained from the parent company). Our HOLD rating for NESTLE is justified by the fact that ,excluding the exchange loss of c.-N13bn, NESTLE operating performance remains strong given the impressive volume growth in recent quarters as well as resilience in OPEX.
Exchange loss on FX devaluation drove negative bottom-line: Inspite of sustained topline growth, Nestle Q2 2016 result showed a negative bottom-line position, reflecting the pass-through effect of Naira devaluation following the revaluation of its dollar-denominated debts. Against our expectation, Q2 revenue was up by 15% y/y, while gross margin contracted by over 900bps largely due to exchange rate pass-through effect on input costs. In similar vein, a c.-N13bn exchange loss drove the loss before and after tax of c.-N7.8bn and c .-N6.1bn y/y respectively during the quarter. However, we highlight the resilience in opex/sales ratio (down by over 200bps y/y) amidst the rising inflationary pressure from spike in energy costs. This reflected gain from internal cost-saving initiatives guided to by management after publication of Q1 numbers.
Going forward, we see NESTLE’s performance in H2 2016 still reflective of the impact of FX devaluation given exposure to dollar debts. On the positive, we expect continued support over the medium to longer term from ongoing expansion programme.
