Culled—Proshare
November 7, 2016/Vetiva Research
Posts second consecutive quarterly loss, 9M’16 PAT down 97% y/y
Unsurprisingly, foreign exchange losses continued to mount pressure on NESTLE’s earnings in Q3’16 as further currency weakness in the quarter ensured a second quarterly loss after tax of ₦51.1 million (Q2’16 LAT: ₦6.1 billion).
Given the company’s exposure to FCY loans, NESTLE recorded an initial 376% y/y surge in net finance charges in Q2’16, which was majorly driven by ₦13.1 billion FX loss (following the c.42% currency devaluation). In 9M’16, this figure rose further to ₦19.4 billion naira, above our ₦16.0 billion estimate, amidst further naira depreciation in the third quarter.
The second major earnings depressor in the quarter came from an unexpected deferred tax expense of ₦1.98 billion which put effective tax rate at 101% and wiped out a ₦4.6 billion PBT in Q3’16.
We recall there was an initial rise in effective tax rate in Q1’16 to 23% (FY’15 average: 19%) following the expiration of a 5-year pioneer tax status on its ₦12 billion manufacturing complex, Flowergate Factory in Sagamu.
Overall, PAT for the nine month period came to ₦485 million (9M’15: ₦17 billion). Stripping off the FX losses incurred in the year, NESTLE could have recorded 9M’16 PBT of ₦25 billion.
Strong sales momentum maintained in Q3’16
Likemost Consumer Companies, NESTLE has posted strong revenue growth in 2016, up 20% y/y to ₦129 billion, supported majorly by price increases. Nonetheless, as we stated in our Nigeria Outlook report Seeking a Winning Formula (20 September), we believe NESTLE will continue to ride on the strength of its brand names (such as Maggi, Milo, Golden Morn) which have become staples in most Nigerian households, and expect it will retain market share across most of its product categories.
Following the sizeable moderation recorded in Q2, gross margin recorded a surprising 542bps rebound in this quarter, driven by an 11% q/q revenue growth and a much slower rise in cost of sales to 2% q/q (Q2: 60% q/q).
We believe costs may have benefitted from a smaller percentage of imported raw materials in the quarter and firm contracts made with domestic input suppliers. Given this, and following a 237bps moderation in OPEX (to sales) in the quarter, operating margin improved markedly to 21% (Q2’16:13%).
FY’16 EPS estimate cut on FX losses
Supported by increased patronage that accompanies the year end festivities, we estimate NESTLE will record a 12% q/q revenue growth (in line with historic average), thus putting FY’16 revenue at ₦184 billion (Previous: ₦162 billion).
We expect to see a mild rise in FX losses in Q4 given our expectation for a further 5% q/q depreciation in the currency, and estimate FY’16 FX losses will come to c.₦21 billion. Given this, our FY’16 EPS estimate has been significantly revised lower to ₦3.74 (Previous: ₦10.22).
Post-2017, we are optimistic about NESTLE’s performance given that a bulk of these dollar denominated loans mature this year (c.60% of total interest bearing liabilities as at 2015) and noting the company’s drive to increase domestic sourcing by accelerating several backward integration plans. Our 12-month target price is revised lower to ₦810.40 (Previous: ₦876.64).
