Culled—Proshare

November 17, 2016/FBNQuest Research

Outlook for 2017 unchanged; Neutral rating maintained
Although Nestle Nigeria (Nestle) reported a loss after tax of –N51m in Q3 2016, the firm’s underlying results were strong. Nestle posted record high sales of N49.0bn in Q3 2016, its highest ever in a quarter, driven by both unit volumes and pricing.

We estimate price increases of c.5-10% on average across key categories which contributed to the firm’s gross margin of 39.2% positively surprising by 400bps. Additionally, a focus on increasing local input in production also helped. However, rising energy costs offset some of these benefits.

Operational efficiency is also improving, with Q3 opex-to-sales of 18.0% being the lowest in 15 quarters. Operating profit of N10.4bn came in ahead of our estimate by 70%. Similar to the firm’s performance in the previous quarter, fx revaluation losses weighed on profitability in Q3.

Following a naira depreciation of c.10%, Nestle reported fx-related losses of –N6.3bn. Tax expenses were up significantly following an end to the firm’s pioneer tax status. Going forward, we believe that the risk of a significant depreciation of the naira at the interbank in Q4 is unlikely.

As such we expect the firm to return to profitability. However, given the 9M results, we estimate an EPS decline of -65% y/y to N10.6 for 2016E. Although Nestle did not declare interim dividends (first time in over a decade) we believe dividend payments at the end of the year are likely.

We have made negligible changes to our 2017E estimates. Our new price target of N730.0 is up slightly (by +1.2%). From current levels, this new price target implies a potential downside of -8.7%.

At current levels, Nestle shares are trading on a 2016E P/E multiple of 75.4x for 82% y/y average EPS growth over the 2017-18E period. The EPS growth is flattered by easy comparables. Ytd, Nestle shares have shed -7.0%, outperforming the ASI by 3%. We have retained our Neutral rating.

Fx losses of c.-N6.3bn hit P&L in Q3
Nestle’ Q3 loss resulted from a sales growth of 17% y/y being offset by a gross margin contraction of 682bps y/y to 39%, a significant rise in finance expenses which led to a PBT decline of -55% y/y and a 151% y/y increase in taxes.

Similar to Q2, the spike in finance costs was mainly driven by fx revaluation losses, following the continued depreciation of the naira (c.10%) in Q3. Sequentially, while sales grew by 11% q/q, Nestle’s PBT of N4.6bn compare with a loss before tax of N7.8bn. Compared with our estimates, sales were ahead by 12%; however, we forecasted the company to make a pre-tax profit of N1.2bn.