April 24, 2017/Cordros Research
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In our view, NB’s reported Q1-17 result impressed on two main fronts: (1) 18% y/y revenue growth and (2) 255 bps q/q expansion of gross margin. Both were ahead of Cordros’ (+3% y/y and +38 bps q/q respectively) and consensus (5% y/y revenue growth) estimates.
Revenue benefitted strongly from the high pricing regime. We recall that NB increased prices on some SKUs in January, in addition to the increases implemented in the second half of last year. Relative to Q1-16, NB’s average prices are currently higher by about 20% (Cordros’ estimate), sufficient to compensate for the mid single-digit decline in volume, as reported by the management. With the decline in volume significantly lagging percentage price increase, we look for a higher net-price effect on 2017F revenue (N367.4 billion) than previously expected (N325.1 billion).
Although gross margin was lower y/y, it was better than we expected, and also reasonably ahead of Q4-16’s, which we consider a “litmus test” for our coverage of FMCG companies. While pricing continues to support margin recovery from the record-low Q3-16 level, the sharp appreciation of the Naira at the parallel market (where producers still meet considerable FX requirements) during the period, signaling possible productivity savings, may have underpinned the q/q margin improvement. That said, management’s reiteration of challenging underlying trading conditions suggests that margin recovery will remain modest, amidst continued consumer preference for lower margin value brands.
Also on the positive, the lower y/y and q/q finance charges strongly validates easing FX headwind. In the interim, the risk of FX losses (resulting from potential devaluation of the local currency) over-bloating finance charges has been lessened by the obvious “resolute” of the central bank to hold the line on the Naira.
Overall, in our view, NB’s sales volume, notwithstanding the modest decline, has shown resilience, considering the magnitude of price increases implemented thus far. And while this will combine with higher average price to drive double-digit revenue growth over 2017F, improving liquidity of FX (potentially reducing the amount of USD requirement purchased from alternative markets), if sustained with continued focus on cost efficiencies, will act as tailwinds for margin and profitability. We have revised NB’s TP higher to N120.17 (previously N106.95), and upgrade recommendation to HOLD. The share price has declined by 5% since we last updated.
