May 3, 2017/Vetiva Research

• Q1’17 logs strongest quarterly revenue figure on record, up 69% y/y
• Earnings growth watered down by higher production costs
• Q1’17 PAT above estimate at ₦8.4 billion, up 25% y/y
• EPS, TP revised upwards on earnings outperformance

Q1’17 earnings beat estimates on strong sales momentum
Reporting the strongest quarterly revenue figure on record, NESTLE’s Q1’17 results came in better than expected across most line items.

NESTLE reported an impressive 69% y/y revenue growth to ₦61 billion, beating Vetiva estimate of ₦45 billion.

Whilst we note that this growth was supported by the lower pricing base in Q1’16, NESTLE’s parent company stated that the robust performance was also following double-digit volume growth.

Particularly, growth was strongest in its seasoning offering, Maggi, with revenue in the Food segment up 88% y/y to ₦40 billion.

Gross margin in Q1’17 came in much lower than the previous year (38% vs 49% in Q1’16).

This is largely due to higher cost of sales (up 105% y/y) arising from the currency devaluation in 2016 given that NESTLE imports about 40% of its total inputs.

In line with the industry trend however, earnings were bolstered by gains from continued cost cutting strategies which saw OPEX (as a % of sales) fall from 24% in Q1’16 to 17% in Q1’17.

With this, EBIT rose 46% y/y to ₦13 billion, outpacing Vetiva’s ₦9 billion estimate. Furthermore, after recording ₦16.3 billion in FX loss in FY’16, NESTLE began the year with a ₦1.0 billion FX loss despite a seemingly improved exchange rate environment. However following a huge jump in interest income to ₦2.6 billion, net finance costs came in much better than expected at ₦1.1 billion.

Given the aforementioned, Q1’17 PBT came in 64% higher y/y at ₦14.3 billion, 66% of total FY’16 PBT.

Overall, following a higher than expected tax expense, profit after tax rose 25% y/y to ₦8.4 billion, 48% ahead of Vetiva estimate.

Estimates revised higher on strong topline growth
Following the outperformance in this quarter, we revise our FY’17 revenue estimate higher to ₦218 billion (Previous: ₦197 billion).

Also, given the sustained improvement in operating expenses and surprise from interest income, our FY’17 EPS estimate is revised higher to ₦41.62 (Previous: ₦30.88).

Consequently our 12-month target price is revised upwards to ₦810.76 (Previous: ₦796.53).