Culled—Proshare

March 8, 2018/FBNQuest Research 

Underperform rating maintained 

Nestle Nigeria’s (Nestle) Q4 sales were the weakest in 2017 and showed a q/q decline for the first time in a decade. Compared with our forecast, sales missed by 11%. We believe that topline growth was driven primarily by unit volume growth unlike in the previous three quarters when higher pricing spurred growth. 

We estimate that Nestle raised prices by c.35-40% in H2 2016. Looking ahead, we do not expect Nestle to raise prices aggressively in 2018 given growing competition from imported products. As such, we have cut our sales growth estimate for 2018 by c.500bps to 10% y/y and anticipate that gross margin contraction would persist. 

Further down the P&L, Nestle significantly deleveraged its balance sheet in 2017. Total debt declined by around 50% to N24bn (c.US$70m) while cost of debt fell by c.-200bps to 8%. As such we do not anticipate any significant negative impact on the P&L coming from this line as seen in prior years. 

We note that Nestle has drawn down only US$15.2m out of a 7-year US$30m loan which Nestle S.A. (parent) approved in 2017. Additionally, we have lowered our tax rate to 28%, recognising the potential tax relief which may be realised from the newly commissioned Milo ready-to-drink plant at Agbara Industrial Estate, Lagos. 

Our new price target of N985.0 is down 15%, mainly because our WACC of 14.9% is higher (previously 14.0%) because of the deleveraging. Nestle shares have shed -11.3% ytd (vs. +12.3% return on the NSE ASI). 

Our price target implies a potential downside of -28% from current levels. Consequently, we retain our Underperform rating on the stock. At current levels, Nestle shares are trading on a 2018 P/E multiple of 26.4x for 10% EPS growth in 2019E. 

Benefits from tax relief reversed y/y PBT decline 
Nestle’s posted sales growth of 12% y/y to N58.9bn while PBT declined by -23% y/y to N12.4bn in Q4 2017. However, PAT grew 44% y/y to N10.7bn on the back of a relatively low tax rate of 13% compared with 54% in the corresponding quarter of 2016. On a segmental basis, topline growth was driven by a 21% y/y rise in beverage sales to N22.0bn. 

Unlike in Q2 and Q3, gross margin contracted by -220bps y/y to 42.4%. The major downside to this set of numbers was a double-digit y/y rise in operating expenses to N12.4bn. The combined impact of the gross margin decline and opex growth led to a PBT decline of -23% y/y. 

Compared with our forecasts, Q4 sales and PBT came in behind our estimates by around 11% and 8% respectively. Nestle proposed a final dividend of N27.5/share (total dividend of N42.50); this implies a total dividend yield of 3%.