June 15, 2018/InvestmentOne Report
Limited Upsides Potential Despite Improving Macro Environment
We maintain a HOLD recommendation on Nestle Nigeria Plc following the release of its Q1 2018 scorecard. Our view is premised on the limited upside represented by our target price of N1,570 against current price levels. We highlight that the upside on the stock is based on the improving macroeconomic environment, expected inflow from election spending and governments expansionary fiscal policy, which could support consumer demand in H2 2018. We forecast Nestle Nigeria Plc FY 2018 P/E multiple at 31.8x, lower than its 2017 P/E multiple of 36.6x, however at a premium compared to Unilever Nigeria Plc with a current P/E ratio of 29.4x. The premium placed on the stock may be due to the potential growth in Nestle Nigeria Plc relative to peers which may have been supported by its larger market share and better gross profit margin performance.
Our forecast for an improvement in topline growth by 11.3% y/y in FY 2018 to N272billion is expected to be volume driven hinged on improving operating environment, government expansionary fiscal policy and expected election spending which may support an increase in EPS. This may be achieved by the firms continued operating cost efficiency and improving FX environment which may support gross profit margin as well as lower interest expense on the back of the current lower interest rate environment. Furthermore, given our expectation of higher trade payables in FY 2018 as reflected in their recently Q1 2018 results, we expect the firms cash conversion ratio to improve to 76% in FY 2018, from 31% in FY 2017.
Valuation
Our N1,570 price target is derived using a discounted cash flow (DCF) model over the 2018-2027 period. We assume that sales growth reaches a terminal value of 12.0% in 2027 while EBIT improves to 20% by 2027 from our 2018 estimates. Our WACC is 14.5%, assuming 13.0% risk free rate, 0.73 beta, 8.4% after tax cost of debt and 5.0% equity risk premium.
