Q1-19 revenue grew by 5.2% y/y, broadly in line with our estimates (1% variance) for the period. Annualised, the achieved revenue was ahead of market expectations by 11%. Compared to Q4-18, revenue rose by 12.4%, suggesting volume recovered strongly from the slack at the end of last year. Food revenue grew by 6% y/y while Beverage grew by 4% y/y. Compared to Q4-18, both segments recorded 16% and 6% top-line growth, respectively, with Food returning to growth following an 11% decline in Q4-18. From our channel checks, prices have been stable for most of NESTLE’s products compared to end-2018 levels.

Gross profit margin expanded by 616 bps y/y to 44.3%, ahead of the 38.1% we estimated for the quarter, halting the recent trend of sub-40% gross margin in Q1.  In addition to the higher revenue, gross margin benefited from lower CoGS which declined by 5.3% y/y, following (1) reduced inflationary pressures, and (2) lower soft commodity prices. On our estimate, the price of maize (-13% y/y), palm oil (-18% y/y), sorghum (-16% y/y) are lower compared to last year.

OPEX rose 10.2% y/y, with the ratio-to-revenue coming in at 17.4%, both lower than our estimates. Despite the double-digit growth in OPEX, EBIT and EBITDA surged 31.5% y/y and 28.1% y/y with the associated margins coming in at 26.9% (+537 bps) and 29.3% (+523 bps), respectively.

NESTLE recorded net finance income of NGN35 million (from NGN879 million net finance cost in Q1-18) following a 79.2% y/y increase in interest income and net FX gain of NGN19 million). Gross loans as at end-March was NGN6.72 billion (vs. NGN18.11 billion as at Q1-18 and NGN8.34 billion as at 2018FY).

Compared to Q1-18, EPS was up 29.9%, driven by higher revenue (+12.4%) and much lower OPEX (-24.9%). Effective tax rate in the quarter was 32.8%, down from 36.9% in Q1-18.

Comment: NESTLE’s Q1 EPS is above our expectations (+61% variance), and is impressive, in our view, given still depressed consumer demand. The stock is trading at forward (2019E) P/E and EV/EBITDA multiples of 22.7x and 14.1x respectively, at a premium to Middle East and Africa peer averages of 9.05x and 15.13x. Our estimates are under review.