Culled—Proshare

May 7, 2019/FBNQuest Research 

PT up 5% following upward adjustments to EPS ests

Nestle Nigeria’s (Nestle) Q1 2019 earnings grew by 49% y/y to N12.9bn, beating our estimate by c.16%. The improved profitability was driven by a positive surprise on the gross margin line which expanded by +616bps y/y to 44.3%. If we exclude the impact of an impairment loss of N3.4bn in 2018 on Nestle’s water factory investment in Abaji, FCT, earnings growth was  modest at around 7% y/y.

As such, we have raised our EPS estimates over the 2019-20E period by around 4%. We continue to expect a relatively stable fx environment compared with the last three years and therefore anticipate negligible fx-related losses during this fiscal year. In Q1, Nestle posted an fx gain of N19m vs. a loss of –N639m in the corresponding period of 2018.

Given the unpredictability of fx markets, a negative swing remains a possibility and therefore cannot be ruled out this year. In Q1, topline growth was modest at around 5% y/y to N71.0bn. Sales for both foods and beverage segments were up by mid-single digits y/y. Prices for grains such as maize, soybean and millet (raw materials) all contracted y/y following relatively stronger production and below-average demand.

Looking ahead, we expect that prices will remain near their three-year averages even though seasonal demand and price shifts triggered by Ramandan consumption needs are expected. Our new price target of N1431 is up 5% and implies a potential downside of -5.9% from current levels.

Therefore, we retain our Neutral rating on the stock. Nestle shares are trading on a 2019 P/E multiple of 24.0x for an EPS growth of 10% in 2020E. These compare with a 2019 P/E multiple of 16.1x for an average EPS growth of 55% in 2020E that consumer goods peers are trading on. Year-to-date, Nestle shares have gained +2.4%, outperforming the NSE ASI by around 10%.

Q1 PBT and PAT up 40% y/y and 49% y/y respectively: Nestle delivered a strong set of results in Q1. PBT grew 40% y/y to N19.1bn and beat our forecast by 13%. The PBT growth was driven by a +616bp y/y expansion in gross margin to 44.3% and a 5% y/y rise in sales to N71.0bn.

The strong performance on the gross margin line more than offset a 10% y/y rise in operating expenses. PAT grew 49% y/y because of a lower effective tax rate of 32.8% in Q1 2019 vs. 36.9% in the corresponding period of 2018. Sequentially, sales and PBT and PAT all grew by 12% q/q, 64% q/q and 30% q/q respectively.