Culled—Proshare

August 6, 2020

by FBNQuest Research

Modest increase to 2020-22E EPS forecasts

Nestle Nigeria’s (Nestle) Q2 PBT was down -23% y/y on account of a gross margin contraction of -751bps y/y, reflective of an fx-induced inflationary environment. The company sources the majority of its raw materials locally, but the pass-through effect of the devaluation fueled an increase in local input prices. That said, PBT beat our forecast by 21% on the back of a -10% lower-than-expected opex. A flattish sales growth y/y also suggest that despite the pandemic, Nestle fared better than competition (case in point: Unilever Nigeria posted a -40% y/y sales decline).

Specifically, Nestle’s sales were supported by a 49% y/y increase in exports. We have adjusted our EPS forecasts for 2020-22E by an average of 3%. Our forecast changes are however conservative relative to the PBT variance of 9% in H1, because fx pressure on CoGS and opex are likely to persist over the rest of the year. These adjustments and a roll-over of our valuation to 2021 lead to a 7% increase in our price target to N1,636.2.

Year-to-date, Nestle shares have shed -20% and underperformed the broad market index which is down -7%. The shares are trading on a 2020E P/E multiple of 23x for average EPS growth of c.10% in 2022-22E. At current levels, our price target represents a potential upside of 39%. As such we retain our Outperform rating on the stock.

PBT decline primarily caused by higher production cost

CoGs increased by 14% y/y and drove the gross margin contraction. In addition, net interest expense was 12% higher y/y. Opex was down -7% y/y but this positive was eroded by negatives from the other line items. On a sequential basis, sales were flat whereas gross margin contracted by -374bps q/q. Opex was down -12% q/q whereas net interest expense increased by 5x.

Essentially, PBT fell -6% q/q. Relative to our forecasts, gross margin and opex beat by 127bps and -10% respetively, driving the 21% positive surprise in PBT.