August 25, 2020/Cordros Report
Nestle remains the most attractive way to gain exposure to Nigeria’s massive consumer goods market, even as the landscape becomes increasingly competitive, and as consumer wallets remain pressured. Though not immune from Nigeria’s macro challenges, the company has delivered consistently strong results, and free cash flow generation has surprised in recent quarters. Compared to peers, we believe Nestle is poised to come out stronger on the other side following the COVID-19 shock, although we expect topline growth will slow. We lower our price target to NGN1,081.85 and retain our ‘HOLD’ rating.
Food Drags H1: NESTLE reported revenue declines of 0.3% in Q2-20 and 0.6% in H1-20. The food segment was most impacted by the COVID-19 shock as revenue declined by 8.7% in Q1-20. This was also amidst a c.6.0% y/y increase in prices on its seasoning brands. There was a slight recovery in Q2-20 (+4.1% y/y) but the growth was not enough to offset the previous quarter’s decline. The beverages segment benefitted from the c. 3.0% y/y price increase in Milo, and increased consumption during the lockdown, with Q1-20 revenue surging by 13.1% y/y. However, the trend surprisingly reversed in Q2 (Beverages: -7/1% y/y). This would suggest CADBURY (not covered) regained some lost market share in the quarter (Beverages: CADBURY: +13.6% q/q; NESTLE: -9.3% q/q) despite increasing prices by a similar magnitude.
We Remain Optimistic from H2: As the easing of the lockdown progresses and as the reopening of on-trade channels commences, we believe demand for Nestle’s products will receive a boost in H2-20. As such we forecast 2.0% revenue growth in 2020FY. Over the medium term (2020-2023FY), we model average annual revenue growth of 6.1%, reflecting expected sub-inflation price increases – demand conditions have not improved to the point where prices can be adjusted in line with inflation. We model 2020E gross margin decline of 150bps, driven by higher domestic inflationary pressures due to COVID-19 and currency weakness. Management has kept operating costs in check in H1-20, with OPEX only growing by 3.4% in the period. We expect this to be sustained thereby cushioning the pressure on EBITDA and EBITDA margin. EBITDA and margin are expected to decline by 2.9% and 136bps respectively. We forecast that EPS will decline by 3.8% y/y in 2020FY (+6.2% y/y in 2019FY). Further out, we forecast an EPS CAGR of 8.4% in 2019-2025FY. Our EPS forecast is in line with Bloomberg consensus in 2020-2021FY, but we are materially above consensus on revenue and EPS growth in 2022 and beyond.
Valuation: The net impact of our changes is an adjustment in our price target to NGN1,081.85/share – implying a 7.9% potential downside. We estimate NESTLE trades on 2020E P/E and EV/EBITDA of 21.2x and 12.5x; a justified premium to EM food producers 15.9x and 9.6x respectively.
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