March 17, 2022/Cordros Report
2021FY results reiterate our positive view of NESTLE as the company’s earnings remained strong despite the effects of the increasingly competitive landscape and existential macro challenges on its operations. We remain optimistic about NESTLE’s medium-term growth prospects. In 2022FY, we believe NESTLE’s brand equity and product innovation will help the company circumvent the stiff competition from unlisted cheaper brands in the food segment. However, considering that NESTLE sources c. 80.0% of its raw materials in Nigeria, we are concerned about the effects of the high inflationary environment on its margins amid the stifled consumer wallet. Following the revisions to our forecasts, we have lowered our price target to NGN1,310.73/s (previously: NGN1,576.80/s) but retain our “HOLD” rating. We estimate a 2022E final dividend of NGN56.21, translating to a dividend yield of 3.9% based on today’s closing price (NGN1,435.00).
Cost pressures dampen earnings growth: NESTLE’s 2021FY revenue grew markedly by 22.6% y/y amid the increasingly competitive business environment. Our analysis revealed that growth in the company’s Food (+21.3% y/y | 59.2% of revenue) and Beverages (+24.4% y/y | 40.8% of revenue) business lines supported the outturn. We believe the c. 5.0% increase in Maggi retail prices drove the growth in the Food segment. In the Beverages segment, we imagine the expansion was supported by higher sale volumes, as our channel checks revealed that product prices in this segment remained broadly unchanged. However, the effects of inflationary pressures on costs dampened profitability, which dragged margins. Consequently, EPS grew mildly by 2.1% y/y to NGN50.51 in 2021FY.
Volume-led growth to support topline in 2022E: For 2022E, we expect volume increases across the company’s product portfolio to support top-line expansion. As such, we forecast 11.7% y/y revenue growth in 2022E. Over the medium term (2023-2026E), we model average annual revenue growth of 10.9%, reflecting expected sub-inflation price increases. We model a 150bps decline in the 2022E gross margin, reflecting cost pressures from the high domestic inflationary environment and currency weakness. We expect operating expenses to grow by 11.7% y/y, though we think operating costs will remain in check and expect the OPEX-to-sales ratio to remain stable at 17.0%. We forecast EBITDA margins to decline by 229bps to 22.8% following the expected drag on margins. We forecast that EPS will increase by 7.5% y/y to NGN56.21 in 2022E (+2.1% y/y in 2021FY). Further out, we forecast an EPS CAGR of 14.7% in 2023-2026E. Our EPS forecast tracks below Bloomberg’s consensus estimate of NGN60.50 in 2022E.
Valuation: The net impact of our changes is a downward adjustment in our price target to NGN1,310.73 (previously: NGN1,576.80/s). Hence, we maintain our “HOLD” rating. We believe NESTLE’s valuation is stretched at the current market price as the market has already priced in growth catalysts. However, given the resilient earnings delivered by the company over the years, we think investors may continue to price the stock at a premium to its fair value. On our estimates, NESTLE trades at a 2022E P/E and EV/EBITDA of 24.1x and 13.1x, a discount to its 5-year average of 25.6x and 14.5x, respectively.
