November 11, 2022/Cordros Report
NESTLE put out impressive numbers in 9M-22, reflective of our expectations for the food producer, as stated in our previous update, driven by the company’s resilience despite the increasingly competitive landscape. However, margins have maintained a downtrend through the year, driven by increased cost pressures due to the highly inflationary environment and FX liquidity constraints within the country. Nevertheless, we expect NESTLE to see out the year positively, aided by the increased demand typically associated with the end-of-year festivities in Q4. Overall, we are upbeat about NESTLE’s medium-term growth prospects, given the company’s ability to utilize its brand equity and innovativeness to withstand stiff competition from unlisted cheaper brands. However, we expect cost pressures, especially from the sourcing of raw materials to inhibit gross and operating margin expansion. Following the revisions to our forecasts and adjusting for heightened cost pressures, we have lowered our price target to NGN1,348.98/s (previously: NGN1,498.69/s) but maintain our “HOLD” rating. Also, we estimate a 2022E final dividend of NGN63.51, which would translate to a dividend yield of 5.2% based on the last closing price of NGN1,215.00/s (10 November 2022).
Sturdy topline supports profitability amid falling margins: NESTLE’s 9M-22 revenue grew markedly by 27.5% y/y, supported by growth across the business’ Food (+29.8% y/y | 60.1% of revenue) and Beverages (+24.2% y/y | 39.9% of revenue) business lines. However, a 34.9% y/y increase in the cost of sales undermined the impressive topline growth and dragged margins, reflecting the effects of inflationary pressures and currency exposure. For clarity, gross margins dipped to the lowest 9M print in at least eight quarters, declining by 355bps y/y to 35.2%. Accordingly, the EBITDA margin declined by 226bps y/y to 21.6%. Notwithstanding, EPS grew markedly by 19.6% y/y to NGN50.66 in 9M-22.
Solid sales to bolster 2022E earnings: Given the impressive sales outturn so far in the year, we raise our revenue growth expectation for 2022E to 27.8% (prev.: +20.9% y/y) and forecast a 19.8% average annual revenue growth over the medium term. We now model a 250bps 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 27.4% y/y. However, we expect the OPEX-to-sales ratio to remain at 17.0% following the faster growth in revenue. We forecast EBITDA margins to decline by 245bps to 20.4% following the expected drag on margins. Consequently, we forecast that EPS will increase by 21.4% y/y to NGN61.33 in 2022E (+2.1% y/y in 2021FY). Further out, we forecast an EPS CAGR of 15.9% in 2023-2026E.
Valuation: As earlier stated, the net impact of our changes is a downward adjustment in our price target to NGN1,348.98 (previously: NGN1,498.69/s). Hence, we maintain our “HOLD” rating. On our estimates, NESTLE trades at a 2022E P/E and EV/EBITDA of 19.8x and 11.3x, a discount to its 5-year average of 25.6x and 14.1x, respectively.
