Nestle Nigeria Plc 2023FY: A Challenging Year but Positive Medium-Term Outlook

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March 18, 2024/Cordros Report

In this report, we update our views on NESTLE following the release of its 2023FY results. NESTLE’s strong operating profit showcased its ability to navigate the pressured consumer market characterised by rising costs, naira devaluation and weak disposable income. However, FX losses due to naira devaluation offset this gain (+40.9%y/y to NGN123.30 billion), thereby plunging the group into a net loss of NGN79.96 billion in 2023FY (vs net profit of NGN49.00 billion in 2022FY). Adjustments to our model have resulted in an 8.4% downward revision to our target price to NGN1,194.35/s (previously: NGN1,308.19/s), resulting in a “BUY” recommendation based on current market pricing. While we see the potential for sturdy operating performance in 2024E due to NESTLE’s well-diversified product portfolio, robust customer-focused advertising, effective pricing and commitment to innovation, our concern persists regarding the potential impact of FX challenges on the company’s earnings. Based on our forecasts, it appears unlikely that dividends will be declared in 2024E.  NESTLE trades at a 2024E EV/EBITDA multiple of 8.4x, compared to its Middle East and African peers’ average of 9.5x.

Operating gains hindered by higher FX loss: For 2024E, we anticipate upward price adjustments in NESTLE’s food and beverage segments, backed by robust brand loyalty among consumers, which should bolster revenue performance. In addition, we expect the introduction of new brands, including NIDO Milk and Soya Instant Powder Mix, in Q4-23 amid continuous capacity expansions to support volume growth. Overall, we forecast revenue growth of 21.0% y/y in 2024E and a CAGR of 22.2% over 2025-2028E. We also project an improvement in 2024E gross margin (+70bps y/y to 40.4%), supported by the company’s cost management efforts, which include a focus on high-margin product segments and higher reliance (100.0%) on domestic sourcing for major raw materials like maize and soya) The overall operating performance outlook remains positive, with a forecasted operating margin of 22.9% in 2024E (+40bps y/y), driven by strong topline gains. Nevertheless, increased finance costs stemming from financing USD-denominated loans and foreign exchange losses due to the naira depreciation are anticipated to impact profitability negatively. Consequently, following a 44.4% y/y increase in net finance charges to NGN328.85 billion, we estimate a net loss of NGN154.13/s for 2024E (vs net loss of NGN100.26/s in 2023FY).

Higher losses to impact FCF in the near term: Despite NESTLE’s robust operating performance, our model points to a negative FCF for NESTLE in 2024E, undermined by a projected rise in net loss (+52.4% y/y to NGN121.84 billion) due to the naira depreciation. Consequently, we expect a negative FCF yield print (23.0% | positive 3.0% print in 2023FY). However, our analysis indicates a transition to positive FCF and an average of 9.0% over 2025-2028E (5-year historical average: 5.0%), reflecting our expectations of stronger earnings beyond 2024E.

Valuation: To arrive at a Dec-2024 target price of NGN1,194.35/s, we utilised a blended Discounted Cash Flow Model (DCF) — (60.0%) and sector relative valuation approach (EV/EBITDA — 40.0%). On EV/EBITDA, we used the Bloomberg EM peer average (9.5x), resulting in a fair value estimate of NGN1,468.45/s. Our DCF FV (NGN1,018.28/s) assumes a 16.9% WACC and a 4.0% terminal growth rate.


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