May 8, 2024/Cordros Report
We update our views on Nestle Nigeria Plc (NESTLE) for 2024E following its recently released Q1-24 results. NESTLE’s revenue performance stayed robust in Q1-24, however, margins (gross: -136bps y/y to 26.4% | EBITDA: -116bps y/y to 12.9%) and profitability were pressured by heightened costs (+76.1% y/y) and significant FX losses (NGN191.67 billion). Moving forward, while we expect further improvement in revenue on further price increases, we expect NESTLE’s operating performance to be impacted by heightened cost pressures stemming from inflation and currency devaluation. In addition, we remain wary of the potential impact of FX challenges on the company’s earnings in the near term. Adjusting for the aforementioned, we reduce our target price by 5.3% to NGN1,130.50/s (previously: NGN1,194.35/s) but maintain our “BUY” recommendation on the stock. On our estimates, NESTLE currently trades at a 2024E EV/EBITDA multiple of 7.2x, compared to its Middle East and African (MEA) peers’ average of 9.7x.
Margins to weaken on cost pressures: Following the better-than-expected revenue outturn in Q1-24, we now revise our revenue estimate for 2024E higher by 558bps to 27.1% y/y (previously: 21.0% y/y) with a CAGR of 22.5% over 2025-2028E. The revision in our revenue growth forecasts reflects our increased optimism in the company’s ability to sustain and potentially accelerate its revenue growth trajectory over the forecast period, supported by the resilient demand for its products and further price increases to offset rising costs. In contrast to our previous expectation of intensified cost-cutting measures, we now recognize a pressing issue with rising costs, affecting margins and constraining efforts to control costs. As a result, we foresee continued cost pressures, prompting us to adjust our forecasts downwards for both gross and EBITDA margins to 39.8% (previously: 40.4%) and 22.2% (previously: 22.9%), respectively. We have also adjusted our FX rate assumption in our model to NGN1,400.00/USD (previously: NGN1,500.00/USD), resulting in a lower FX loss projection of NGN198.50 billion (previously: NGN238.78 billion). Consequently, we now expect NESTLE to report a loss per share of NGN115.79 (prev.: NGN154.13 | 2023FY: NGN100.26).
No dividends expected in the near term: To address negative shareholders’ funds, NESTLE opted to revalue its assets, thus boosting its book value. While we note that this should support the negative equity balance in 2023FY (NGN78.04 billion) to a positive equity balance of NGN47.34 in 2024E, we anticipate dividends will be postponed until profits cover the deficit in retained earnings. Thus, we expect the negative retained earnings balance to worsen to NGN170.41 billion in 2024E (2023FY: NGN78.63 billion) and remain negative in 2025E (NGN84.70 billion) despite projected profits. Consequently, we do not expect dividends until 2026E, when the retained earnings balance turns positive (NGN5.09 billion).
Valuation: Our target price is NGN1,130.50/s, derived from a 60/40 blend of the Discounted Cash Flow Model (DCF) and sector-relative valuation approach (EV/EBITDA). On EV/EBITDA, we utilized the Bloomberg EM peer average (9.7x), resulting in a fair value estimate of NGN1,593.03/s. Our DCF FV (NGN822.16/s) assumes a 22.9% WACC and a 4.0% terminal growth rate.
