May 7, 2025/Cordros Report
In this report, we present our outlook for NESTLE for 2025E, following a stronger than expected Q1-25 performance, characterized by lower cost and operating margins. We like that NESTLE was able to bring down its cost-to-sales ratio by 13.86ppts to 59.4% in Q1-25 (Q1-24: 73.3%). This was achieved by improving energy efficiency and substituting imported inputs with local alternatives. Factoring NESTLE’s robust pricing power, solid operational execution, and a more stable macroeconomic environment, our model estimates significant improvements in key operating margins in 2025E. We expect 2025E gross and EBITDA margins to increase by 505bps y/y and 656bps y/y to print 37.0% and 27.1% (2024FY: 32.0% and 20.5%), respectively. Adjusting for the aforementioned, we have revised our target price to NGN1,319.08/s (previously: NGN930.10/s) but retain our “HOLD” recommendation on the stock. On our estimates, NESTLE currently trades at 2025E PE and EV/EBITDA multiples of 6.7x and 3.5x, respectively – MEA peer average of 9.7x and 6.4x, respectively.
Earnings to rebound on cost optimisation and reduced FX loss: In 2025E, we project revenue growth of 28.5% y/y, supported by strategic price increases and volume gains from recent capacity expansions across product portfolios – Food (+28.7% y/y) and Beverages (+28.1% y/y). Meanwhile, over the medium term (2026E-2029E), we expect average revenue growth of 12.4%. That said, we expect the company’s recent cost optimisation success to translate into a 505bps y/y decline in cost-of-sales ratio to 63.0% (2024FY: 68.0%), providing the required room for gross and EBITDA margins to increase to 37.0% and 27.1% (2024FY: 32.0% and 20.5%), respectively. While FX-related losses are expected to moderate, we still anticipate a modest FX loss in 2025E (NGN9.56 billion | 2024FY: NGN290.70 billion) on our year-end FX rate estimate of NGN1,706.33. Consequently, we project EPS at NGN163.20 in 2025E (vs. loss per share of NGN207.65 in 2024FY).
Equity position to return to positive in 2025E: On our estimates, we project a positive equity position for NESTLE in 2025E – NGN37.07 billion (vs negative equity balance of NGN92.29 billion in 2024FY). This reflects our expectations on profitability in 2025E, where we forecast a PAT of NGN129.36 billion, which should reduce the accumulated deficit on the balance sheet to NGN113.87 billion (vs. NGN242.23 billion in 2024FY). Given the still negative retained earnings balance, we do not anticipate any dividend payouts in 2025E. We believe dividend payments will resume in 2026E, where retained earnings is expected to turn positive – NGN19.26 billion.
Valuation: Our target price is NGN1,319.08/s, derived from a 60/40 blend of a DCF and sector relative valuation approach (EV/EBITDA). On P/E, we applied the MEA peer average 2025E multiple of 9.7x, resulting in a fair value (FV) of NGN1,583.39/s based on our 2025E EPS estimate of NGN163.20/s. Similarly, utilising the MEA peer average EV/EBITDA multiple of 6.4x, we derived a fair value estimate of NGN1,892.04/s. The combined multiples yielded a multiple-based fair value of NGN1,737.71/s. Our DCF’s fair value estimate is NGN1,039.42/s, derived from an equal blend of FCFF (TP: NGN1,396.60/s) and FCFE (TP: NGN683.37/s) estimates assuming a 18.9% WACC, 27.5% cost of equity and a 4.0% terminal growth rate.
