Nigeria | Nestle Nigeria Plc Q1 2016: Leveraging on Stronger Value Brands

LAGOS, Nigeria, Capital Markets in Africa — Nestlé Nigeria Plc (“Nestlé “or “the Company”) published its Q1: 2016 results last weekend with the Company showing an impressive growth in revenue on the back of its stronger value brands despite the recent constraints on consumer spending. While leveraging on its rich product portfolio and its cost-cutting measures, which led to moderation in cost to sales ratio and drop in finance charges, Nestlé’s profitability metrics improved significantly in Q1:2016 as operating profit, PBT, and PAT margins strengthened 4.5%, 11.5% and 7.8% to 25.0%, 24.1% and 18.5% from 20.5%, 12.7% and 10.7% respectively in Q1:2015. Whilst our major valuation assumptions remain largely the same, we revised our 12-Month target price to N894.99 from N847.16 and retain our “BUY” recommendation on the stock.
                                                                                                                       
Revenue Growth Commendable amidst Consumer Spending Constraints
Nestlé was able to sustain its strong performance of the previous financial year into Q1:2016 as the Company grew its revenue commendably by 31.1% Y-o-Y (up from N27.6bn in Q1:2015 to N36.1bn in Q1:2016), a remarkable performance compared to a modest revenue growth of 5.5% Y-o-Y (up from N143.3bn in 2014 to N151.3bn in 2015) recorded in FY: 2015. Performance is largely attributable to Nestlé’s rich product portfolio which cuts across major value segments (nutrition, health, and wellness) despite macroeconomic pressures on consumer spending. Product brands across food & beverages (Milo, Golden Morn, Maggi, Nido), Nutrients (Cerelac), Wellness (Nestlé’s Pure Life) etc. continue to support sales volume from varying categories of customers. The Company’s strategy of retail product packaging, notwithstanding consumer spending constraints, has helped in further driving revenue growth. Additionally, we are of the view that sales volume has been largely supported by the recent FX challenges in the country which have significantly reduced the consumption of majority of imported substitutes to Nestlé’s retinue of products – hence driving revenue growth.

Also worthy of note is that revenue growth was buoyed by a lower 2015 base effect. Revenue was down Q-o-Q by 16.5% (down from N43.3bn in Q4:2015 to N36.1bn in Q1:2016) mainly due to larger sales in the fourth quarter which traditionally is the quarter Nestlé makes its most revenue annually. Nevertheless, we believe the Company started the financial year on a good note and would likely sustain this momentum for the rest of the year, though we are still cautioned by growing industry competition. Our conservative forecast projects a revenue growth of 8.0% for the FY: 2016.

Improved Cost Efficiency and Lower Finance Charges Bolster Profitability
Nestlé’s direct cost of production moderated in Q1:2016 as the cost of sales increased 19.4% despite the higher increase of 31.1% in revenue. This translated into a lower cost to sales ratio of 50.8% as against 55.8% in Q1:2015. Consequently, gross profit grew by 45.9% while the gross profit margin improved markedly by 5.0% to 49.2% from 44.2% in Q1:2015. We see this as laudable as the Company continues to push for efficiency in its direct cost of production. However, Nestlé recorded higher operating cost in the period as the selling, distribution and administrative expenses jumped by 33.9%, faster than the revenue growth recorded. OPEX margin thus settled at 24.2% in Q1:2016 as against 23.7% in Q1:2015.

The Company recorded a momentous jump of 173.2% (up from N175.7m to N480.2m) in finance income for the period while also recording a marked 66.6% (down from N2.3bn in Q1:2015 to N780.3m in Q1:2016) reduction in finance charges against the backdrop of lower stock of Bank borrowings. This bolstered profitability ratios as the Company grew PBT and PAT by 150.2% and 126.2%while margins improved respectively to 24.1% and 18.5% from 12.7% and 10.7% in the corresponding period. We believe Nestlé would sustain the efficiency momentum for the rest of the financial year while also maintaining its working capital management drive in reducing the level of borrowing and saving financing cost. Our PBT and PAT growth projections of 18.5% and 17.1% for FY: 2016 implying a PBT and PAT margin of 21.3% and 17.0% respectively reflect our conservative projections.

We Revise Upward Our Target Price on Nestlé from N847.16 to N894.99; We Retain Our “BUY” Rating
Whilst we note the impressive performance of Nestlé in the first quarter of 2016 financial year, we are of the view that the Company is well positioned to further tap into industry growth potentials notwithstanding the stiff competition. Nestlé’s rich product portfolio, massive distribution channels/route to market and the value product brands, amidst constrained consumer spending, remain our long-term view projection of future growth for the Company. Although our valuation assumptions remain largely the same as our previous update on Nestlé, with slight changes in some ratio projections, our blend of relative and absolute valuation shows a 12-Month target price of N894.99 as against our previous target price of N847.16 reflecting a 31.6% upside potential compared to market price of N680.00 as at 04/05/2016. The target price presents an implied forward P/E and P/BV of 25.5x and 12.6x as against the current trailing P/E and P/BV of 20.6x and 12.6x. We retain our “BUY “recommendation on Nestlé.

Source: Afrinvest (West Africa) Limited Research Team