Nestlé Nigeria Plc (Nestlé) released unaudited results for 9 months ended 30th September 2016 wherein revenue rose 16.6% YoY to ₦49 billion while PBT and PAT declined 74% YoY and 97% YoY to ₦5.5 billion and ₦485 million respectively.
FX pressures underpin negative Q3 16 earnings: Akin to Q2 16, when NGN depreciation drove a surge in interest expense associated with Nestlé’s dollar loans, continued naira weakness resulted in a five-fold YoY spike in finance expense to ₦7.1 billion (Q3 2016E: ₦6.1 billion) driving further deterioration in interest coverage ratio (-86% YoY to 1.5x) . Excluding the impact of net foreign exchange losses, Nestlé should have reported PAT of ₦6.2 billion (-25.2% YoY growth).
Input cost pressures offset impact of price hikes on gross margin: As in H1 16, when revenue rose 22% YoY, Nestlé continued to record strong growth with Q3 16 sales up 17% YoY to ₦49 billion (Q3 16E: ₦47.2 billion). However, Nestlé, grappled with a rising cost environment which offset the impact of strong revenue growth. Given the steep cost pressures, gross margin slid 7pps YoY to 39.2%.
Elevated taxes exert further pressure on earnings: Another pressure point over Q3 16 was a spike in effective tax to 101% which in notes provided stem from expiration of pioneer tax status on its Flowergate factory located in Ogun State. Overall largely reflecting the aforementioned pressures (FX, input cost and taxes), Nestlé departed from its usual practice of announcing interim dividend.
Nestlé trades at a 2016E P/E of 72.4x vs. 23.6x for its Bloomberg Middle East & Africa peers. Given the weak earnings outlook and premium of last trading price to our FVE of ₦612.87 we retain our SELL rating on the stock.
