Nestlé Nigeria Plc. (9months ended September 2014)
- Nestlé Nigeria Plc (Nestlé) released unaudited results for 9 months ended 30th September 2014 wherein revenues rose 7.6% YoY to N102.6 billion while PBT and PAT declined 1.1% and 1.4% to N20.2 billion and N16.9 billion respectively.
- Nestlé declared an interim dividend of N10 per share which translates to a dividend yield of 1% using price as at close of 29th October 2014.
Revenue growth remains positive, nevertheless
- In contrast to the negative growth trend in revenues across our consumer goods coverage thus far, Nestlé’s Q3 14 revenues rose 7.6% YoY (H1 14: +7.6% YoY) to N35.5 billion – 3% behind our forecasts. With management guidance of no price cuts, revenue growth remains largely volume driven its food segment (~61% of revenues) though we note that, as with peers, annualized days sales receivables continued to remain elevated suggesting some struggles driving sales.
Rising cocoa prices underpin margin contraction
- Q3 14 COGS tracked faster than revenues (+12.6% YoY) to N20.4billion (Q3 14E: N20.7billion) resulting in gross profits at N15 billion. The quicker rise reflects higher mean Cocoa prices (+34% YoY) which jumped following heightened prospects of a global cocoa deficit as strong chocolate demand growth in North America and Asia was projected to outweigh global supply which was beset by concerns about the proximity of major cocoa exporters (Ghana and Ivory Coast) to the epicenter of the Ebola Virus disease outbreak. The elevated cocoa prices offset largely benign trends in domestic cereal prices and underpinned 2.6pps YoY contraction in gross margins to 42.4% (H1 14: 43.6%).
- In contrast with Nestlé’s guidance to increased marketing and distribution expenditure over FY 14, S&D expenses declined3% YoY to N5.6 billion (Q3 14E: N6.2 billion), though impact of moderation was offset by a 25% YoY rise in Admin expenses to N2.1 billion vs. our forecasts at N1.7 billion resulting inopex rising 3% YoYto N7.7 billion (H1 14: +27.6% YoY). Consequently, Q3 14 EBIT was flat YoY at N7.3 billion with related margins contracting 1.6pps YoY to 20.6%.
Spike in finance costs compounds earnings weakness
- Net finance charges rose six and half fold to N1.1 billion from Q3 13 on account of a jump in finance cost (+142% YoY) amid a plunge (-81% YoY) in finance income. The increases in finance expenses reflect the nearly two-fold YoY expansion (+25% QoQ) in ST borrowings to N10 billion. The jump in ST borrowings appears puzzling with strong working capital positions (Q3 14 N8.9 billion vs. Q3 13 N2 billion) and higher cash balances (+9.1% YoY to N8.2 billion). Whilst we are yet unclear as to the drivers, we note that negative financing cash flows of N12 billion suggesting debt repayment likely occurred during the quarter.
- Overall, the input cost pressures and higher finance costs resulted in 13% and 15% YoY contraction in Q3 14 PBT and PAT to N6.3billion and N5.02billion respectively. Corresponding margins contracted4.2pps YoY and 3.8pps YoY to 17.6% and 14.2%.
Slowing sales growth to drive modest taper to FVE
- Current readings place Nestlé on track for a deceleration in top-line growth, from the double digit rate of recent years, to more modest levels. Whilst we believe Nestlé’s more defensive product portfolio and its more advanced RTM strategy—which places greater emphasis on control of the supply chain—should continue to support positive topline growth, the subdued nature of the Nigerian consumer space and tightening trading environment is likely to combine to temper growth in coming quarters. Nevertheless, near term earnings outlook is likely to buoyed by recent recoil in Cocoa prices (-11% QTD) which have retreated ahead of the November main harvest in West Africa with International Cocoa Organisation (ICCO)expectations for a good crop which suggests a reversal of Q3 14 trends.
- Nestlé trades at a current PE of 35.3x vs. 21.7x for Bloomberg Middle East and Africa peers. Although as with NSE Consumer good peers, Nestlé has declined 13% —on weak sector earnings—sinceour last update, our FV estimate (N793) is at 20% discount to its last trading price leaving our SELL rating intact.
Source: ARM Research