Action/Event: Nestlé Nigeria released 1Q18 results late on Monday, with a reported 10% revenue growth, 4% and 2% behind SBGS’ and Bloomberg consensus estimate respectively. EPS growth came in slower at 3%, behind SBGS’ and Bloomberg consensus estimates by 23% and 18% respectively.
Revenue growth on volume-price mix; beverages segment grows faster than food: SBGS’ retail price survey showed relatively muted prices for Nestlé’s products since the last significant price increase in 1Q17. Interestingly, the beverages segment grew at a faster pace of 17% y/y despite relatively flat prices compared to 7% for the food segment, which saw a price increase of about 5%. This could speak to stronger competition for Nestlé’s food products- Maggi and Golden Morn. Given that our FY18E revenue estimates of 15% envisages high single digit volume growth and price increase, a likely price increase in subsequent quarters could be supportive of stronger revenue growth potential. We still see risk to volumes from renewed competition post the height of the FX crisis but three new product SKUs launched by Nestlé in 2017 is the right counter, in our view.
Margins mirror 1Q17 but down from FY17 on impairment loss: Gross and EBIT margin came in at 38.2% and 21.5% respectively, mirroring 1Q17 but belying the improvement since (FY17 gross and EBIT margin of 41.3% and 22.8% respectively). An impairment loss of N3.4bn taken in the food segment contributed to this lower than expected margin performance. Except for this impairment charge, margins could have been stronger by a material 506bps. We have contacted management to get an understanding of the impairment loss. Operating profit grew 10%, at pace with revenue growth.
Slower EPS growth of 3% on lower finance income: Slower EPS growth was driven by finance charges as interest income on cash balances declined with debt repayment. Nestle had booked significant interest income on its significant cash balances earlier in FY17 when limited FX supply at the time restrained debt payment. Nestlé continued to pay down its foreign currency debt in 1Q18 as gross borrowings declined in the quarter by 25% from FY17. Debt to equity ratio consequently improved to 34% from 54% in FY17. This is in line with our FY18E estimate of 32% and the lowest debt to equity ratio for Nestle to date. While management has said that it would maintain a mix of foreign and local currency debt, we think the risks around current FCY debt are significantly more benign now compared to the last two years.
Risks: Heightened competition and material cost inflation are key risks we see to our estimates for Nestlé.
Valuation: We maintain our estimates, Hold recommendation and target price of N1,681 as we look to get more colour from management. On our numbers, Nestlé is trading at FY18E P/E of 28x compared to Unilever Nigeria at 30x.
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