Nestle : On track for solid 2019 despite emerging concerns

Nestle Nigeria (Nestle) reported Revenue growth of 4.0% y/y to N211.3 billion for 9M 2019 from N203.1 billion and post-tax profit growth of 11.2% y/y to N36.8 billion from N33.1 billion in 9M 2018.

On a q/q basis, Revenue growth was down 2.1% to N69.4 billion in Q3 2019. The company’s reported Revenue of N211.3 billion for 9M 2019 missed our 9M 2019 estimate of N215.6 billion while Net profit also missed our 9M estimate of N40.2 billion. Earnings per share stood at N46.48/s as at 9M 2019.

We observed significant uptick in trade receivables which implies Revenue growth has been on the back of favourable trade terms with key partners and we struggle to see the sustainability of this strategy. Also, we saw some production cost pressures in Q3 which we expect to continue into Q4 2019.

However, we believe Nestle remains a quality choice in an otherwise beleaguered consumer sector. Thus, while we see long term concerns on the horizon, we view Nestle as well-positioned with a strong distribution network, favourable brand appeal and diversified product portfolio to be able to weather the storms ahead.

We have revised our Revenue and key profit lines for 2019e lower. We have also lowered our long-term forecasts as we struggle to see quicker recovery for underlying industry fundamentals.

The overall impact is a reduction in our target price for Nestle to N1,409.6/s (a 22.6% upside on today’s closing price of N1,150.0/s) but we retain our BUY rating on the stock as we believe current market pricing (c.7.5% off its 52-week low) creates an attractive entry opportunity for investors. We arrive at our target price using a blend of DCF valuation and Relative valuation in the ratio 60:40.

Nestle in its recently released 9M 2019 result announced Revenue growth of 4.0% y/y to N211.3 billion for 9M 2019 from N203.1 billion in 9M 2019. On a q/q basis, Revenue fell by 2.1% q/q in Q3 2019 to N69.4 billion from N70.9 billion in Q2 2019.

Reported Revenue of N211.3 billion missed our 9M 2019 forecast of N215.6 billion by a modest 2.0%. Notably, we have observed consistent decline in quarterly Revenue through 2019, thus, while we note y/y Revenue growth has remained sturdy, we feel the company may have started feeling the pressure of weak consumer wallets.

Across product segments, both Food (up 2.1% y/y to N131.8 billion) and Beverage (up 7.4% y/y to N53.7 billion) business segments recorded modest growth on a y/y basis.

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Nestle recorded a 6.9% y/y increase in Operating Expenses (adjusted for depreciation) to N38.0bn in 9M 2019 from N35.5bn in 9M 2018. The increase in Operating Expenses was driven largely by an 8.9% y/y increase in Marketing & Distribution Expenses (adjusted for depreciation) to N31.3bn in 9M 2019 from N28.7bn in 9M 2018.

We note the increase in marketing costs stems from sustained promotional activities for Milo RTD as well as the launch of the new Maggi Signature brand. Administrative Expenses (adjusted for depreciation) however recorded a modest decline of 1.5% y/y to N6.7bn in 9M 2019.

Slower growth in Operating Expenses compared to Gross Profit pushed EBITDA higher by 14.3% y/y to N62.3bn in 9M 2019 from N54.5 billion in 9M 2018. However, EBITDA was lower within the quarter, down 20.5% q/q.

Depreciation & Amortisation rose 2.0% y/y to N5.2 billion in 9M 2019 from N5.1 billion in 9M  2018. Nevertheless, EBIT increased 15.6% y/y to N57.1 billion in 9M 2019 from N49.4 billion in 9M 2018. Improved debt position (total loans & borrowings; 9M 2019 – N11.2 billion vs 9M 2018 – N17.5 billion) saw Finance Cost slide lower by 40.9% y/y to N1.6 billion.

Despite Finance Income declining 22.6% y/y to N1.1 billion, Nestle recorded a 61.0% y/y decline in Net Finance Cost to N496.2 million resulting in Net Profit growth of 11.2% y/y to N36.8 billion in 9M 2019 compared with N33.1 billion in 9M 2018 missing our 9M estimate of N40.2 billion.

Earnings per Share came in at N46.48/s for 9M 2019 compared with N41.78/s in 9M 2018. The company announced an interim dividend of N25.0/s which implies a dividend yield of 2.0% based on yesterday’s closing price of N1,220/s.

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