Nestle Nig Plc: Equity Update

Nestlé Nigeria - Contraction in Food Giant’s Revenue Insider Dealing: Nestle S.A Increases Stakes in Nestle Nigeria

Nestlé Nigeria Plc reported an improved performance in Q1 2019 despite the difficult operating environment. It managed its cost of sales and other operating costs better in Q1 2019 relative to Q1 2018 to deliver good profit for its shareholders. The company, therefore, maintained its leadership position in the industry in terms of efficiency. It also maintained fairly strong growth in revenue to keep its market share. The finance cost dropped significantly and compensated for the increase in the operating expenses during the period.

The cash position of the company improved in Q1 2019. Although the company tied down more cash in inventory, and in trade and receivables, it also enjoyed free credit from its suppliers. Consequently, its working capital improved. Raw materials increased both in absolute terms and relative to the total inventory in Q1 2019 compared with Q1 2018. Although this means that the company tied down more cash in raw materials during the period than in the corresponding period of last year, we are not worried about this development, as the company might have adopted the strategy to ensure it had sufficient raw materials in contemplation of the general election that took place during the Q1 2019.

The cash profit from core activities generated by Nestlé during Q1 2019 improved over Q1 2018. This is an indication that more revenue translated to cash prot in 2019 compared with 2018. However, the company also tied down a substantial amount of cash in working capital resulting in a drop in cash generated from operating activities. The company generated net increase cash flow of N29.55bn in Q1 2019, an improvement over the net increase cash flow of N24.34bn it generated in Q1 2018. The ratio of the cash prot generated from core operation to the company’s revenue increased marginally to 29.75% in Q1 2019 from 29.60% in Q1 2018.

The operating margin of the company improved in Q1 2019 compared with Q1 2018 despite the challenging business environment. The Gross Prot margin increased to 44.34% in Q1 2019 from 38.18% in Q1 2018. The Earnings Before Interest and Tax (EBIT) margin also increased to 26.90% from 21.52% in Q1 2018. The gain in finance cost and absence of the impairment charge of about N3.41bn in Q1 2018 translated to better profit margins during the year. The Profit Before Tax (PBT) margin increased to 26.94% in Q1 2019 from 20.22% in Q1 2018. The Profit After Tax (PAT) margin also increased to 18.10% in Q1 2019, from 12.76% in Q1 2018. Nestlé’s strategy is to sustain its market leadership in providing high quality and affordable nutritional food for Nigerians of all ages. It
contributes to the growth of the local economy through local sourcing of raw materials, where possible, and continuous product innovation. It trains farmers to ensure that they produce high yielding and quality inputs that are used in food processing, therefore increasing the revenue and profit of farmers.

Valuation – We employed a relative valuation method using enterprise value (EV) to earnings before interest tax, depreciation and amortization (EBITDA) multiple. Applying the EV/EBITDA multiple of 12.02x on EBITDA for the forecast period, we arrived at a fair value of N1,284.55. We, therefore, place a HOLD rating on the company’s shares.

Nestle Nig Plc: Equity Update - Brand Spur