Frieslandcampina Wamco Nigeria – Volume growth to further expand margins in FY-19E

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Chapel Hill Denham Securities Limited

Turnover now expected at N163.44bn in FY-19E (previously N158.68bn) due to the impressive 22.1% YoY growth in Q3-19, which puts 9M-19 revenue growth at 9.9% YoY to N121.80bn. Broadly, FrieslandCampina Wamco Plc’s (Wamco)  products have enjoyed stable and growing demand, post-2016, due to consumer perception of their superior quality, gained through the company’s first-mover status in Nigeria. While we suspect that the company remains the market leader in milk and dairy-based products, the recent stiffening competition from Arla (producer of Dano) represents a threat to Wamco’s market share. As our open market price survey suggests, the prices of Wamco’s  Peak sachet, pouch and tin SKUs have been unchanged over the last quarter, although Peak’s sachet SKU retails at an average of 15% premium to Dano (Arla)  and Cowbell (Promisador).

Frieslandcampina Wamco Nigeria - Volume growth to further expand margins in FY-19E - Brand Spur

The outlook for higher raw milk input prices suggests a slowdown in margin improvement in FY-19E. Already, global raw milk prices have rallied by 6.2% since Q2-19 due to rising global demand (especially from developing countries),  indicating renewed input cost pressure from Q4-19E into FY-20E. Consequently,  we forecast FY-19E cost of sales at N124.59bn, rising by 5.2% YoY, indicating a  gross margin of 21.5%, an improvement from 21.1% in 9M-19 and 20.6% in FY-18. Similarly, we expect FY-19E EBITDA at N34.09bn, increasing by 10.9% YoY, largely supported by our expected growth in revenue, implying an EBITDA margin of 14.8% (marginally unchanged from 14.1% recorded in FY-18). Likewise,  given the company’s low debt profile, FY-19E’s PBT and PAT are estimated at  N19.59bn and N14.18bn respectively.

Frieslandcampina Wamco Nigeria - Volume growth to further expand margins in FY-19E - Brand Spur

Free Cash Flow to Equity (FCFE) to remain positive at N28.80bn in FY-19E, albeit down 14.8% YoY. We expect net cash to firm at N18.72bn in FY-19E, up 6.0% YoY driven by a net operating cash flow (NOCF) of N26.01bn while net investing cash flow is expected to be negative at N7.29bn (dragged by ongoing capex spending)  at a capex intensity of 4.8% (compared to 4.2% in FY-18). Our positive NOCF  expectation is based on expected improvement in earnings in FY-19E, despite noted working capital pressures in 9M-19. In addition, net debt proceeds is expected at N13.64bn in FY-19E, unchanged from 9M-19.

Frieslandcampina Wamco Nigeria - Volume growth to further expand margins in FY-19E - Brand Spur

BUY rating maintained, while our 12 month TP is lowered to N145.82 (previously N173.19) due to the company’s sustained earnings growth in 9M-19 which we expect to continue in Q4-19. Notably, Wamco’s quoted price on the  NASD OCT market has declined by 27.1% ytd, which we suspect to be due to illiquidity in the OTC market. Our new TP implies an expected total return of  29.8% (capital gain of 21.5% and a dividend yield of 8.3%). We expect Wamco to trade at an FY-20E EV/EBITDA of 4.0x, which is at 81.4% and 80.2% discounts to peers in emerging and global markets. The risks to our outlook on Wamco  include; 1.) Full restriction on the imports of milk & dairy-based products, 2.)  Significant increase in global raw milk prices. and 3.) Fierce competition from peer milk and dairy-based product manufacturers.

Frieslandcampina Wamco Nigeria - Volume growth to further expand margins in FY-19E - Brand Spur

Frieslandcampina Wamco Nigeria - Volume growth to further expand margins in FY-19E - Brand Spur