Nestle Nigeria Plc – Sustained Top-Line Growth Amid Weak Macros

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Nestle Nigeria Plc, in its recently released financial statement for the full year, ended December 2019, reported a top-line growth of 7% driven by revenue increases from the Beverage and Food segment. Cost of sales grew at a slower pace by 2%, and operating income surged by 19%. Profit before tax (PBT) advanced YoY by 19%, and profit after tax (PAT) rose by 6%. Management declared a final dividend of N45.00k per share (FY 2018: N38.50k) summing full-year dividend to N70.00k per share (FY 2018: N58.50k).

Cost curtailment lifts operating income, but PAT dragged by a higher effective tax rate

Nestle Nigeria Plc grew top line by 7% from N266.28bn in FY 2018 to N284.04bn in FY
2019 driven by a 10% and 5% revenue increase from the beverage and food segment
of the business, respectively. Revenue from the beverage segment grew from N98.10bn
to N107.95bn in FY 2019, while revenue from the food segment increased from
N168.17bn to N176.09bn. We attribute the sustained growth in revenue to the robust
distribution network of the group as well as product packaging innovations to meet the
depleting wallet of the consumers.

Cost of sales increased, though at a slower pace compared with revenue by 2% from
N152.35bn in FY 2018 to N155.89bn in FY 2019. We believe that the mute growth in
production cost was due to the significant portion of the input material sourced locally.
Consequently, gross profit rose from N113.92bn to N128.15bn and gross profit margin
strengthened by c.300bps to 45%.

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PBT increased YoY by 19% from N59.75bn to N71.12bn on the back of relative stable
operating expenses and a lower finance cost which declined by 11% from N2.51bn to
N2.23bn in FY 2019. However, due to a higher effective tax rate of 36% (FY 2018: 16%),
PAT grew by 6% from N45.68bn to N49.46bn, with earnings per share of N57.63k (FY
2018: N54.26k).

Recommendation

The group’s performance in FY 2019 was anchored by revenue growth and cost optimization despite the harsh operating environment and the pressured consumers wallet.
Decomposition of the revenue by periodicity shows that the group recorded the most robust growth in Q4 2019. Revenue surged by 15%, marking the only double-digit growth for the year. Besides the group’s brand and route to market, we believe that the sustained land border supported topline growth. In FY 2020, we project a topline growth of 7% and expect production cost to grow in tandem with revenue. We anticipate a relatively stable production cost on the back of significant material input sourced locally.

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Overall, we arrived at a forward EPS of N62.40k and a fair value estimate of N1,163.50k on
the stock. At the market price of N1,080.00k, the stock is trading at a forward PE of 17x and an 8% discount to our fair value estimate. Thus, we recommend a HOLD on the stock.

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Nestle Nigeria Plc - Sustained Top-Line Growth Amid Weak Macros - Brand SpurNestle Nigeria Plc - Sustained Top-Line Growth Amid Weak Macros - Brand Spur

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