…Flattish expected volumes in ’21f trigger 14.9% price target reduction
We have cut our price target on Neste Nigeria (Nestle) to NGN1,570.6/share, down by around -15% and also downgraded our recommendation to Neutral.
For 2021f, we anticipate a sustained tightened operating environment for Nestle. We estimate a 3.0% y/y growth in turnover to NGN295.6bn (previously NGN304.8bn) and EPS growth of 9.2% y/y (previously 22.4%).
Our revised forecasts reflect our expectation that volume growth in ’21f will be marginal as consumer pockets reel from the impact of a forced adjustment in spending on reduced real income and persistent inflation (headline inflation of 16.47% in Jan ’21).
We expect prices to be stable in response to competitive pressures. We recall that Nestle raised prices in 2020, which was inclusive of the VAT increase (to 7.5% vs. 5% previously). Based on our channel checks, the company raised prices on leading brands – Milo, Nescafe, Maggi and Golden Morn.
Also, we expect the impact of higher commodity prices, food inflation (20.57% in Jan ’21) and naira devaluation (4.3% ytd) will drive CoGS higher (+3.9% y/y, slightly ahead of forecast turnover growth of 3.0% y/y). We also forecast opex to be higher in ’21f, on higher admin expenses (due to a gradual return to the office) and marketing expenses (increased on-site activations/ promotions).
Nonetheless, we expect EBIT & EBITDA to be resilient, increasing by 1.0% y/y and 1.6% y/y to NGN65.0bn and NGN73.4bn respectively. We estimate interest expense at NGN3.10bn (-30.0% y/y), as we project a lower fx revaluation loss in ’21f.
Notably, there is a two-year interest payment moratorium on the new USD79.5m (total drawable amount of USD200m) intercompany loan received from Nestle S.A (parent). Consequently, we expect PBT to grow 3.8% y/y to NGN62.9bn (previously NGN70.01bn) while we have revised our PAT forecast down to NGN42.8bn (+9.2% y/y, prior estimate of N49.01bn).
Year-to-date, Nestle has lost -8.6% to NGN1,375.0, underperforming the ASI by -1.8%. Nestle’s ’21f EV/EBITDA of 14.60x is not far from the average for global peers (15.90x), but its ’21f P/E multiple of 25.46x is ahead of peers’ average of 17.93x.
FX devaluation loss impacted EPS in Q4 ’20; final dividend beat expectations
Nestle delivered an EPS of N7.00 (-37.3% y/y) in Q4 ’20, implying a FY ’20 EPS of NGN47.29 (-17.9% y/y). This was behind our estimate of NGN50.51 (variance of -6.4%) and driven by a higher-than-anticipated CoGS and finance cost.
Nestle has proposed a final dividend of NGN35.50 which is ahead of our forecast of NGN25.51/share but lower than the final dividend of NGN45.00/share in FY ’19. This final dividend implies a dividend yield of 2.45% (vs. 3.10% in FY ’19). Qualification date is 21 May ’21; payment date is 23 June ’21.