Nestle Nigeria Plc.: Slight Upward Revision To 2018 – 2019E Earnings; SELL Rating Maintained

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At our revised TP of NGN851.92 (previously NGN843.54), we maintain SELL rating on NESTLE’s stock at the current market price of NGN1,380. The q/q sales revenue contraction reported in the seasonally-supportive Q4 is a volume pressure worthy of note. Besides, gross margin (-219 bps y/y and -107 bps q/q in Q4-17) appears less likely to improve materially in the absence of further price increases. That said, we note the potential stimulus to 2018E earnings from significantly lower finance charges and lower opex-to-sales ratio. On net, we revise 2018E net profit estimate 5% higher to NGN49.3 billion, equating to NGN62 dividend per share, and 4% yield on today’s price.

Our latest 2018 sales revenue estimate of NGN268.6 billion (10% growth vs. 2017FY) is lower by 4% compared to the previous estimate. We based our estimate entirely on volume growth (driven by the Food segment), as we maintain our view that the odds are high against price increase in 2018. While NESTLE’s market leading status accords the group some influence over pricing, we believe the implications to market share is high in today’s resurgent competitive environment, amidst little recovering consumption expenditures.

We retain our gross margin estimate of 42% (vs. 41% in 2017FY) for 2018E. While noting the weakness experienced in Q4-17 as dampening growth outlook, we have based our benign growth estimate on moderating commodities price inflation and stable naira exchange rate outlook. Likewise, we estimate EBIT margin to expand modestly to 23% (vs. 22.8% in 2017FY) on slightly conservative opex growth expectation (13% in 2018F vs. 27% previously).

With NGN42.7 billion loans repaid (96% were intercompany loans), gross debt at the end of 2017F was NGN24.2 billion. New long-term intercompany loan
(NGN5.5 billion) was drawn also in 2017FY. Gross borrowing is currently split into 74% USD intercompany loans (vs. 92% in 2016FY) and 26% secured NGN
borrowings (vs. 8% in 2016FY).The split was 70:30 during the pre naira devaluation and acute FX challenge period of 2011-2014FY. We estimate finance charge to reduce by more than 14x in 2018E on less geared balance sheet and stable naira outlook.

Financial Statement (NGN’million).

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