Please find attached our Nestle Nigeria Plc FY'10 Earnings Release Report for the period ended December 31, 2010.
Nestlé’s FY’10 sales came in strong at N82.7 billion (21.1% YoY), up from N68.3 billion a year ago, buoyed mainly by increase in volume sales. Profits Before Tax grew by 32.4% to N18.2 billion from N13.8 billion in the previous year, while Profit After Tax also improved by 28.8% to N12.6 billion from N9.8 billion a year ago.
In our opinion, the robust sales can be attributed to the increased volumes at the Agbara plant, an offshoot of the recent upgrade embarked upon by the company, while growth in earnings was boosted by cost savings and increased efficiency.
Analysis of Result
Turnover came in 1.2% lower than our N83.6 billion estimate, while reported After Tax Earnings of N12.6 billion aligns with our N12.5 billion estimate. Nestle proposed a dividend of N10.60, implying a total dividend N12.55 (Nestle paid an interim dividend of N1.95 in Q3’10) which is the same as the absolute amount paid in the previous year. The payout ratio stands at 66%, falling short of our expectation of 83% payout ratio. We think payout was lower in anticipation of debt servicing on loans procured to build the Sagamu factory.
Profitability margins for the period, increased YoY from 20.2% (PBT) and 14.3% (PAT) to 22.1% and 15.2%. On a QoQ basis, Nestle’s PBT margins increased to 20.9% from 20.7%, while PAT margins dipped to 14.8%. The dip in PAT margin can be adduced to higher effective tax rate within this period.
Our expectation is that earnings will come under some pressure from factors such as rising food prices, financing cost, and higher depreciation charges, and have modeled the likelihood of the foregoing into our forecast. Particularly, we expect some increased pressure on 2011 earnings, majorly predicated on the commencement of interest payment on its US$94 million loan as the 2 year moratorium has expired.
We have revised our Target Price range for Nestle to N355.98 - N397.62 implying a midpoint of N376.79 (Post-scrip). If we adjust today’s price of N453.12 for the scrip issue, the Post-scrip price comes to N368.67, which is only a 2% discount to our Target price. We therefore revise our previous Accumulate rating on Nestlé to a “Reduce”.
ADEDOYIN ADELAKUN, Research Division, Vetiva Capital Management Limited
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