May 3, 2011
Nestle Nigeria Plc (Nestle) released its Q1’11 result for the period ended March 31, 2011 today.
Please find below Highlights of the result as released on the floor of the Nigerian Stock Exchange:
· Top line surges on, up 21% YoY
Q1’11 Sales continued on similar pattern as FY’10, registering a 21% YoY growth. In our opinion, sales must have been driven by increased volumes, particularly in prime products Maggi and Milo. We recall that over the last two years, Nestle embarked on capacity expansion, first in 2009/10 with the upgrade of the Agbara plant and then in February 2011 with the commissioning of the new Sagamu plant. While we do not expect any significant contribution from the new Sagamu plant (considering its lunch launch close to the end of the period under review), we think the company may have benefited from the earlier expansion. This impressive top line came in ahead of our estimates of N19.8 billion by 6%.
· Pre-tax Profits down 26%...this comes as no surprise
Reported Profit Before Tax (PBT) came in 26% below Q1’10 figure but matches our estimate of N3.1 billion. We recall that in February, Nestle had provided guidance on FY’11 numbers which indicated a drop in profits from FY’10 (coming close to 2009 levels). Reasons communicated for the drop in profits were likely increases in marketing spend, depreciation charges (from new plants) and input costs. We think these costs would have fed through to the bottom line despite the impressive top line growth. Reported Profit After Tax (PAT) came in just 4% ahead of our estimate (N2.2 billion vs N2.1 billion) as we had assumed a higher tax rate of 31% (actual 29%).
· Margins down significantly YoY, but matches our estimate
PBT and PAT margins came in at 15% and 11% respectively (Vetiva estimates: 16% and 11%). These margins however, were down significantly from Q1’10 record of 25% and 16% respectively. We note that PBT and PAT margins averaged 23% and 15% respectively in the four quarters of 2010. Given the aforementioned costs increases, we expect margins to finish the year around Q1’11 levels.
· We maintain our Reduce rating
Despite the impressive top line growth (marginally surpassing our estimates), we maintain our REDUCE rating on Nestle. Our DCF based 2011 target price of N376.79 suggests a downside of 2% on current market price (N386.22). However, we note that Nestle may continue to ride on favourable investor sentiment to post gains beyond our target value given that it has historically traded at steep premiums to peers. Nestle now trades at 25.4x trailing earnings relative to sector average P/E of 14.0x.
Vetiva Capital Management Limited
Plot 266B, Kofo Abayomi Street
P. O. Box 73530 Victoria Island
Tel: +234-1-4617521-3, 2700657-8; Fax: +234-1-4617524