Monday, April 30, 2012 / ARM Research


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Strong turnover growth

•Nestlé’s Q1 2012 turnover grew ~41% YoY to N28.7billiion--a marked acceleration from its 5 year average growth of ~19% for that period-- largely on the back of stronger volumes growth than anticipated, thus beating our, and management’s, forecast by 13% and 26% respectively.

•Remarkably, according to management, despite the 8 day disruption in January, the company met its January top-line targets on the back of supply chain efficiencies, which ensured that distributors were promptly restocked, thus providing the headstart for the momentum witnessed in that quarter. Our discussion within the industry also suggests that disruptions from unrest in the north has had limited impact on some packaged goods consumers whose key markets are in the south or otherwise were not materially affected.  
 

Other income and a moderating OPEX supports PBT as lower taxes boost PAT

•An 81% YoY rise in other income to N858million (3% of sales) was stronger than we expected and coupled with a 6. 5% YoY softening in opex, helped shore up PBT, which grew sharply (112%YoY) to N7.34billion well ahead of its 3 year average run rate of 25%.

•Similarly, as a percentage of sales, opex declined ~600bps, possibly reflecting in part, operating cost cutting measures efficiencies for FY 2012, enunciated by Nestlé’s management.

•In addition despite a 33%YoY rise in tax expense to N1.2billion, a 10ppt YoY reduction in effective tax rates to 16% provided further support for PAT which rose 140%YoY to N6.2billion. Lower tax rates are largely as a result of capital allowances granted for its Flowergate factory in 2011. The tax benefits last through 2013.
 

We remain upbeat about FY 2012

•As we had intimated in our previous update, we are optimistic about the materialization of much of the revenue upside from the Flowergate factory in FY 2012, an expectation we have factored into our model.

•Whilst Q1’12 performance buttresses our earlier expectations for Nestlé’s performance in FY 2012, we still temper our forecasts in light of the headwinds we had earlier highlighted in our previous stock update.

•Specifically, while the company appears to be weathering the moderation in consumer spending we anticipated, we still expect this—as well as ongoing threat of supply chain disruptions—to diminish revenue potential somewhat even as we expect heightened inflationary pressures to weigh on costs. Nevertheless, on the basis of our discussions—as corroborated by Q1 performance-- we have made slight upward adjustments to our revenue and earnings forecasts.

•Q1 typically accounts for ~21% of total sales, on which basis we believe Nestle is well on course to exceed our previous N120billion revenue forecast all things being equal.

•Specifically, we revised our sales forecast to N127billion, 5.8% higher than our previous N120billion --representing a 30%YoY growth-- thus bringing our 2012 EPS estimate to N36.65

 
We revise our TP

•We thus revise our TP upwards 7.2% to N436.02 from our previous TP, representing a premium of 4.1% from current market price, thus upgrading our rating to a NEUTRAL from SELL.  
 

ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:

Reference: NESTLE declares N6.2b PAT in Q1 '12 result,(SP:N419.00k)
 

www.proshareng.com/quote/NESTLE

 
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