Friday, March 18, 2016 10:55AM /ARM Research
· Nestlé Nigeria Plc. (Nestlé) released FY 2015 results wherein revenues rose 6% YoY to N151 billion while PBT and PAT were 20% (9M: N20.8 billion) and 7% YoY (9M: N17.2 billion) higher at N29.3billion and N23.7billion respectively.
· In addition, Nestlé proposed a final dividend of N19 per share (of which Pioneer: N5) which brings total payout over the year to N29 per share (Q3 15: N10). At current pricing, the final payout translates to 4.3% dividend yield whilst total payout ratio for FY 15 comes to 97% (FY 14: 98%).
Pressured purchasing power underpins slowdown in sales growth
· In contrast to double-digit growth in prior two quarters, sales growth decelerated to +6% in the seasonally strong festive Q4 15 given pressures on consumer spending. Though Nestlé, on account of the defensive nature of its product portfolio, continues to report positive growth, the softening trend is in line with patterns in the broader Food, Beverage and Tobacco (FBT) space, which is in a three-quarter recession. Over FY 15, sales expanded at its slowest pace since 1997 reflecting, as with the FBT, adverse impact of constrained purchasing power on consumer demand.
· On a segment basis, FY revenue growth was driven by the strong performance of the Food subdivision, which grew 8% (vs. 2% for Beverage) accounted for 60% of sales (FY 14: 58%). And whilst Nigeria still accounts for most of revenue (98%), exports to other countries nearly doubled to N3 billion in 2015 (FY 14: N1.6 billion).
Tame commodity price trends buoy operating margins
Largely reflecting benign commodity price trends, Q4 15 COGS was relatively flat (+0.9% YoY) at N24 billion resulting in gross profits of N19.3 billion (+14.2% YoY). Amid flat COGS trends, Q4 15 gross margins expanded 300bps YoY to 44.7%. On an FY basis, a 3% YoY contraction in raw materials and consumables (72% of COGS) to N57 billion was strong enough to neuter the effect of a 9% YoY uptick in factory overheads (N11 billion), and benign commodity price trends helped offset currency pressures resulting in 180bps YoY improvement in gross margins to 44.5%. Furthermore, we note that FX issues drove a 600bps YoY moderation in Nestlé’s imported raw materials/COGS ratio 44%.
· Over Q4 15, dual increases in S&D (+4.1% YoY) and admin costs (+5.7% YoY) drove opex 4.4% YoY higher to N10.3 billion. Nonetheless, the overall growth remained modest relative to sales growth resulting in Q4 15 opex-to-sales ratio falling 50bps YoY at 23.7%. Cost restraint over Q4 15, with opex rising slower than topline, combined with feed-through from gross margin expansion in driving 28% YoY rise in EBIT to N9 billion and corresponding margins climbing 3.5pps YoY to 21%. Similar patterns played out on a FY basis with the gross margin gains largely driving 194bps improvement in EBIT margins to 22.3% (FY 15 EBIT: N34 billion).
Lower finance expense bolsters earnings
· Further gains to earnings emanated from cut-back in Q4 15 finance expenses (-80% YoY to N627million). Amid lower LT borrowings (YoY: -32%, QoQ: -45%) and higher ST borrowings (YoY: 25%, QoQ: 5%), we infer that monetary policy easing over Q4 15 provided Nestlé an opportunity to refinance some of its expensive loans at lower rates. The Q4 15 shrinkage in finance expense underpinned an 8% YoY moderation in FY 15 finance costs to N5 billion (9M: +92% YoY).
· The benign input costs and tamer finance charges resulted in Nestlé reporting 99% YoY jump in Q4 15 PBT to N8.5 billion. Nonetheless, resumption of taxation in Q4 15 (vs. tax credits in Q4 14) resulted in only 21% YoY rise in PAT to N6.5 billion. A similar dynamic played out in the full year earnings, as 10pps jump in effective taxes to 19% weighed on bottom-line (PAT: N24 billion; PBT: N29 billion).
· The slowdown in Nestlé’s revenue growth is in line with our thesis about pressured consumer income underpinning top-line weakness across the consumer goods sector. Though Nestlé’s more defensively themed portfolio continues to sustain scope for positive revenue growth, further pressures in the domestic macro environment could drag top-line slower over 2016. Furthermore, the impact of El Nino should cascade to bullish cocoa and sugar prices, which in turn would push COGS higher and compress margins. In addition, given weak currency outlook for 2016, rising share of dollar debt (+12pps YoY to 81%) raises prospects for higher charges. In sum, we expect earnings growth to moderate over 2016.
· Nestlé trades at a current P/E of 23.8x vs 25.9x for Bloomberg Middle East & Africa peers and last trading price is at 6.4% discount to our last communicated FVE (N734.40). Our model is under review.
· Conference call details to follow.