Thursday, May 5, 2016 1:15PM/Vetiva Research
· Top and bottom line beat estimates, up 31% and 126% respectively
· Better that expected production cost supports earnings
· TP raised marginally N876.52 (Prev: N863.69)
Strong start to FY’16 amidst positive sales momentum
NESTLE’s Q1’16 result showed impressive performances across key line items. NESTLE reported a 31% y/y growth in Revenue (N36 billion), coming in slightly above Vetiva and Consensus estimate of N35 billion.
Whilst we note that this strong growth was supported by the low base of Q1’15 (due to political uncertainty and heighted insecurity), we highlight that the top line performance stood as the highest first quarter revenue figure recorded in the last decade.
Given Management’s unwavering rhetoric to limit price increases, we are inclined to believe this remarkable performance was driven more by volume rather than price.
Earnings beat estimates on lower than expected production cost
Although Cost of Sales rose 18% y/y, the expense line came in 8% better than our estimate as the company’s cost reduction drive continues to pay off. With Cost of Sales (as a % of Revenue) at 51% vs. Q1’15: 56% and Q4’15: 55%, Gross margin (49%) came in better than our 44% estimate.
Furthermore, with Operating Expenses (as a % of sales) coming in flat y/y, Operating Margin improved 500bps y/y to 25% (Q4’15: 21%). We recall that NESTLE had reported a significant rise in Finance Cost (N2.3 billion) in Q1’15 (on the back of the impact of devaluation on the company’s dollar loans).
However, stability in the currency at the official market kept Net Finance Cost 86% lower y/y (59% better than our estimate). Overall, PAT rose 126% y/y to N6.7 billion, coming in 20% ahead of our estimate.
EPS, TP revised upwards, BUY rating maintained
With revenue only slightly ahead of our estimate (1% deviation), we have chosen to maintain our N162 billion FY’16 estimate as we remain guarded about consumer spending in 2016 following the quickening in general price levels.
Nonetheless, we remain positive about NESTLE’s ability to maintain lower costs given its drive to increase domestic sourcing by accelerating several backward integration plans.
We note the N15 billion expansion plan recently announced by management (due 2017) and the newly commissioned N5.6 billion water factory in Abuja as a show of faith in driving growth. That said, we have revised our FY’16 EPS estimate to N36.03 (Previous: N32.03) and our 12-month target price to N876.52 (Previous: N863.69).
DOWNLOAD PDF REPORT HERE