Nestle Nigeria Q2 2021 Results Review: Upgraded to Outperform from Neutral


Tuesday, August 31, 2021 / 11:59 AM / by FBNQuest Research / Header Image Credit: Tribune Online


Average EPS over 21-23f raised by 9%; price target raised by 15%

We have raised our EPS forecast for Nestle over the 21-23f period by 9% on average. Our upward revision is because of price increases by around 10% (based on our market survey) in Q2'21. As such, we expect that earnings over the next two years will moderately benefit from the price increase. For this year, our  earnings estimate is relatively unchanged.

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Looking ahead into H2'21, we believe further price increases will be difficult to implement, as we anticipate a shift to market share preservation. Our view is based on shrinking real income of consumers, which we believe remains a concern. For FY'21, we now have a revised sales estimate of NGN340.4bn, up 8.9%, from prior forecast. This implies that the food segment will expand by 16% y/y to NGN200.7bn and the beverage segment by 21% y/y to NGN139.7bn. The forecast for each segment is behind the H1'21 annualised run rate of NGN202.3bn and NGN140.6bn respectively.


Our gross margin estimate for FY'21 is lowered to 39.0% (from 41.5% previously), due to year-to-date escalations in international commodity prices and double digit food inflation in Nigeria. Nestle also has some exposure to fx volatility, as we estimate local to foreign raw material sourcing at a 70:30 ratio. Further down the P&L, our opex estimate is slightly adjusted to NGN57.9bn while our net interest forecast is raised by 12.8% to NGN5.2bn (vs. prior forecast of NGN4.6bn). For bottom-line, we have adjusted our effective tax rate to 35% (from 32%), which implies a new tax estimate of NGN24.4bn (from NGN21.3bn previously). The increase in effective tax, follows the trend noticed in Q1 '21 & Q2 '21, which leads to a PAT forecast of NGN45.3bn in '21f (largely unchanged).


For our valuation, we have rolled forward our valuation to 2022. This, alongside changes to our EPS forecasts, imply a new price target of NGN1,721.3 (higher by 15.2%). Our DCF valuation is driven by a risk-free rate of 12.5% and our adjusted beta of 0.8. At current levels, our price target implies a potential upside of 22.9%. We have consequently raised our recommendation to Outperform from Neutral. On multiples, Nestle trades at a '22f EV/EBITDA of 10.6x compared with 10.1x and 18.6x for peers in SSA and EM countries respectively. Year-to-date, Nestle shares have shed -7.0% vs. the ASI's decline of -1.9%.


Further contraction in gross margin in Q2 '21

Nestle Q2 '21 topline expanded by 19.1% y/y on the back of price increases and strong y/y beverage volumes. Q2 '21 sales were also ahead of our forecast of NGN75.1bn by 12.1%. Nestle's gross margin declined to 37.6% (from 41.3% in Q2 '20 and 39.8% in Q1 '21). Also, opex rose by 26.5% y/y to NGN15.7bn. Down the P&L, net interest expense increased by 328.1% y/y. PAT declined by -12.2% y/y.


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