Stock & Analyst Updates | |
Stock & Analyst Updates | |
1785 VIEWS | |
![]() |
Wednesday,
October 30, 2019 /12:34PM / By ARM Research / Header
Image Credit: Independent Newspaper Nigeria
Nestle released 9M 19 result yesterday, with reported EPS expanding
11.2%YoY to N46.48 driven largely by the absence of impairment charge, which
created a high base for input cost same period in the prior year. However, the
quarterly numbers revealed a different story, as the ongoing competition in the
seasoning market coupled with new cost pressures left earnings lower over Q3
19, with EPS declining 9.1% YoY to N13.37. Relative to our estimate, revenue
fell short by 4.7%, while higher than expected cost estimate and taxes drove
material deviation in PAT. On the 9M numbers, Nestle declared an interim
dividend of N25 per share. Our full year dividend expectation of N68.75
translates to a dividend yield of 5.6% using the last closing price.
Disappointing Sales
Points to Intense Competition in Seasoning Market
The revenue picture over Q3 19 was quite disappointing
with revenue ticking up by just 2.4% over the period - the least YoY revenue
growth recorded since Q1 15. This largely reflects the increasing competition
in the seasoning market from the smaller brands - given the seasoning accounts
for almost 40% to 50% of the company's product portfolio by our estimate.
Consequently, revenue from food segment was flat over the period (-0.9% YoY to
N43.6 billion). On the flipside the company seems to be holding its grip in the
beverage segment, with sales expanding 8.3% YoY to N25.9 billion - giving a
mild boost to overall sales.
Surprisingly, Cost
Pressure Re-surfaces
Unlike H1 19 wherein Nestle reported expansion in
gross margin excluding the base effect from impairment cost booked over 2018,
Q3 standalone was bedevilled by cost pressure, with gross margin contracting
153bps YoY to 43.5% over Q3 19. The input cost (+5.2% YoY to N39.2 billion)
pressure is surprising, as our channel checks reveals that prices of key raw
materials were down over the period. Coupled with a relatively flat operating
expense (+1.9% YoY), EBIT margin weakened further by 144bps to 23.9%. PBT was
down by 0.6% to N16.1 billion and PAT down by 9.1% YoY to N10.6 billion
mirroring higher taxes – with effective tax at 34.3% (+620bps YoY).
Cash Position Drops
Q3 19 saw receivables days increase to 75 days from an average of 50
days over the last 7 quarters, which gives further credence to the company's
challenge in growing sales. For us, we believe the need to support revenue
growth amidst the challenging environment drove the increase in receivable
days. On that note, trade receivables went up by N17.1 billion between Q1 and
Q3 19 with cash balance dropping to N12.6 billion from N33 billion reported for
Q1 19.
Nestle's Q3 performance raises some concerns since we expected its brand
loyalty to support sales growth above mid-single digit, as seen in prior years.
For us, on expectation of flat pricing in a bid to support volumes amidst
intense competition from smaller brands, we worry about what the future holds
for the two top players in the seasoning market (Nestle and Unilever).
Nonetheless, it is fair to state that Nestle's history of being a defensive
stock leaves the company as our top pick in the consumer space. We have an OVERWEIGHT
rating on Nestle with a FVE of N1447.39 which presents 18% upside using
last closing price. Nestle trades at a P/E of 20.7x which is a premuim to
Bloomberg MENA peer average of 20.6x, respectively. Albeit, relative to other
Nestle peers, it's at a significant discount ( Nestle Pakistan: 35.18x, Nestle
India:85.5x. Nestle Malaysia: 51.9x, Nestle SA: 33.81x).
Research 234 (1) 2701653 research@armsecurities.com.ng
Related
News
1. NESTLE
Declares N36.84bn PAT in Q3 2019 Result,(SP:1220.00k)
2. Nestle Nigeria Plc - Absence of One-off Cost Magnifies
Gross Profit
3.
NESTLE Declares N12.85bn PAT in Q1 2019
Results,(SP:1520.00k)
4. NESTLE Declares N43.01 bn PAT in 2018 Audited Results;
Proposes N38.50k Final Dividend
5. NESTLE Notifies of the Company's Closed Period
6. Consumer Goods Sector - NESTLE Tops on EPS as ENAMELWA
Tops on PE Ratio
7. NESTLE Declares N33.118 bn PAT in Q3 2018
Result,(SP:1500.0k)
8. Nestle Nigeria Plc Announces Board Meeting and Closed
Period
9. NESTLE Declares N21.46 bn PAT in Q2 2018
Results,(SP:1560.0k)
10. Nestle Nigeria Q2 2018- Sales Up by 12% YoY to N67.8bn
11. Nestle Nigeria Achieves an Impressive Earnings Performance
in Q2 2018 Results