Tuesday, March 6, 2018 /03:39 PM / Vetiva Research
revenue prints below estimate, down 7% q/q
top and bottom line up 34% and 326% y/y respectively
DPS of ₦27.50 declared (Total: ₦42.50, Vetiva: ₦35.00)
Fourth quarter berths with surprises….
Nestle Nigeria Plc released its FY’17 financial results showing a 34%
y/y growth in revenue to ₦244 billion, lagging Vetiva’s estimate of ₦249 billion. The deviation from our expectation was
driven by a surprising underperformance in Q4’17 where the top line came in 7%
lower q/q vs. a 5-year Q4 average growth rate of 10% q/q. Historically the
strongest quarter in the year, Q4 recorded the weakest contribution to revenue
in 2017 at 24% vs 5-year average of 28%. Operating profit margin also
deteriorated in the quarter, coming in 450bps lower q/q at 21% (Vetiva: 24%)
with further pressure coming from selling and distribution expenses.
Consequently, operating profit declined 23% q/q and 18% below our estimate.
Bottom line for the quarter was however supported by a sizable moderation in
net interest expense – Q4’17: ₦0.2 billion vs. Vetiva’s estimate: ₦2.9 billion and Q3’17: ₦2.7 billion (excluding FX losses). We note that with
improving operating cashflow, NESTLE consistently paid down its outstanding
debt obligations through the year – with total loans & borrowings down 59%
y/y. Given this, and a tax rate of 13% in the quarter (Vetiva: 35%), Q4’17
profit after tax printed 34% above our estimate and 67% higher q/q at ₦11 billion.
….but FY’17 results come in decent,
modest PAT outperformance
Earnings for the full year printed 9% above our estimate at ₦34 billion and much higher
than the dismal ₦8
billion recorded in FY’16. Revenue grew 34% y/y for the period, driven by a mix
of stronger pricing as well as mild recovery in volume rollout. Meanwhile,
whilst gross margin remained flat at 41%, EBIT margin was supported by a 106bps
improvement in operating expenses (as a % of sales). Further supported by a 47%
y/y decline in net interest expense, FY’17 PBT came in exactly in line with
Vetiva estimate and 117% higher y/y at ₦47 billion. The Board of Directors has recommended a
final dividend of ₦27.50,
bringing total dividend for FY’17 to ₦42.50 (Vetiva: ₦35.17, FY’16: ₦10.00) – translating to a 100% dividend payout and 3% dividend yield.
FY’18 earnings path remains
reassuring, TP revised higher
Whilst the unexpected pullback in Q4’17 revenue leaves us more cautious,
we believe further recovery in general demand levels, NESTLE’s strong
positioning in the food & beverage segments and volume ramp-up in its
recently commissioned 8,000 tonnes/annum Milo Ready-To-Drink beverage
production plant will drive an 11% y/y top line growth for FY’18. We also
estimate a 56% y/y decline in FY’18 net interest expense (FY’18: ₦4 billion, FY’17: ₦9 billion) – driven by a
lower debt balance, expected moderation in interest rates and continued
moderation in FX losses. With this, we forecast ₦41 billion profit after tax for FY’18 – implying 22%
y/y growth. Our 12-Month Target Price is revised higher to ₦1,140.79 (Previous: ₦925.63) and we maintain
our SELL rating. We note that the stock trades at a premium to peers, both on a
current (NESTLE P/E: 33.25x, Bloomberg EMEA Peers: 20.23x) and forward (NESTLE
P/E: 27.34x, Bloomberg EMEA Peers: 16.59x) basis.