Wednesday, August 2, 2017 11:10AM/Elixir Research
NESTLE Nigeria Plc recently made public its 2017 H1 results. The numbers showed an upbeat momentum in performance with strong recovery in profitability (from the 2016 low base and lower FX loss) and encouraging revenue growth, lifted by volume growth and low pricing base.
Margins made a major recovery, nearing historical level. The result appear marginally weak on a q/q perspective, however. NESTLE posted a major recovery in both margins and profitability backed by a sharp drop in FX losses and strong cost containment.
Net foreign exchange loss fell to ₦5.17 billion from ₦13.13 billion (H1’16) which had a major positive impact on PAT (to ₦16.55 billion vs. ₦0.54 billion in H1’16). On q/q, PAT was down 2.03% to ₦8.19billion vs. ₦8.36 billion.
Q2 standalone gross profit margin improved to 40.91% vs. 38.4% Q1’17 but thinned slightly in H1’17 by 104bps y/y to 39.65% from 40.69% (H1’16). Improvement in the FX environment and higher prices to calm cost pressures, supported the broad expansion in margins.
Despite the jump in operating expenses (H1’17: 21.86% and Q2’17: 10.67%), EBIT rose by 78.34% to ₦26.69 billion. With this, operating profit margin for both H1 and Q2 standalone rose 329bps y/y to 21.9% from 18.61% (H1’16) and 22.20% from 21.60% (Q1’17).
This improvement in margins are quite commendable as it signifies sustained cost containment strategies on the part of management. We note that H1’17 net finance cost came in lower at ₦2.24 billion due partly to the jump in finance income (from ₦0.82 billion to ₦5.15 billion) and also, a higher than anticipated FX loss.
RoE made a major recovery to 60.60% based on trailing 12M computations up from 25.67% for 2016FY. H1 revenue up 51.56% y/y to ₦121.92 billion but Q2 sales was marginally down by 0.63% q/q to ₦60.77 billion vs. ₦61.15 billion Q1’17.
According to management, there was strong volume growth from the Nigerian business, the much lower product pricing base of 2016 also contributed to the big boost in H1 revenue. However, volume growth was marginally weaker in Q2’17 (standalone) relative to Q1’17.
Estimates revised on increased volume growth and improved cost outlook
We have raised our 2017FY revenue estimate to ₦241.94 billion, implying a 33% y/y growth on price increase and higher volume sales expectation.
Conversely, cost outlook was lowered to 58% (cost-to-sales ratio) given the reduction in inflationary pressure. Similarly, we reduced the OPEX-to-sales ratio t0 18.2% (2016FY: 20.40%) but our net finance cost estimate was adjusted higher by 50bps. We now arrived at a lower 12M target price of ₦855.94 (previous: ₦960.55).
The cut in target price was due to adjustment of some other valuation parameters. Due to changing trends in consumer goods industry, we cut our terminal growth assumption from 10% to 8% and adjusted our beta factor higher to 1.06 with our market risk premium maintained at 5%.
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