Tuesday, June 31, 2018 /1:25PM/ARM Research
Nestle Nigeria (Nestle) first half 2018 earnings was remarkable with EPS of N27.07 (+30% YoY) outperforming our estimate of N25.78 (+5.0% deviation). The sturdy earnings performance was on the back of the confluence of stronger revenue (+11% YoY to N135.3 billion), expansion in EBIT margin (+187bps YoY to 23.8%) and lower finance costs (-76.4% YoY to N1.7 billion).
EPS performance in the just released quarter was impressive as it more than doubled performance in the corresponding period of the prior year to print at N16.21 (vs. ARM forecast of N14.92). We note that the deviation of our forecast from actual was largely due to lower than expected finance costs.
In terms of drivers, Q2 18 EPS growth (+59.6% YoY) benefited from higher revenue of N67.8 billion (+11.6% YoY) reflecting growth in its food (+11% YoY to N42 billion) and beverage (+12.5% YoY to N25.7 billion) segments. Decomposing growth, price checks revealed a modest 2% price increase for its foodproducts, hence we attribute much of the growth therein to volume.
We link the higher food volume growth to the just concluded Ramadan season which likely drove demand for Maggi whose popularity is predominant in the North. On its beverage business, our price check revealed average price increase of 7%, indicating volume growth on that end.
Benefitting from lower commodity prices and improved dollar availability, Nestle reported a slower rise in cost of sales of N38 billion (+5.9% YoY) relative to revenue which led gross margin to expand 305bps YoY to 44% (vs. Q1 18: 38.2%; Q4 18: 42.4%; Q2 17: 40.9%). To add, breakdown revealed that the company reported an impairment loss of N1.04 billion on PPE1 related to its food business which was classified in the cost of sales thus limiting gross margin expansion – excluding the loss, gross margin would have printed at 45.5%.
Additional commentary from the company didn’t reveal the food division that was impaired. We recall that Nestle in its Q1 18 result recorded an impairment loss of N3.4 billion on its beverage business – related to its water plant in Abaji, Abuja.
In the review period, operating expenses of N12.2 billion (+7.2% YoY) rose at a slower pace than revenue thus driving a 75bps moderation in OPEX to sales. Against this backdrop alongside gross margin expansion, EBIT margin expanded 380bps with related profit higher by 30.7% to N17.6 billion, in line with our estimate of N17.8 billion.
As stated earlier, the miss in our EPS forecast stemmed from lower than expected finance costs with Nestle reporting N586 million lower than our forecast of N1.2 billion. Precisely, we had expected the company to commence payment of some of its due FX obligations however, it didn’t materialize as breakdown of its cash flow statement revealed that no loans were repaid in the review quarter. The confluence of lower finance cost and higher finance income of N1.2 billion – supported by its cash position of N25.9 billion (+4.9% QoQ) – ensured a net finance income of N597 million.
Nestle trades at a current P/E of 30.8x vs 26.5x for Bloomberg Middle East and Africa peers.
Our model is under review.