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Nestle Nigeria Plc – Gross Margin Contracted to 38.4% in Q1 2017

Proshare

Friday, April 28, 2017/ 4:30PM / FBNQuest Research 

Event: Nestle Nigeria reports Q1 2017 results
Implications: Positive reaction expected by the market
Positives: Q1 sales and PAT were up y/y and q/qNegatives: Gross margin contracted -1081bps y/y and -622bps q/q to 38.4% 

Today, Nestle Nigeria (Nestle) reported its Q1 2017 results. Sales grew markedly by 69% y/y to N61.2bn while PBT grew by 64% y/y to N14.3bn. Nestle’s topline recovery which began in Q2 2015 has been sustained for eight consecutive quarters. Unit volume growth and y/y price increases both contributed to the strong topline growth. We however believe that price increases across all categories are the primary drivers to the topline growth delivered.

We estimate prices across board were raised by around 35-40% on average over the last year. Unit volume growth has been aided by a decline in competition from imported products due to fx supply constraints. Sales in Nestle’s Food category were up 92.6% y/y to N40.3bn while sales for the Beverage segment also grew 46% y/y to N21.4bn. The strong topline growth more than offset the negative impact from a gross margin contraction of -1081bps y/y to 38.4% and a double-digit y/y rise in opex. Nestle printed a net finance income of N1.1bn compared with a net finance charge of –N300m in the corresponding quarter of 2016.

A strong finance income of N2.6bn offset an fx-revaluation loss of N1.0bn. PAT was up 25% y/y to N8.4bn. Overall, Nestle’s Q1 performance is very strong. Sequentially, sales grew by 16.6% q/q. A gross margin contraction of -622bps q/q led to a PBT decline of -11% q/q. However, the firm posted PAT growth of 12% q/q due to a comparatively lower tax rate of 41.5% vs. 53.6% recorded in Q4 2016.  

Compared with our forecasts, Q1 sales beat our N42.6bn estimate by 40%. PBT beat more significantly (87%) offsetting a weaker-than-expected gross margin and a negative surprise on the opex line which came in 15% higher than we were modelling. The variance on the PBT is largely due to the strong topline recorded. On an annualised basis, Nestle's Q1 2016 sales and PBT are tracking significantly ahead of consensus sales and PBT estimates of N198.9bn and N57.1bn respectively. Upward adjustments to consensus estimates are expected on the back of these numbers. 

Looking ahead, we expect Nestle, like its peers, to continue to contend with the macroeconomic headwinds in 2017. In our view, sector leaders like Nestle are likely to fare better compared with competition. However, recent fx interventions by the central bank (if continued) could see imported competition staging a comeback, possibly in H2. Nestle shares have declined -10% ytd underperforming the ASI by 6%.  

We rate the stock Neutral. Our estimates are under review.  

Nestle Nigeria Q1 2017 results: actual vs. FBNQuest Research estimates (N millions) 

 

Q1 2017

 

Actual

Y/y

Q/q

FBNQuest est.

Actual vs FBNQuest est. (%)

Sales

61,152

69.3%

16.6%

     42,634

43.4%

cost of sales

-37,668

105.3%

29.7%

-25,581

47.3%

Gross profit

23,483

32.1%

0.4%

17,054

37.7%

-gross margin

38.4%

-1081bps

-622bps

40.0%

-160bps

Operating expenses

-10,274

17.3%

-2.6%

-8,953

14.7%

Other operating income

0

n/a

n/a

          -  

n/a

Operating profit

13,210

46.4%

2.9%

8,101

63.1%

Net int. and similar chgs

1,073

n/a

-66.5%

-447

-340.0%

PBT

14,283

63.7%

-11.0%

7,653

86.6%

-PBT margin

23.4%

-79bps

-725bps

18.0%

540bps

Tax

-5,924

189.8%

-31.1%

-2,449

141.9%

Tax rate

41.5%

1805bps

-1215bps

32.0%

948bps

PAT

8,359

25.1%

12.3%

5,204

60.6%

-PAT margin

13.7%

-482bps

-52bps

12.2%

146bps

Source: NSE, FBNQuest Research estimates

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