Wednesday, May 03, 2017 4:55 PM /FBNQuest Research
Neutral rating maintained
Nestle Nigeria (Nestle) posted earnings growth of 25% y/y in Q1 2017 thanks to a strong topline growth of 69% y/y.
This topline growth completely offset negatives on both the gross margin and opex lines. Price increases across all categories were the primary drivers behind the topline growth delivered.
We estimate prices across the 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.
Q1 earnings beat our forecast soundly, mainly due to positive surprises on the sales and finance income lines. Nestle also posted an investment income of N2.6bn.
Over the coming quarters, we expect the impact of price increases which took place in 2016 to moderate.
Additionally, imports (competition) may stage a comeback in H2, limiting unit volume growth for the year.
Therefore, we have raised our sales growth forecast modestly for 2017E to 30% y/y. This offsets a -300bps cut to our gross margin estimate for the period.
Our EPS estimate over the 2017-18E period is up by 33%. Our new price target of N750.0 is up by only 7% because we have raised our risk-free rate by 100bps to 15.5% given higher yields on federal government debt instruments.
From current levels, our price target implies a potential upside of c.1%. Nestle shares are trading on a 2017E P/E multiple of 23.7x for 83% y/y average EPS growth over the 2017-19E period. Ytd, Nestle shares have shed -8.0% (ASI: - 3.4%).
We have retained our Neutral rating.
Q1 PBT up +64% y/y on the back of strong topline growth
Q1 2016 sales grew markedly by 69% y/y to N61.2bn while PBT grew by 64% y/y to N14.3bn.
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 N20.9bn.
The strong topline growth more than offset the negative impact of a gross margin contraction of -1081bps y/y to 38.4% and a doubledigit y/y rise in opex.
Sequentially, sales grew by 16.6% q/q while PBT declined by -11% q/q. Compared with our forecasts, Q1 sales beat our N42.6bn estimate by 43%.
PBT beat significantly (87%): sales more than offset a weaker-than-expected gross margin and a negative surprise on the opex line which came in 15% higher than we were modelling.