Monday, July 31, 2017 12:45PM/ Vetiva Research
· H1’17 revenue berths in line with estimates, up 52% y/y
· Earnings recover from H1’16 low base on lower FX loss, stronger margins
· FY’17 EPS revised slightly higher on improved cost outlook
Revenue in line with estimates following strong Q2
Maintaining the run rate from Q1’17, NESTLE reported another strong topline growth in Q2’17 with cumulative revenue for the H1’17 period up 37% y/y to ₦121.9 billion (Vetiva: ₦121.4 billion).
Whilst the lower pricing base from H1’16 was a major driver of this robust performance, Nestlé’s parent company had also stated that volume growth in its Nigerian subsidiary was likewise strong.
The Food segment remained the better performing sector, with revenue rising 61% y/y compared to 37% y/y from Beverages.
Stronger margins, lower FX losses drive astronomical recovery
Supported by an improving FX environment and price increases taken to mitigate cost pressures, gross margin continued to firm up in the second quarter (Q2’17: 41% vs. Q1’17: 38%), with H1’17 gross margin coming in just in line with our estimate at 40%, albeit slightly below the 41% recorded in H1’16.
However, amidst sustained operating cost containment, H1’17 operating profit margin rose 329bps y/y to 22%. With this, EBIT rose 78% y/y, 5% above our estimate.
Whilst finance costs declined 50% y/y to ₦7.4 billion in H1’17, the figure came in far above our ₦3.0 billion estimate amidst higher than expected FX losses in Q2’17.
With its financial liabilities carried at amortized cost, we attribute the FX loss to the difference between the carrying cost and exchange rate at the time of repaying some of its dollar denominated borrowings – NESTLE recorded ₦20.8 intercompany loan repayment in its cash flow statement.
Nonetheless, supported by the ₦5.1 billion interest income on bank deposits, net finance cost moderated significantly y/y to ₦2.2 billion (H1’16: ₦14.1 billion).
Given the foregoing, NESTLE recorded a strong bottom line rebound from the low base in H1’16: ₦536 million, with PAT up to ₦16.5 billion (Vetiva: ₦16.8 billion).
FY’17 EPS, TP revised slightly higher on improved cost outlook
With revenue largely in line with our estimate, we have retained our FY’17 estimate at ₦241 billion – implying a 33% y/y growth. Whilst we revise our net interest expense estimate higher to reflect the negative surprise in Q2’17, we reduce our OPEX to sales ratio from 19.6% to 18.4% on an improved cost outlook.
As such, FY’17 EPS estimate is reviewed slightly higher to ₦42.15 (Previous: ₦41.62) and our 12-month target price to ₦819.95 (Previous: ₦818.65).