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Nestle Nigeria Reports Q2 2017 Results; Records Net FX Loss of N4.1bn

Proshare

Friday, July 28, 2017 11.55AM / FBNQuest Research

Event: Nestle Nigeria reports Q2 2017 results

Implications
: Positive reaction expected by the market

Positives
: Q2 sales up 37% y/y; PBT and PAT of N10.2bn and N8.2bn compare with losses before and after tax of –N7.8bn and –N6.2bn in Q2 2016 resp.

Negatives
: Net fx loss of -N4.1bn reported in Q2

This morning, Nestle Nigeria (Nestle) reported Q2 2017 results which showed that sales were up 37% y/y to N60.8bn. PBT and PAT came in at N10.2bn and N8.2bn, compared with losses before and after tax  of –N7.8bn and –N6.2bn respectively.

Topline y/y growth was boosted by double-digit price increases which mainly occurred in Q4 2016. We estimate prices across board were raised by around 35-40% on average over the last year. Q2 profitability was boosted by a gross margin expansion of 717bps y/y to 40.9% which we primarily attribute to relatively cheaper access to fx for imports.

Surprisingly, Nestle reported an fx loss of -N4.1bn in Q2 (-N5.7bn in H1 2017) which compares with an fx-related loss of –N13.1bn in Q2 2016. Sales for both Nestle’s Food and Beverage categories were up by around 40% y/y to N37.9bn and N22.9bn respectively.

Sequentially, while sales were flattish q/q, PBT declined by 29% q/q. The fx-related loss of –N4.1bn was the primary driver behind the PBT decline on a q/q basis. PAT came in flattish q/q due to a lower effective tax rate of 19.5% in Q2 compared with 41.5% in Q1 2017.

Compared with our forecasts, Q2 sales beat our N57.6bn estimate by 5.5%. However, PBT was broadly in line. A positive surprise on the gross margin line was offset by negatives on both opex and net finance expense lines. PAT beat by 30.5% due to a lower effective tax rate of 19.5% compared with 38.0% that we had modelled.

On an annualised basis, Nestle's H1 2017 sales and PBT are tracking ahead of consensus sales and PBT estimates of N238.7bn and N43.2bn respectively. As such, we expect upward adjustments to consensus estimates 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. Given recent fx interventions by the central bank, we believe imported competition will ultimately start to stage a comeback, possibly in H2. Nestle shares have gained +18% ytd, underperforming the ASI by 21%.

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

Nestle Nigeria Q2 2017 results: actual vs. FBNQuest Research estimates (N millions)
 

Q2 2017

H1 2017

 

Actual

Y/y

Q/q

FBNQuest est.

Act. vs      FBNQuest est (%)

Actual

Y/y

FBNQuest est.

Act. vs      FBNQuest est (%)

Sales

60,768

37.1%

-0.6%

57,606

5.5%

     121,920

51.6%

118,757

2.7%

cost of sales

-35,909

22.3%

-4.7%

-37,444

-4.1%

-73,577

54.2%

-75,112

-2.0%

Gross profit

24,860

66.3%

5.9%

20,162

23.3%

     48,343

47.7%

43,645

10.8%

-gross margin

40.9%

717bps

251bps

35.0%

591bps

39.7%

-104bps

36.8%

290bps

Operating expenses

-11,370

26.3%

10.7%

-10,369

9.7%

-21,644

21.86%

-20,643

4.8%

Other income

0

n/a

n/a

0

n/a

0

n/a

0

n/a

Operating profit

13,490

126.9%

2.1%

9,793

37.7%

26,699

78.3%

23,003

16.1%

Net int. and similar chgs

-3,313

-76.0%

n/a

330

n/a

-2,240

-84%

1,403

n/a

PBT

10,177

n/a

-28.7%

10,123

0.5%

24,460

2628.5%

24,405

0.2%

-PBT margin

16.7%

3442bps

-661bps

17.6%

-83bps

20.1%

1895bps

20.6%

-49bps

Tax

-1,988

n/a

-66.4%

-3,847

-48.3%

-7,912

2093.7%

-9,770

-19.0%

Tax rate

19.5%

-197bps

-2194bps

38.0%

-1847bps

-32%

-7257bps

40.0%

-7238bps

PAT

8,189

n/a

-2.0%

6,276

30.5%

16,548

2988.4%

14,635

13.1%

-PAT margin

13.5%

3130bps

-19bps

10.9%

258bps

13.6%

1291bps

12.3%

125bps

Source: NSE, FBNQuest Research estimates

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