NESTLE: Topline Recovery Likely to Persist in 2016; Remains Rated NEUTRAL


Thursday, March 31, 2016 3:43PM /FBNQuest Research

Slight increase to our PT; maintaining neutral rating
Nestle Nigeria’s (Nestle) Q4 2015 results showed strong y/y growth on both the PBT and PAT lines. However, we note that the strong PBT growth was helped by easy comparables given an unusually weak Q4 2014. Nestle’s Q4 PBT of N8.5bn was broadly in line with our estimate.

Going forward, we expect improving topline growth to partially offset the negative impact of a slight gross margin contraction (-100bp y/y), a higher tax rate and mid-single digit y/y rise in opex given higher inflation. As such, we have raised our 2016-17E EPS estimates by around 3.7% on average.

Our price target of N769.0 is up 5.3% and implies a potential upside of 9.9% from current levels. Nestle shares are trading on a 2016E P/E multiple of 24.1x for 8.8% EPS growth in 2017E. The shares have shed -18.6% ytd (vs. -11.3% for the NSE ASI). We reiterate our Neutral rating.

Improved y/y numbers in Q4 2015
While sales of N43.3bn were up 6% y/y, PBT and PAT grew by much wider margins of 99% y/y and 21% y/y respectively. Nestle’s topline recovery which began in Q2 2015 has been sustained for three consecutive quarters.

A gross margin expansion of 305bps y/y to 44.7% and an 80% y/y decline in net finance charges boosted PBT growth (up 99% y/y). The strong PBT growth was helped by easy comparables given an unusually weak Q4 2014.

Sequentially, while sales were up 3% q/q, PBT and PAT were both down by 17% q/q and 22% q/q respectively. Compared with our estimates, sales and PBT were both ahead by around 5% respectively.

Nestle proposed a final dividend of N19.00 which worked out to a dividend yield of around 3% at the time of the announcement.

Macroeconomic conditions are likely to remain challenging for most of the year. Fx-related issues continue to be a major concern. For Nestle, although a significant portion of its raw materials is sourced locally, the firm’s loan book has considerable fx exposure.

Management statements indicate that around 70% of the firm’s US dollar denominated loans will mature in 2016. From an operational viewpoint, we expect management to focus on cost efficiencies as well as expand its product portfolio.

Although we expect sales growth of around 6% in 2016E we anticipate a low-single digit decline in a PAT on the back of a higher tax rate.

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