Tuesday, May 3, 2016 1:43PM/ FBNQuest Research
Event: Nestle Nigeria reports Q1 2016 results
Implications: Upward adjustments to consensus estimates expected
Positives: Q1 sales and PBT up 31% y/y and 150% y/y respectively; gross margin expanded 499bps y/y to 49.2%; net finance costs down -86% y/y to N300m
Negatives: No obvious negatives.
Late last week, Nestle Nigeria (Nestle) reported impressive Q1 2016 results which showed a continued recovery on all key line items on the firm’s P&L. While sales of N36.1bn were up 31% y/y, PBT and PAT grew by much wider margins of 150% y/y and 126% y/y respectively.
Nestle’s topline recovery which began in Q2 2015 has been sustained for four consecutive quarters. According to management statements, sales were driven by y/y growth in both the Food and Beverage segments. Sales for Nestle’s Beverage and Food segments were up by 35% y/y and 29% y/y respectively.
We believe unit volume growth was the primary driver for topline improvement given flattish pricing. We also believe that Nestle is benefiting from relatively softer competition as importers continue to struggle to meet fx requirements. Given that Nestle sources around 65% of its raw material locally, we expected that the firm’s operations were likely to be better off compared with competition.
Also, Nestle’s parent, Nestle SA, has in the past provided fx credit lines for its local subsidiary, a situation we believe could re-occur if required. In addition to topline growth, a gross margin expansion of 499bps y/y to 49.2% and an -86% y/y decline in net finance charges boosted PBT growth which was up 150% y/y. We note that Nestle’s low reliance on imported raw materials continues to keep gross margin at healthy levels. We await management’s comments on all of these lines.
Sequentially, while sales declined by -17% q/q, PBT and PAT were both up by 3% q/q respectively. The q/q sales decline is not surprising given that Q4 is seasonally the strongest quarter for Nestle. Compared with our estimates, sales and PBT were both ahead by 11% and 35% respectively.
On an annualised basis, Nestle’s PBT of N8.7bn is currently tracking ahead of consensus full year 2016 PBT estimate of N31.7bn. As such, we expect upward revisions to consensus 2016E forecasts. Looking forward, although we believe consumer goods firms will struggle given the continued macroeconomic headwinds, we expect sector leaders to benefit from shrinking competition.
Additionally, firms with local manufacturing presence, a strong distribution network and access to fx are likely to turn in a good performance in 2016. At current levels, on our published estimates, Nestle shares are trading on a 2016E P/E multiple of 21.2x for 9% EPS growth in 2017E.
We rate the stock Neutral. Year to date, Nestle shares have declined -28.5% underperforming the NSE ASI by -16.0%.
Our estimates are under review.
Nestle Nigeria Q1 2016 results: actual vs. FBNQuest Research estimates (N millions)