Tuesday, November 07, 2017 12:56PM /Vetiva Research
· Revenue prints in line with estimates, up 43% y/y
· PAT 9% below estimate on higher FX losses
· Strong cash position supports deleveraging strategy
· FY’17 EPS revised lower to reflect FX losses
9M’17 revenue in line, PAT marginally below estimate
Still strongly supported by higher pricing and modest volume recovery, NESTLE reported a 43% y/y growth in revenue for the 9M’17 period, with top line (₦185 billion) largely in line with our estimate. With cost of sales and operating expenses marginally better than we expected (2% and 1% deviation respectively), 9M’17 operating profit rose 70% y/y (flattered by the cost-bitten base from prior year) and 7% ahead of our estimate at ₦43 billion.
The major sour spot came from net finance expense (9M’17: ₦8.6 billion vs. Vetiva: ₦2.6 billion), bloated by persistent foreign exchange losses on dollar denominated loans amounting to ₦11 billion. We attribute these losses to FX differential between carrying costs of the loans (believed to be CBN rate of ₦305) and settlement rate at repayment date (at NAFEX rate of c.₦365).
Overall, 9M’17 profit after tax printed at ₦23 billion, a remarkable improvement from ₦485 million recorded in 9M’16 but 7% below our estimate. The Board of Directors has declared an interim dividend of ₦15.00 per share (FY’16: ₦10.00/share).
Cash to the rescue – Deleveraging to protect from future volatility
With the currency devaluation in 2016 significantly bloating dollar denominated liabilities, most Consumer Goods companies have sought to reduce their FX exposure by raising equity capital to pay down these loans.
However, given its strong cash generation from operations, NESTLE repaid ₦31.3 billion of its foreign intercompany loans in the last two quarters, reducing the loan balance which stood at ₦46.5 billion as at FY’16. With at least ₦15 billion FX loans outstanding, NESTLE will likely continue this deleveraging strategy over the coming quarters even as risks remain stacked against foreign currency liabilities.
That said, whilst we note that cash from operations has fallen to a recent low of ₦22 billion (FY’16: ₦61 billion), we do not expect NESTLE to raise equity capital in the near term, noting the company’s preference for internal debt restructuring, its accommodating debt to equity ratio of 0.63 and strong interest cover (12.0x vs. coverage average: 5.4x).
FY’17 EPS revised slightly lower on FX losses
We revise our FY’17 revenue estimate 3% higher to ₦249 billion – implying a 37% y/y growth – and review our operating margin estimate to 23% (Previous: 22%) – supported by contained costs.
Also, given the ytd run rate, we increase our net finance expense for FY’17 to ₦12 billion to reflect the higher than expected FX losses and lower interest income. Our FY’17 PAT estimate is thus revised lower to ₦31 billion (Previous: ₦33 billion) and our 12-month target price lower to ₦817.96 (Previous: ₦819.95).