Nestle Nigeria shares continue decline, rating under review



Monday, May 04, 2015 9:49 AM / FBN Capital Research

Event: Nestle Nigeria reports Q1 2015 results

Implications: Downward adjustments to consensus estimates expected

Positives: Opex down 8% to N6.5bn

Negatives: Sales of N27.6bn down 18% y/y; finance costs up significantly y/y

Late last week, Nestle Nigeria (Nestle) reported Q1 2015 results which showed declines across all key P&L line items. Sales of N27.6bn declined 18% y/y, representing the first topline double-digit decline since we initiated coverage on the stock in 2012. We believe the weak topline suggests slow consumer demand as the nation prepared to go to the polls amidst high uncertainties. Beyond this, it also appears that topline growth continues to be challenged by increased competition across various product segments, insecurity in northern Nigeria and lower discretionary income.

Both PBT and PAT were down 51% y/y. A significant (230%) y/y rise in finance costs more than offset any benefits accruing from an 8% y/y decline in opex. A slight contraction in gross margins of 24bps y/y weighed on profitability to a lesser extent.

The gross margin movement is not surprising given that Nestle sources most of its raw materials locally. As such, for this line item, the devaluation of the naira would be of less concern compared with peers. However, we believe the devaluation of the naira is the primary driver for the increase in finance charges, given Nestle’s sizeable fx loan exposure. For opex, although the decline in Q1 2015 was the first in as many quarters, we do not believe it is sustainable because we now expect a new drive to win back potential lost market share.

Our channel checks reveal relatively flattish y/y pricing for key Nestle products.  As such we believe lower unit volumes were the primary driver for the soft topline trend. Nonetheless, we await management’s comments on all of these lines. Sequentially, sales, PBT and PAT all declined by 32% q/q, 19% q/q and 45% q/q respectively. Although Q4 is seasonally strong, we must stress that this time around the results were uncharacteristically weak. Compared with our estimates, sales and PAT were behind our N36.4bn and N5.5bn forecasts by 24% and 54% respectively.

On an annualised basis, Nestle’s sales and PBT track well behind consensus full year 2015 estimates of N156.3bn and N28.9bn respectively. As such we expect downward revisions to consensus 2015E estimates. We also believe this set of results may spark a sell-off and consequent re-pricing of the stock.

Given its position as a bellwether in the sector, we believe the outlook for Nestle is likely to be challenging as we do not see a quick turnaround in the consumer environment.

At current levels, on our published estimates, Nestle shares are trading on a 2015E P/E multiple of 31.7x for 13% EPS growth in 2016E. Year to date, Nestle shares have declined -6.1% compared with the NSE ASI (+0.1%).

We rate the stock Underperform.  

Our estimates are under review.


Nestle Nigeria Q1 2015 results: actual vs. FBN Capital Research estimates (N millions)





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