NESTLE: Cautious Optimism for 2016; Neutral Rating Maintained


Wednesday, June 01, 2016 9:12AM /FBNQuest Research

Maintaining Neutral rating 
Nestle Nigeria’s (Nestle) Q1 2016 results surprised positively, with earnings up 126% y/y and ahead of our forecast by around 40%. Key drivers were a strong topline growth and gross margin expansion. A decline in net finance charges also supported improved profitability.

Looking ahead, although we expect improved sales through the year, we contend that a weakening economy and a higher inflationary environment are likely to curtail sales growth over the next three quarters.

As such, we forecast a modest sales growth of c.8% y/y for 2016, driven mainly by unit volume growth, vs. 18% y/y delivered in Q1. We expect flattish pricing through the year as the firm is likely to struggle to pass on escalating production costs. We have raised our gross margin estimate by around 300bps to 47% to reflect benefits coming from Nestle’s price-volume mix strategy.

In Q1, gross margin expanded by around 500bps y/y to 49%. Both topline growth and the upward adjustment in gross margin are likely to offset rising distribution costs, mainly due to higher petrol prices.

Last month, the federal government raised petrol prices by c.70% due to fx constraints. Given these adjustments, we have raised our 2016-17E EPS estimate by around 8.7% on average. Our price target of N796.0 is up 3.5% and implies a potential upside of +1.4% from current levels.

We note that Nestle shares are up 28% over the last one month on the back of renewed interests by domestic investors mainly. As such, we see limited upside in the stock. Nestle shares are trading on a 2016E P/E multiple of 24.0x for 1.3% EPS growth in 2017E.

The shares have shed -8.8% ytd, underperforming the NSE ASI by around 5%. We reiterate our Neutral rating.

Positive surprises in Q1 2016
Nestle’s Q1 2016 results showed a continued recovery on all key line items on the 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. Sales for Nestle’s Beverage and Food segments were up by 35% y/y and 29% y/y respectively.  

We also believe that Nestle benefitted from relatively softer competition as importers continue to struggle to meet fx requirements. 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.

Sequentially, PBT and PAT were both up by 3% q/q respectively.

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