Nestle Nigeria Plc 9M’18 results – Sturdy performance supported by lower costs…

Sturdy performance supported by lower costs…

Nestle Nigeria Plc 9M’18 results – Sturdy performance supported by lower costs…

Nestle Nigeria Plc (NESTLE) 9M’18 results – the firm grew its top line by 9.7% YoY to N203.1 billion in the period, in line with our estimate of N207.2 billion (-2.0% deviation). In the same vein, after-tax earnings advanced by 44.1% YoY to N33.1 billion, in line with our estimate of N33.5 billion.

Following its impressive 9M’18 earnings, the company proposed an interim dividend of N20.0/share (vs. N15.0/share in the prior year. This represents a dividend yield of 1.4% based on its last close price of N1,380.0.

Other highlights:

• In Q3’18, NESTLE’s revenue grew by 7.1% YoY to N67.8 billion. According to provided breakdown, the food segment, which contributes c.65% to top line, advanced by 12.4% YoY to N43.9 billion. This offset the shortfall in the beverage segment, which declined by 1.3% YoY to N23.9 billion in Q3’18.

• In the same vein, we note that cost of sales grew at a slower pace (+4.1% YoY) than revenue (+7.1% YoY). We believe this was impacted by the moderation in the cost of some key raw materials, notably sugar, which declined by 22.2% YoY relative to the same period in the corresponding year. All in, gross margin expanded by 1.6 ppts YoY and 1.1% ppts QoQ to 45.1%.

• Down the line, we observed operational efficiency, as EBIT margin was relatively flat in the period at 25.4% (Q3’17: 25.9%, Q2’18: 26.0%). On finance costs, lower FX related losses (-99.2% YoY) accompanied with a 2.0% YoY moderation in finance cost, drove overall finance costs for the period to N1.5 billion (-79.4% YoY). Together with finance income amounting to N551.7 million in the period, the company posted net finance cost of N990.8 million (-84.4% YoY).

• Overall, increased sales growth, manufacturing cost savings and significantly lower net finance costs boosted bottom line growth, as after-tax earnings surged by 81.3% YoY to N11.7 billion in the quarter.

Analyst take:

NESTLE’s ability to continuously drive top line growth despite weak consumer wallets is applaudable. For us, this speaks to consumer loyalty, as well as improved route-to-market strategies. In Q4’18, we expect increased volumes to continue to drive top-line growth, given the festivities during the period. On finance costs, we do not expect further material losses relating to FX, given the stability of the Naira – which should inherently lead to significant decline in finance costs, on a year-on-year basis. In sum, we expect the key drivers for earnings in the coming quarter to remain buoyant revenue growth and further cost savings. NESTLE currently trades at a P/E of 24.94x, a premium to Bloomberg MEA peer average of 19.64x. Based on our last review, our target price for the counter is N1,157.60 (SELL).

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