August 6, 2019/Cordros Report
Results summary (Q2/H1-19): NESTLEs reported H1-19 EPS of NGN33.11 was up 22.3% y/y, driven by higher revenue, lower input costs, and a net finance income (vs. loss the previous year). When annualized, H1-19 EPS, came in ahead of the market’s expectation for 2019FY (NGN62.52) and Cordros’ estimate of NGN65.72. Q2-19 revenue rose by 4.9% on the back of improved volume outturn from the Beverages segment (+9.5% y/y), following increased demand during the Ramadan period. Food revenue growth, however, was much slower than expected, rising only by a tamer +1.6% y/y — lowest growth on record — compared to average growth of 8.7% y/y over the previous four quarters. Our channel checks revealed that there was a c.6% increase in the price of Maggi at the start of Q2, so the slower growth suggests that competitive pressures intensified in the period with the proliferation of lower-priced brands. Notably, the contribution of the Beverage segment to total revenue rose to c.40% – highest since Q1-16. On a quarter-on-quarter basis, however, revenue declined marginally by 0.03% q/q, weighed on by a 5.9% q/q decline in the Food segment. This is reflective of frontloading that must have taken place ahead of the Maggi price increase, leading to lower volume outturn in Q2 and likely explains the supernormal 16.3% q/q growth in Q1-19.
Q2-19 Revenue Below Estimate; Estimate For 2019E Is Revised Lower: NESTLEs Q2-19 revenue of NGN70.94 billion was below our estimate for the period (-4% variance), following continued weakness in the Food segment. Our channel checks indicate growth in H2-19 is expected to be lower compared to H2-18 amidst continued weakness in the consumer wallet, and the absence of any catalysts to stimulate demand (the hike in the National Minimum Wage is not likely to be implemented in 2019FY). Additionally, December is known as the two-week month as (1) NESTLEs factories shut down for two weeks, and (2) distributors are away on Christmas holidays. Overall, we revise 2019E revenue lower by 2.6% to NGN283.95 billion.
Estimates and Valuation: The net impact of the changes to our model is 2.3% increase to our 2019E EPS estimate to NGN67.23 (from NGN65.72 previously) but a downward revision in our TP to NGN1,175.79 (previously NGN1,189.91) — higher tax assumption impacted WACC in DCF valuation –, while maintaining a ‘HOLD’ rating. On our estimates, the stock is trading at forward (2019E) P/E and EV/EBITDA multiples of 18.9x and 11.6x, premiums to 17.0x and 11.1x, respectively, for its Middle East & Africa peers.