November 19, 2019
Outperform rating maintained
Nestle Nigeria’s (Nestle) earnings of N10.6bn declined by around -9% y/y and missed our forecast by 20%. In Q3, sales for Nestle’s Beverage segment grew by 8% y/y to N25.9bn and continues to grow in importance. Besides this, the results did not show any real improvements from H1. Sales growth (up just +2.4% y/y in Q3) remains sluggish while cost price increases are difficult to push to consumers given the continued strain on consumer wallets. Looking forward, we project sales growth of <10% y/y over the next two years.
We however cut our earnings forecasts by around 5% to reflect our expectations of higher production and operating expenses. The overall impact is a 4% reduction to our EPS outlook over the 2019-20E period. We forecast EPS growth of 21% for 2019E. Our new price target of N1,378.0 is down 11% and implies a potential upside of 20% from current levels. Additionally, we believe the stock is in oversold territory as it has shed -23% year-to-date, underperforming the NSE ASI by 6%. As such, we retain our Outperform recommendation. Nestle shares are trading on a 2019E P/E multiple of 17.5x for EPS growth of c.4% in 2020E. These compare with a 2019E P/E multiple of 11.9x for an average EPS growth of 16% in 2020E that consumer goods peers are trading on.
Q3 PBT of N16.1bn came in flattish y/y
In Q3, sales and PBT of N69.4bn and N16.1bn both came in flattish y/y. However, PAT declined by around -9% y/y to N10.6bn because of a higher effective tax rate of 34.3% vs. 28.1% in Q3 2018. Gross margin contracted by -153bps y/y to 43.5% while operating expenses of N13.6bn were flattish y/y. On a q/q basis, while sales were flattish, PBT and PAT both fell by -24% q/q and -21 q/q respectively.
The major driver behind the relatively weaker q/q performance was a -525bp q/q contraction in gross margin which more than offset an improvement on the net finance expense line. Compared with our forecasts, sales and PBT both missed by c.4% and 15% respectively. Nestle proposed an interim dividend of N25.00 per share (vs. our N20.00 forecast) which implies a yield of around 2% and represents a 25% y/y increase compared with the interim paid in 2018.