March 11, 2020
Outperform rating maintained
Nestle Nigeria’s (Nestle) earnings declined -11% y/y to N8.8bn, missing our estimate by around 42%. The primary driver for this variance was a negative surprise in operating expenses which came in 23% above our estimate. Through 2019, management heavily invested in sales promotion (up +15% y/y to N15.5bn) and advertising (up +10% y/y to N5.0bn). We expect marketing spend to remain at similar levels for most of 2020.
However, we have cut both our sales and earnings estimates for 2020E by around 6% because of the on-going global health pandemic which is likely to weigh on local consumption over the next quarter. Our new price target of N1,900 is down by a similar magnitude. We note that consumers were already faced with headwinds such as higher value added tax rates (up 50% to 7.5% in February) and an impending hike in electricity tariffs. We project sales and earnings growth of 5% y/y and 12% y/y respectively for 2020E.
Volatile global oil prices, which have shed -45% ytd, pose by far the largest macro risk to our forecasts. In the event that the oil output dispute between Saudi Arabia and Russia persists, we expect the central bank to re-introduce administrative measures to limit fx accessibility -a replay of events in 2016/17. Nestle shares have shed -18% over the last month (ASI: -12.2%). At current levels, our price target represents a potential upside of 87%.
As such we retain our Outperform rating on the stock. In our view, the market sell-off presents an ideal opportunity for investors. Nestle shares are trading on a 2020E P/E multiple of 15.8x for EPS growth of c.4% in 2021E.
Q4 PBT of N14.6bn grew 25% y/y on the back of solid sales growth
In Q4, sales and PBT of N72.7bn and N14.6bn both grew by 15% y/y and 25% y/y respectively. PAT however declined by -11% y/y to N8.8bn as a result of a higher effective tax rate of 39.3% vs. 15.2% in the corresponding period of 2018. On a full year basis, Nestle’s sales of N284.0bn were up 7% y/y, helped by exports to Burkina Faso, while PAT of N45.7bn, up 6% y/y, missed consensus’ N48.8bn forecast. On a q/q basis, PBT fell -10% q/q largely because of a double-digit rise q/q rise in operating expenses which more than offset gains on the gross profit and net finance expense lines. Nestle proposed a final dividend of N45.00 per share (vs. our N40.00 forecast) which implies a yield of around 4% at current levels and represents a 17% y/y increase compared with the dividend paid in 2018.