June 2, 2020
By FBNQuest Research
Nestle Nigeria’s (Nestle) underlying performance for Q1 2020 fell slightly behind expectations with PBT missing by -5%. PAT missed by -13% because of a -14% negative surprise in tax charges. Despite a -9% y/y decline in the PBT, the results indicate that Nestle fared better than peers Unilever Nigeria (-53% y/y) and PZ Cussons Nigeria (6x y/y increase in pretax loss to -N2.4bn) over the same period. However, given the weak macroeconomic outlook on the back of the COVID pandemic, we have made deeper cuts to our earnings forecasts than the Q1 variance.
Specifically, we see earnings taking a hit from a slowdown in consumption, and higher input costs and other fx losses due to the weaker exchange rate. Besides these challenges, we see competitive headwinds strengthening in the seasonings business as new entrants continue to scale up their presence in this space. Indeed, sales from the food segment â€“ under which seasonings is the major driver – were down -9% y/y compared with mid-single to double-digit growth in recent quarters.
With these in mind, our 2020-22E EPS forecasts have been cut by an average of -13%. We have also factored in an upward adjustment to our equity risk premium assumption by 150bps to 7.5%. These adjustments lead to a -19% cut to our price target to N1,537. Year-to-date, Nestle shares have shed â€“32% and underperformed the broad market index by -27%. They are trading on a 2020E P/E multiple of 21x for EPS growth of c.21% in 2021E. At current levels, our price target represents a potential upside of 55%. As such we retain our Outperform rating on the stock..
PBT decline driven by higher opex y/y
Opex increased by 14% y/y to -N14.1bn, offsetting a 67bp increase in gross margin to 45% and a significant decline in net interest income to -N83m. On a sequential basis, PBT grew by 20% q/q, largely because of a 122bp q/q expansion in gross margin, and double-digit q/q decreases in opex and net interest expense. Relative to our forecasts, PBT missed by -5%, primarily due to a 6% negative surprise in opex.