30 th September 2019 Arthur Steven Asset Management Limited NESTLE VALUATION REPORT
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EARNINGS UPDATE│NESTLE|H1:2019
Nestle Nigeria Plc released its Half-year (HY) 2019
financial statement showing an increase of 4.89%
year-on-year (YoY) in revenue ₦141.91 billion while
the Profit Before Tax (PBT) grew marginally by
22.32% YoY to ₦26.25 billion.
Nestlé Nigeria is a food processing group organized
primarily around 2 families of products:- foods
(62.2% of net sales): cereals (Nestlé Nutrend,
Nestlé Cerelac and Nestlé Golden Morn brands),
dairy products (Nido), chocolates and
confectionery (Chocomilo) and seasoning products
(Maggi); - beverages (37.8%): instant coffee
(Nescafé brand), bottled water (Nestlé Pure Life), chocolate beverages (Milo), etc.
Share Price Performance
Year-to-Date, Nestle share price has depreciated by
22.88% with year highest price of N1617.10 and year
lowest price of N1070.00.
Source: ASAM research
Source: ASAM research
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Revenue growth is expected to slow.
In the full year of 2018 revenue expanded by 9.1% YoY. However, we noticed in the last
quarter of 2018, growth in the food segment slowed down which is unusual being the
festive season with Q4 18 revenue to FY 18 revenue printing at 24% relative to average in
the last six years (excl. 2017) of 28%. To add, product prices
remained low. however, slow growth in the food segment persist
in the first half of 2019, that said we foresee this trend in the
company’s income to continue during the remaining half of the
year. In the coming years we expect slower growth in volumes and
lower prices to drive a modest revenue growth expectation. Thus,
we expect revenue to grow by 9.82% YoY to N292.4billion. Over
our forecast period (2019F – 2023F), we expect revenue growth of
8.4% (5-yr CAGR) as we remain optimistic on the implementation
of the minimum wage bill, coupled with Nestlé’s aggressive
promotional offers aimed at driving volumes.
Lower input prices will support margin.
On input cost, we estimate cost to sales to decline to 56% in FY’19 from 57% in FY’18. In
the first half of the year cost to sales declined to 53% from 59% in H1’ 18. Based on our
expectation of a further moderation in the prices of its key inputs (Sugar, Maize and
Sorghum). In addition, we foresee a non-recurrence of the impairment charge booked in
2018, which further supports our guidance of a moderation in its cost of sales.
Source: ASAM
research
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Its Abaji water factory and other assets were included in its cost of sales, hence we expect
cost of sales to increase by 7% YoY to N163.76billion. This translates to a gross profit of
N128.67billion, with related margin of 44%.
Hostile S&D will tame margin expansion.
In H1 2019, Nestle operating expense increased with OPEX to sales at 18.07% (H1 18:
17.31%). Mainly higher selling and distribution expenses propelled this as the company
embarked on diverse promotional offers aimed at driving growth in volumes, with the
impact not reflected on the company’s revenue growth over the period. However, we do
not expect the company to back down just yet given the increasing competitive landscape.
Therefore, we leave our OPEX to sales unchanged at 18% - which overlaid with gains from
the topline translates to an operating profit of N26.25billion (+22% YoY).
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Conclusion
For the remaining half year of 2019, we
remain optimistic on the company’s
earnings, driven by moderation in the
prices of its key inputs with expectations of
stable/declining product prices. This
should translate into expansion in gross
margin by 122bps YoY to 44.5%. However,
with our forecast OPEX to sales maintained increased to 18% YOY from 17% H1’ 18 and
this is propelled significantly by higher selling and distribution expenses as the company
embarked on diverse promotional offers aimed at driving growth in volumes. With the
impact not reflected on the company’s revenue growth over the period, we do not expect
the company to back down just yet given the increasing competitive landscape
promotional offers. Further down, the company was able to extinguish its FCY loans in
the first half of the year and thereby making gains on FY of 38.6 billion reducing net
finance cost nearly to zero percent. Overall, we lower our EPS estimate to N52.45 in 2019.
Though earnings growth story looking attractive, it looks expensive from a valuation
standpoint. Accordingly, we recommend our SELL recommendation with FVE of
N1,022.54.
Valuation Summary and Recommendation
We used the Free Cash Flow to Equity (FCFE), which gave us ₦1127.89, and the Dividend
Discount Model (DDM), which gave us ₦917.20 for our valuation. On our revised
numbers, we now have a blended fair value of ₦1022.54 per share using a blend of FCFE
and DDM with respective weights at 50% each.
NESTLE – PRICE
MOVEMENT
Source: NSE
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Relative to last closing price, this translates to -14.80% DOWNSIDE POTENTIAL and a
SELL rating on the shares. The company currently trades at a forward P/E of 36.24x,
which is at a discount to peer average of 22.16x.
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Ratings Specification
BUY: Target Price of the stock is above the current market price by at least 10 percent
HOLD: Target Price of the stock ranges between -10 percent and 10 percent from the
current market price.
SELL: Target Price of the stock is more than 10 percent below the current market price.
The information, opinions and recommendations
contained herein are and must be construed solely as
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as to the accuracy, timeliness, completeness, merchantability or fitness for any
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of any nature in respect of any statement, opinion, recommendation or information
contained in this document.
Disclaimer
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Arthur Stevens Asset Management Ltd.
(MEMBER OF THE NIGERIAN STOCK EXCHANGE)
… Succeeding Together
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