Decent fundamentals but difficult operating conditions

Monday, June 7, 2021 / 9:05 am / by FBNQuest Research / Header image credit: Premium Times

2% upgrade from our estimates of EPS over 21-23 f; Neutral rating maintained

Nestlé Q1 ’21 profits grew 11% year-on-year to NGN 12.4 billion, supported by 26% year-on-year and 24% year-on-year increases in food and beverage sales respectively . Based on our market research, an increase in average prices across Nestlé’s entire portfolio resulted in double-digit year-on-year revenue growth in the first quarter 21 (+ 24.1% year-on-year ). We expect the impact of the price increase to subside by the end of the second quarter of ’21. This implies that stronger volume growth may be needed to generate higher profitability in FY ’21.

In our view, another round of price increases (to pass on costs) could prove difficult, due to the contraction of real income amid rising food inflation and currency devaluation. Nonetheless, we have slightly revised our sales and profit estimates for fiscal year ’21f by 5.7% and 3.0% respectively, to reflect the impressive trend in Q1 ’21. The changes to our estimates imply that revenue is now expected to be N312.6bn in FY’21f (versus a previous forecast of NGN295.6bn). This follows an increase in sales for the business segments: food (9.1% yoy to 187.4 billion NGN) and beverages (8.6% yoy to 125.2 billion from NGN).

As a result, the gross margin is up + 50bps to 41.5%. Elsewhere, we raised our estimate of operating expenses to NGN 58.5 billion (from 4.1% year-on-year), with operating profit up 9.6% to NGN 71.3 billion (from compared to the previous estimate of NGN 65.0 billion). However, a surprise 243.4% yoy increase in interest expense in the first quarter of 21 forced a revision of net interest expense of NGN 4.6 billion (from an earlier forecast of NGN 298 million. ). The increase in interest charges is attributable to a 27.0% year-on-year increase in long-term loans to NGN43.0 billion. We are making a marginal change of + 3.0% to our fiscal forecast to NGN 21.3 billion (vs. NGN 20.7 billion previously), resulting in a PAT forecast of NGN 45.3 billion in 21f (vs. earlier estimate of NGN 44.3 billion).

For our valuation estimates, we raised the risk-free rate in our DCF model to 12.5% ​​(from 11%) and our adjusted beta estimate is increased to 0.8 (from 0.7 previously). Our new price target of NGN 1494.2 is 4.9% lower. At current levels, our price target implies an upside potential of 6.7%. Therefore, we maintain our Neutral rating. Since the start of the year, Nestlé shares have lost -3.4% against a -4.3% drop in ASI.

The gross margin weakened in the first quarter of ’21; interest charges surprised negatively

On average, Nestlé’s results in Q1 ’21 were better than expected. Sales grew 24.1% yoy (and 17.4% yoy) to NGN 87.3 billion while profits grew 10.8% yoy, reflecting strong demand for products against a background of higher prices across its portfolio. However, the gross margin fell by -520 bps yoy to 39.8% (vs. 45.0% in Q1’20). We link this to the impact of supply chain disruptions, local inflation, and cost-based currency devaluation.

In addition, the company recorded a year-on-year increase in net interest expense of + 1,486.5% year-on-year to NGN 1.3 billion in the first quarter 21 thanks to the increase in loans (+27.0 % year-on-year to NGN 43.0 billion).


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Proshare Nigeria Pvt.  Ltd.

Proshare Nigeria Pvt.  Ltd.

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