Net fx loss offset strong underlying profits
- Downgrading to Underperform after strong gains: Positive surprises in both sales and gross margin led to Nestle Nigeria’s (Nestle) operating profit beating our N12.4bn forecast by 33%. Sales of N63.3bn beat by 8% while gross margin was ahead by c.350bps. However, PBT came in behind by around 16% due to a significant rise in net finance charges, driven by fx-related losses of –N6bn. We deduce from management statements that the fx-loss recorded is likely related to loan repayments of c.N15bn in Q3. We have raised our sales and gross margin forecasts for 2018E by 4.5% and 150bps to N251.0bn and 41.5% respectively. However, we have also significantly raised our net finance expense estimate to just below -N12bn, anticipating further repayments of existing intercompany loans in Q4. Looking beyond 2017, we are however more optimistic on Nestle’s performance over the next 12 months due to increased access to fx and the gradual recovery in Nigeria’s macroeconomic environment. Overall, our EPS estimate over the 2017-18E period is up 2.1%. Our new price target of N1,000 represents an increase of 5%, but implies a downside potential of –20.0% from current levels; this largely reflects the gains the shares have recorded ytd: +54% vs. the ASI’s +37%. As such, we have downgraded our rating on the stock to Underperform from Neutral. Nestle proposed an interim dividend of N15 (ahead of our N10 estimate) which implies a yield of c.1%. At current levels, Nestle shares are trading on a 2017E P/E multiple of 30.9x for 20% EPS growth in 2018.
- Q3 PBT of N10.0bn helped by 433bp y/y gross margin expansion: Q3 2017 sales were up 29% y/y to N63.3bn while PBT grew significantly, by 117% y/y. PAT came in at N10.0bn compared with a loss after tax of –N51m in the corresponding period of 2016. Topline y/y growth continues to benefit from double-digit price increases which occurred in Q4 2016 mainly. Similar to Q2, Q3 profitability was boosted by a gross margin expansion of 433bps y/y to 43.5% which we primarily attribute to relatively cheaper access to fx for imports. The big downside to this set of numbers was an fx loss of –N6.0bn in Q3 (-N11.2bn in 9M 2017). Sequentially, while sales were up 4.2% q/q, PBT came in flattish, mainly on the back of the reported fx loss of –N6.0bn which compares with –N4.1bn in Q2.