NESTLE NIGERIA PLC: REBOUND ON STRONG PRODUCT DEMAND, EFFICIENCY, IMPROVED ENVIRONMENT

The food and beverages giant recently released it scorecard for the period ended march 31, 2017 to the investing community in keeping with its post-listing requirements to promote best practice at all time, just as the numbers posted beat market expectations as predicted by INVESTDATA before the actual figures hit the market. This impressive earnings report had influenced the company’s share price positively since it was made available to the public.

The growth in the company top line shows that management strategy to reposition and reformulate its products by packaging them in affordable sizes  to meet different market segments, a situation that has started paying off as it continued to increase market share as reflected in it  revenue growth.

Having started on a strong footing in Q117 with revenue growth supported by increasing market and price increases, we expect the company to further deliver a decent top line growth in the coming quarters. We believe the rest of the year may offer even more room for upward movement in earnings that will drive share price, as the nature of the company’s products have good relative price elasticity.

The efficiency gains in internal cost management and backward integration is now paying off, which may further push up profit margin in the coming quarters. The company value chain has fostered local input in it production processes which has contributed to cost management.  

The internal cost saving initiatives of the management has helped to sustain profitability during the toughest time sin the economy that has now reflected in this numbers. There is also the effect of the new foreign exchange policy of the Central Bank of Nigeria (CBN), as shown in the series of recent interventions to meet the needs in the various segments of the fx market, which has benefited the manufacturing sector and helped reduce operating cost, especially importation, thereby boosting productivity.

Nestle Nigeria sales revenue for the period was up compared to the 2016 corresponding numbers which revealed strong market penetration that impacted the price  movement  from  N725.50 per share on the day the result was released, to  N835 each, representing a 15.09% gain in just nine trading days.

The company top and bottom line were up by 69% and 25% respectively to N61.15bn from N36.13bn in the corresponding period of 2016. The return of relative peaceto the troubled north-east Nigeria, which serves as passage to neighbouring countries have equally supported its sales revenue for the period under review. Bottom line moved north for the period, from N6.68bn in 2016 to N8.36bn, despite the high financing cost that grew by 95.87% to N1.53bn from just N780.34m in 2016. This was in addition to income tax for the period that jumped by 190.20% to N5.92bn from N2.04bn in 2016.All these elements militated against the company’sprofit line. Similarly, shareholders’ funds for the period declined by 12.52% to N39.19bn, from N44.8bn in 2016

NESTLE NIGERIA PLC
3MONTHS UNAUDITED REPORT  FOR 2017
COY	2016	2017	% Chg
	(N)	(N)
Date Released	April 29, 2016	April 28, 2017
Price at Released Date	620.00	725.50	17.02
Turnover	36,130,866,000	61,151,517,000	69.00
Profit After Tax	6,681,389,000	8,358,827,000	25.00
Shareholders' Fund	44,804,367,000	39,192,511,000	-11.26
ESTIMATED RATIOS
Earnings Per Share	8.43	10.55	25.15
PE Ratio(x)	18.39	17.20	-6.47
Earnings Yield	1.36	1.45	6.62
Book Value	56.52	49.44	-12.53
Price to Book	10.97	14.67	33.73
ROE(%)	14.91	21.33	43.06
Profit Margin(%)	18.49	13.67	-26.07
Year End	Dec	Dec

Source: Company Financial &Investdata Research Analyst Opinion/Recommendations

The CBN’s intervention in the fx market and the establishment of the Industrial Development Council by the government to drive industrialization that will boost productivity and give incentives to manufacturing companies by way of tax cuts, among others. Also, faithful implementation of the Federal Government’s four-year Economic Recovery Growth Plan (ERGP), which is expected to further boost recovery and return the country to the path of growth and prosperity again. A special stimulus package for manufacturing sector is underway in the form of special funds with low interest, special tax system for the sector which would likely be in form of tax holiday to enhance productivity and output. Also, we expected mild recovery in the purchasing power of Nigerians going forward which will support sales revenue of manufacturing company.

Meanwhile, for the company's Q2 2017 scorecard, expect a better performance as profitability will expectedly improve, regardless of the prevailing higher operating cost, just as recovery in the macro-economic environment will equally boost performance.

Summary and valuation 

Nestle Nigeria’s 2017 earnings projection is revised to N20.12bn from the early estimate of N12.72bn, representing a 160% increase from the 2016 N7.92bn.

Its Q1 trailing Price/Earnings Ratio at 17.20, down from 18.39x in 2016 as a result of growth in earnings, is expected to decline to 10.23x in 2017. The Q1 profit margin was slightly weak at 13.67%, compared to 18.49% in 2016.

We maintain our position of HOLD for long term investment horizon.  A major shareholder had increased its stake by an additional 20.47m shares in the last one year, which represents 2.58%, bringingits holding to 66.06%.

Technical View

Nestle in the last two years has been on a bearish channel with different attempts to rebound within the channel as it recently broke down the major strong support level of N615 to a low of N570 to retrace up on it financials that beat market expectation and rally up as positive sentiment on the recent numbers. The stock is currently trading above its 20 and 50-Day moving average at N835. Currently, MACD is bullish for the last sixtrading sessions. RSI is reading 75.32 lofty overbought region and at the same signaling sell for traders that enter lower, while other technical indicators like CCI and MACD are signaling buy, while OS is saying sell.

The trending momentum and direction is strong as ADX is above 20 at 30.34 and money flow index is looking up, indicating that funds are entering the stock. Watch trend.

Nestle Nigeria PLC
Share Holding Structure
Nigerians/Others	26.60%
Nestle S.A., Switzerland	66.06%
Stanbic IBTC Nominees	7.34
Other Statistics
Shares Outstanding (MN)	792,656,252
Open Price (2017)	N810
Current Price as at (May 12 2017)	N835
Date Listed	20th April, 1979
Year End	31st December

Source: Company Financial &Investdata Research

Management

The impact of strategic plans of the board and management, led by David Ifezulike and Mauricio Alarcon respectively, is yielding results already as internal cost management is reducing the impact of the weak macro economy and Fx market-afflicted cost pressure. This is despite the cost of expansion and production drive of the management to deliver value to all stakeholders. This has however reflected in its 2016 performance, despite the challenging business environment and low purchasing power of the people. 

Five-Year Financial Analysis

The company's international best practice and consistency in the release of its financials over the years have helped the market and analysts predict and forecast its performance and release dates. This has added to its valuation status as it stands sure in portfolio management effectiveness. The market price as at release dates on the other hand is experiencing decline after two years of trending up within the five years under consideration. The price moved from N981.00 in 2012  to an all-time high of N1,071.00 in 2013, closing at N570 per share when the 2016 audited result hit the market recently from N820 in 2014 to N680 in 2015. 

Looking at the company’s performance critically for the last five years, it is evident that there has been a stable up-trend performance with positive numbers that reveal the competence of the successive management, regardless of challenging business environment but was hard hit in 2016.
The company's top line for the period was up by 55.86% to N181.91bn from N116.71bn in 2012; while profitability level for the same period was down 62.54% to N7.92bn, from N21.14bn recorded in 2012. This was after recording high of N23.74bn in 2015 where the highest reward was given to shareholders in the form of N29 dividend per share, even while earnings remained almost flat in three of those years under consideration before the decline in 2016 that reduced it to N10 each. Within the same period, the economy has experienced mixed movement of progress and retrogression to the current situation of the nation.

Meanwhile, shareholders’ fund stands at N30.88bn from the N34.19bn posted in 2012 after recording a high of N40.59bn in 2013. Dividend grew through the period from N20 per share in 2012 to N29 per share in 2015 before it dropped to N10 in 2016. Please note that dividend reward grew more than the revenue and earnings for that same period which is not too good. Such high payout ratio does not support future payments and expansion.

NESTLE NIGERIA
FIVE YEARS FINANCIAL PERFORMANCE
YEAR	2012	2013	2014	2015	2016
Ticker	000(N)	000(N)	000(N)	000(N)	000(N)
Date Released	20-Feb-13	26-Feb-14	25-Feb-15	16-Mar-16	2-Mar-17
Price At Released	981.00	1071.00	820.00	680.00	570.00
Turnover	116,707,394	133,084,076	143,329,000	151,271,526	181,910,977
PAT	21,137,275	22,238,279	22,236,000	23,736,777	7,924,968
Net Assets	34,185,562	40,594,801	35,939,640	38,007,074	30,878,075
DIVIDEND	20.00	24.00	27.50.	29.00	10.00
BONUS

Source: Company Financial &Investdata Research Five-Year Estimated Ratios

Earnings power of Nestle within (2012 to 2016) seems to be strong enough to have supported it share price for that same period with the help of its shareholding structure and relatively small number of shares in issue. The drop in earnings from N26.67 in 2012 and   N29.95 in 2015 to N10.00 in 2016 has increased investors waiting periods over the years as PE ratio stood at 57.01x from low of 22.71x in 2015 and other previous years from 2012.

As observed, this is because of the sharp drop in earnings while market price relatively remained high. The Book Value of the equity over the years revealed high premium on the stock which was as a result of consistent dividend and strong numbers with that of 2016 at N38.95 as against the market price of N570 when the report was released. Long term investors have over the years recouped their investment, and they continue to enjoy relative capital protection in this stock.

NESTLE NIGERIA
FIVE YEARS ESTIMATED RATIOS
YEAR	2012	2013	2014	2015	2016
EPS(N)	26.67	28.06	28.05	29.95	10.00
PE Ratio	36.79	38.17	35.49	22.71	57.01
Earnings Yield	2.72	2.62	3.68	4.40	1.75
Book Value	43.13	51.21	45.34	47.95	38.95
Return on Equity (%)	62.00	55.00	48.00	62.00	25.67
Profit Margin (%)	18.11	16.71	15.51	15.69	4.36
Year End	Dec	Dec	Dec	Dec	Dec

Source: Company Financial &Investdata Research