NESTLE 2017FY: STRONGER EARNINGS DRIVEN BY ECONOMIC RECOVERY, STABLE FX RATE

Nestle Nigeria Plc recently presented its full year earnings report for the period ended December 31, 2017 to the investing public in line with the post-listing requirement of the exchange the same time as the release date for that of 2016. Notwithstanding the fact that the company moved from its early filer status of February to March, it allows investors and traders plan their investment and forecast the company's pattern.

The company's performance for the period was impressive, reflecting an improvement in the operating environment, compared to the situation in 2016 when the Nigerian economy was steeped in recession that negatively impacted the manufacturing sector, as well as the purchasing power of many Nigerians. With the recovering economy came improved demand for goods and services.

Nestle Nigeria’s products engaged in products repackaging during the period in affordable sizes to meet different income levels while the nation’s macro-economic indicators are improving,  

Nestle recorded a 34.2% rise in sales revenue from N181.91bn to N244.15bn, while profit after tax grew significantly from N7.92bn in 2016 to N33.72bn, a 325.5% growth over the preceding year’s level. Shareholders' Funds increased by 45.34% to N44.88bn, just as earnings per share rose from N10.00 in 2016 to N42.55, which beat market expectation and estimates.

The company is technically placed at a fair value of N860 per share. The growth in its numbers is attributable to the above-mentioned factors, as well as the continued capacity building to meet market demand, just as it continues to capture new markets.

However, despite the increase in cost of production, drop in finance expenses due to an improvement in foreign exchange situation following the intervention of the Central Bank of Nigeria (CBN)and creation of the investors and exporters’ window that has ensured exchange rate stability. This also impacted interest expenses, which dropped, thereby enhancing operating profit. This also reflected in the profit margin of 13.81% that is below the 15% international standard.

The impressive full year earnings had further boosted the intrinsic value of the stock.

The food segment remained the company’s mainstay, contributing the lion’s share of total revenue at N244.15bn in 2017 from N181.91bn. The business model and products of the company are essential elements that support future growth in revenue and profit.

NESTLE NIGERIA PLC
AUDITED ACCOUNT  FOR 2017
COY	2016	2017	% Chg
	(N)	(N)
Date Released	March 2, 2017	March 2, 2018
Price at Released Date	570.00	1,442.00	152.98
Turnover	181,910,977,000	244,151,411,000	34.21
Profit After Tax	7,924,968,000	33,723,730,000	325.76
Shareholders' Fund	30,878,075,000	44,878,177,000	45.34
Dividend	10.00	42.50	325.00
ESTIMATED RATIOS
Earnings Per Share	10.00	42.55	325.5
PE Ratio(x)	57.01	33.89	-40.55
Earnings Yield	1.75	2.95	68.57
Book Value	38.95	56.62	45.37
Price to Book	14.63	25.47	74.09
ROE(%)	25.67	75.15	192.75
Profit Margin(%)	4.36	13.81	216.74
Year End	Dec	Dec

  Source: Company Financial & Investdata Research

The company’s rebounding earnings power was supported by increasing sales and finance income added to decline in cost of financing its operations which boosted the year’s bottom line. This also was enhanced by management's cost cutting efforts, which reflected much also in the profit level, looking at profit margin for the period.

With the economic recovery and continued improvement in the company's operation, shareholders should expect a better dividend payout in 2018 financial year, if this tempo is sustained.

Valuation/Recommendations

The company's full year Book Value stands at N56.62, with Price/Earnings ratio of 33.89x on the strength of its growing earnings per share of N42.55, that reduced investors’ waiting period from 57.01x in 2016.  Its 2017 profit margin of 13.81% is a sign of recovery from the lean 4.36% in 2016, compared to previous year’s over 15%.

Income investors with medium and long-term horizon should look the way of this stock, while traders should stay away for now and wait for the pullback before positioning in the company. We have revalued Nestle and placed it on HOLD for now until first quarter 2018 result is made available.

Technical View

Nestle in the recent years had rallied after breaking out from a two-year bearish channel with different attempts to rebound within the channel. The stock rebounded in March 2017 after a major breakdown of the  strong support level of N615 to a low of N570 to retrace up on its financials that beat market expectation, despite the earnings decline. The stock is currently trading above its 20 and 50-Day moving average at N1,380. Currently, MACD is bearish for the last eight trading sessions.  RSI is reading 54.75 and at the same signaling sell, while other technical indicators like CCI and SO are mixed in signal as CCI said buy while SO is signaling sell.

The trending momentum and direction is strong as ADX is above 20, but money flow index just turned up, indicating that funds are entering the stock which is a sign of positioning ahead of mark down for its final dividend of N27.50 and  the 2018 Q1 earnings report.  

Nestle Nigeria PLC
Share Holding Structure
Nigerians/Others	26.92%
Nestle S.A., Switzerland	65.74%
Stanbic IBTC Nominees	7.34
Other Statistics
Shares Outstanding (MN)	792,656,252
Open Price (2017)	N810
Close Price (2017)	N1,555.90
Current Price as at (March 29 2018)	N1,380
Date Listed	20th April, 1979
Year End	31st December

Source: Company Financial & Investdata Research

Management

The impact of strategic plans and internal cost efficiency of the management, are becoming obvious on its numbers as macro-economic data remain upbeat on the strength of improved liquidity in the FX market that supported relative exchange rate that moderated cost of production. This is in addition to its earlier backward integration to drive production and deliver value to all stakeholders, which however had reflected in its impressive performance, despite the seemingly challenging business environment and improving purchasing power. 

Five-Year Earnings Performance

Looking at the company’s five years performance and its consistency in the release of its numbers over the years have helped the market players and analysts forecast its performance and release dates. The company’s share price as at release dates had been unstable, hitting the highest ever in 2017 to reflect its impressive performance after the setback in 2016 where it touched the recent lows of N570. Market value decline for four years after the first breakout of N1000 mark in 2013 to rebound fully in 2017 when it touched an all-time high of N1,550.99 before closing the week at N1,380.

The company’s performance in the last five years has seen a stable up-trend in sales revenue even as profit remained positive but continued to undulate as revealed by the posted numbers for the period, which also reflected the challenging business environment for the period under consideration.
The company's turnover for the period was up by 83.46% to N244.15bn from N133.08bn in 2013; while profit level for the same period rose by 51.62% to N33.72bn from N22.24bn in 2013 after touching low of N7.92bn in 2016. It has in the last five years paid a total dividend of N133 to its shareholders for having faith in the company and its management, regardless of the boom or gloom in the economy within the period.

Meanwhile, net asset of the company stood at N44.88bn from the N40.59bn posted in 2013.  Dividend grew through the period from N24 per share in 2013 to N42.50 after dropping   to N10 in 2016. Please note that dividend reward grew more than the earnings for that same period at 77.05% to reflect the high payout of it earnings.

NESTLE NIGERIA
FIVE YEARS FINANCIAL PERFORMANCE
YEAR	2013	2014	2015	2016	2017
Ticker	000(N)	000(N)	000(N)	000(N)	000(N)
Date Released	26-Feb-14	25-Feb-15	16-Mar-16	2-Mar-17	2-Mar-18
Price At Released	1071.00	820.00	680.00	570.00	1,442
Turnover	133,084,076	143,329,000	151,271,526	181,910,977	244,151,411
PAT	22,238,279	22,236,000	23,736,777	7,924,968	33,723,730
Net Assets	40,594,801	35,939,640	38,007,074	30,878,075	44,878,177
DIVIDEND	24.00	27.50.	29.00	10.00	42.50
BONUS

Source: Company Financial & Investdata Research

Five-Year Estimated Ratios

Nestle earnings power for the period seems to be supporting its share price for same period, despite the seeming over valuation that was helped by its shareholding structure and its relatively small number of shares in issue. The rebounding earnings from N28.06 in 2013 before sliding to N10.00 in 2016 had moved up to N42.55, reducing  investors waiting periods over the years as PE ratio stood at 33.89x from high of 56.01x in 2016 and other previous years from 2013 except for 2015.

As observed, this is because of improvement 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 2017 at N42.55 as against the market price of N1, 442 when the report was released. Long term investors have over the years recouped their investment, as they continue to enjoy relative capital protection in this stock.

NESTLE NIGERIA
FIVE YEARS ESTIMATED RATIOS
YEAR	2013	2014	2015	2016	2017
EPS(N)	28.06	28.05	29.95	10.00	42.55
PE Ratio	38.17	35.49	22.71	57.01	33.89
Earnings Yield	2.62	3.68	4.40	1.75	2.95
Book Value	51.21	45.34	47.95	38.95	56.62
Return on Equity (%)	55.00	48.00	62.00	25.67	75.15
Profit Margin (%)	16.71	15.51	15.69	4.36	13.81
Year End	Dec	Dec	Dec	Dec	Dec

 Source: Company Financial & Investdata Research