Equity Research: Nestle Nigeria Plc

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Adela Maud Welch
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1 Equity Research: Nestle Nigeria Plc Thursday June 18, 2015 Table 1: BUY Current Price Fair Value The turnover in FY 2014 increased by 7.70% to N143.33bn from N133.08bn in the previous year. Expanding Through Innovation 1.0 FY 2014 Performance Analysis: The audited Financial Year (FY) 2014 result for (Nestlé) for the period ended December 31, 2014 shows that its Turnover (T/O) increased by 7.70% to N143.33bn, compared with N133.08bn recorded in the corresponding period of The cost of sales also increased by 7.60% to N82.10bn from N76.30bn recorded in FY The cost of sales as a percentage of Turnover fell marginally to 57.28% from 57.33% as at FY The administrative, selling and distribution expenses increased by 10.63% to N32.03bn. These expenses as a percentage of turnover increased to 22.35% in FY 2014 from 21.76% in FY The investment income stood at N551.59mn as at FY 2014, representing an increase of 52.67%, compared with N361.31mn recorded in the corresponding period. The company also recorded a significant increase of % in its finance cost of N5.31bn from N2.15bn in This increase in finance costs was largely due to a substantial rise in the net foreign exchange loss, which stood at N3.04bn in FY 2014 from N609.07mn in FY PBT stood at N24.45bn in 2014, a fall of 6.15% from N26.05bn recorded in the corresponding period of The Profit Before Tax (PBT) fell to N24.45bn, a decrease of 6.15% from N26.05bn recorded in the corresponding period of This is a reflection of the challenges the company is facing with regards to stiff competition in the industry and increased finance costs. The tax provision also decreased by 41.67% to N2.21bn from N3.79bn, the decrease in the tax provision was due to the recognition of previously unrecognised tax credits and the origination and reversal of temporary differences resulting in a deduction of N815.76mn from the current tax expense leading to a Profit After Tax (PAT) of N22.24bn in FY 2014 from N22.26bn in the corresponding period of 2013, representing a marginal decrease of 0.10%. Table 2: Financial Performance (N bn) FY 2014 FY 2013 % T/O % EBIT % PBT (6.15%) PAT (0.10%)

2 N'bn Equity Research Report Table 3: Quarterly Result Highlights (N'bn) Q Q Q Q Q Q Turnover PBT PAT The company s profit margins in FY 2014 were impacted by various factors thus showing mixed performance from the figures recorded in FY Gross Profit margin increased marginally to 42.72% in FY 2014 from 42.67% in FY The PBT Margin in FY 2014 decreased over the FY 2013 figure. The PBT margin decreased to 17.06% Profit margins in FY 2014 declined marginally from the figures recorded in FY in FY 2014 from 19.57% as at FY The PAT margin currently stands at 15.51%, down from 16.72% in the corresponding period of The Earnings Before Interest and Tax (EBIT) margin declined to 20.37% from 20.91% in Table 4: Profitability Margins FY 2014 FY 2013 GP* Margin 42.72% 42.67% EBIT Margin 20.37% 20.91% PBT Margin 17.06% 19.57% PAT Margin 15.51% 16.72% *GP Gross Profit Q4 Revenue Trend Q Q Q Q Revenue

3 Fixed assets increased by 2.48% to N67.51bn from N65.88bn in FY The total assets of the company which stood at N106.06bn as at FY 2014 were financed by a mix of equities and liabilities in the ratio of 33.89% and 66.11% respectively. A cursory look at the balance sheet position as at FY 2014 compared with the position as at FY 2013 reveals an increase in the company s fixed assets. Fixed assets increased by 2.48% to N67.51bn from N65.88bn in FY The company s inventory increased to N10.96bn from N9.85bn in FY Trade debtors and other receivables also went up by 24.86% to N22.33bn in FY 2014 from N17.88bn in FY Cash and bank balances decreased significantly by 72.99% from N13.72bn in FY 2013 to N3.70bn in FY This decrease was primarily due to a significant decrease in call deposits. The call deposits fell to N2.43bn in FY 2014 from N9.62bn in The trade creditors and other payables decreased by 8.29% to N26.66bn from N29.07bn as at FY Borrowings increased by 13.48% to N31.12bn from N27.42bn in FY The increase in loans and borrowings in FY 2014 was mostly due to an increase in foreign related party loans from Nestlé Treasury Centre-Middle East and Africa Limited. These foreign loans as at FY 2014 stood at N22.15bn. The total assets of the company which stood at N106.06bn as at FY 2014 were financed by a mix of equities and liabilities in the ratio of 33.89% and 66.11% respectively. Our analysis of the liabilities shows that the short-term liabilities stood at N44.64bn, accounting for 63.66% of the total liabilities, while the long-term liabilities stood at N25.48bn accounting for 36.34% of the total liabilities. The long-term liabilities constituted mainly of long term loans and borrowings, which stood at N18.39bn. The current liabilities constituted mainly of trade & other payables. Working capital stood at a negative N7.25bn from N8.52bn recorded in FY Net assets for the period decreased by 11.47% to stand at N35.94bn from N40.59bn as at FY Financing Mix Liabilities 66% Equity 34% Nestle VS NSE ASI Rebased (June'14-June'15) Jun Sep Dec Mar Jun-15 Nestle NSE ASI Rebased 3

4 1.1 Q Performance Analysis: As at Q1 2015, turnover (T/O) decreased by 17.56% to N27.56bn, compared with N33.43bn recorded in the corresponding period of The administrative, selling and distribution expenses increased by 25.61% to N1.88bn. The company also recorded a significant increase of % in its finance cost of N2.34bn from N873mn in Given the run rate, the company would need to remain focused on marketing development to meet its previous year s performance. The Profit Before Tax (PBT) fell to N3.49bn, a decrease of 50.69% from N7.07bn recorded in the corresponding period of The tax provision also decreased by 50.08% to N533mn from N1.07bn, leading to a Profit After Tax (PAT) of N2.95bn in Q from N6bn in the corresponding period of 2014, representing a decrease of 50.80%. The PBT Margin decreased over the Q1 2014, and the Financial Year ended December (FY), 2014 figure. The PBT margin decreased to 12.65% in Q from 21.16% as at Q1 2014, and from 17.06% as at the end of FY Also, the PAT margin currently stands at 10.72%, down from 17.96% in the corresponding period of 2014, and also down from 15.51% as at FY The result also indicates that the percentage of T/O, PBT, and PAT in the Q to the Audited T/O, PBT and PAT for the period ended December 2014 are: 19.23%, 14.26% and 13.29%, respectively. Given the run rate, the company would need to remain focused on marketing development to meet its previous year s performance. We however note the low business activities in Q as a result of the security challenges in the country and the general elections. Table 5: Profitability Margins Q Q Q Q GP* Margin 44.23% 44.47% 43.12% 41.84% EBIT Margin 20.49% 23.12% 24.49% 23.87% PBT Margin 12.65% 21.16% 22.98% 25.63% PAT Margin 10.72% 17.96% 19.53% 21.53% *GP Gross Profit Table 6: Financial Performance (N bn) Q Q Change T/O (17.56%) EBIT (26.92%) PBT (50.69%) PAT (50.80%) 4

5 N'bn Equity Research Report Q1 Revenue Trend Q Q Q Q Revenue Drivers of Performance and Strategic Focus: Nestlé s performance during the period was driven by the following factors: Diversified product portfolio which are essential for healthy living. Its backward integration strategy to secure raw materials locally by partnering with farmers to provide quality raw materials. The Naira devaluation had an adverse impact on the foreign debt of the company. Investments in plants upgrade to produce products more efficiently. The Naira devaluation. The security challenges in the country and the general elections in However, the company s increased finance costs especially the exposure to foreign exchange adversely affected profit in FY 2014 and Q In FY 2014, Nestlé s foreign exchange exposure was estimated at N63.24bn with imported raw materials of N41.10bn dominating the foreign exposure. In Q1 2015, finance costs rose by % to N2.34bn from N872.90mn in Q

6 Nestlé priorities moving forward remain unchanged from its standard corporate business principles. The company has the policy to positively impact the communities in which it operates. 2.1 Strategic Focus: Nestlé s priorities remain unchanged from its standard corporate business principles. In respect to its brand and product, the company s focus is to ensure its brands and products undergo continuous innovation. Also, Nestlé seeks to ensure that its products are available wherever, whenever and however the customer wants them. A key part of Nestlé s business principles is its commitment to environmentally sound business practices that will benefit the communities it operates in. Consequently, to further reduce its environmental footprint and ensure efficient use of energy for manufacturing operation, Nestlé has built a Tri-Generation power plant at its Agbara factory. The plant generates power, while chilled and hot water are generated using heat from the power plant exhaust gases. This enables the company to increase overall energy efficiency from 42% to 74% and to reduce carbon dioxide emissions by 5,000 tonnes per year. Also, in 2014 Nestlé laid the foundation for its ultra-modern N4.8bn Nestlé Waters factory in Abaji near Abuja. This facility is key to the growth of Nestlé s water operation in Nigeria. The Company chose the rural location for the factory with the aim of contributing to the rural development by providing local employment and purchasing directly from small scale suppliers and intermediaries. As at FY 2014, Nigerian market contributed 98.91% to the turnover of the company 1.09%. 3.0 Business: Nestlé manufactures and markets a range of high quality brands: Infant Cereals - Nestlé Nutrend, NAN Lactogen and Nestlé Cerelac; Family Cereals-Nestlé, and Golden Morn; Beverage Drink - Nestlé Milo; Confectionary- Nestlé Chocomilo; Nestlé Kitkat Bullion- Maggi cube, Maggi Chicken, Maggi Crayfish, Maggi Mix PY, and Nestlé Pure Life table water. Nestlé also markets Coffee - Nescafe Classic Coffee, Nescafe 3-in-1 Coffee and Nescafe breakfast, as well as Nestlé s Full Cream Milk product- Nestlé Nido. Globally, Nestlé companies are organized into regional groupings to leverage expertise and the size of the company. In the case of Nigeria, the company is a part of Central and West Africa region. The region is managed through Nestlé Central & West Africa Limited, which is based in Accra. As at FY 2014, Nigerian market contributed 98.91% to the turnover of the company, while Niger, Senegal, Togo, Ghana, Guinea and others contributed the balance of 1.09%. 6

7 The company has successfully substituted imported corn starch with locally produced cassava starch. Nestlé S.A Switzerland with 503,177,098 ordinary shares was the only shareholder that held more than 5% of the paid up capital of Nestlé Nigeria. On a continuing basis, to stimulate industrial growth the company is committed to long term sustainable business practices. Nearly all of the company s key ingredients for products which are manufactured in Nigeria are sourced locally through farmers and suppliers where available. As part of this policy, it has successfully introduced the use of locally produced items such as soya bean, maize, cocoa, palm oil and sorghum in a number of its products. Also, the company has successfully substituted imported corn starch with locally produced cassava starch. In 2014, Nestlé CWA Limited, Ghana transferred its ordinary share of 472,308,222 representing 59.59% of the total shareholdings to Nestlé S.A Switzerland. Consequently, as at 31 December 2014, Nestlé S.A Switzerland with 503,177,098 ordinary shares was the only shareholder that held more than 5% of the paid up capital of Nestlé Nigeria. Table 7: Company Summary Ticker Nestlé Sector Consumer Goods Sub-sector Food Products - Diversified Date of Incorporation September 25, 1961 Date of Listing April 20, 1979 Financial Year End December Number of Fully Paid Share 792,656,251 Current Capitalization(NGN) 679,710,661,795 NSE Capitalization (NGN) 11,454,385,203, % of NSE Capitalisation Week high NGN 1, Week low NGN YTD Return (%) (12.53%) 52 Weeks Average Volume Traded Trailing EPS NGN Trailing P/E Ratio (X) As at June 11,

8 Table 8: Directors Shareholding as at December 31, 2014 Director Position Holdings Mr. David Ifezulike Chairman 56,255 Mr. Dharnesh Gordhon MD/CEO Nil Mr. Syed Saiful Islam* Executive Nil Mr. Martin Kruegel** Executive Nil Mrs. Iquo Ukoh Executive 37,500 Mr. Giuseppe Bonanno Non-Executive Nil Mr. Kais Marzouki Non-Executive Nil Mr. Gbenga Oyebode Non-Executive Nil Mrs. Ndidi Okonkwo Nwuneli Non-Executive Nil *Appointed October 1, 2014 **Resigned September 30, 2014 Table 9: Shareholding Structure as at December 31, 2014 Name No. Of Ordinary Shares % of Shareholding Nestlé S.A., Switzerland 503,177, % Others 289,479, % Total Number of Shares 792,656, % 8

9 The food products segment contributed 58.49% to the company s revenue in FY 2014, compared with the contribution of 41.51% by the beverages range. 4.0 Product Analysis: Nestlé has two reportable business segments, which are its strategic business units. The units are Food Products and Beverages. This strategic business units offer different products and services, and are managed separately because they require different technology and marketing strategies. The food products segment contributed 58.49% to the company s revenue in FY 2014, compared with the contribution of 41.51% by the beverages range. 4.1 Food Products: This includes the production and sale of Maggi, Cerelac, Nutrend, NAN, Lactogen and Golden Morn. The company launched the Nestlé Golden Morn Millet in 2013; because of the need to provide consumers with high quality foods that provide nutritional value at an affordable cost. The product offers consumers the opportunity to increase their intake of two essential micronutrients (Iron and Vitamin A) as part of their daily breakfast. The introduction of millet variety expanded the product portfolio of Golden Morn to three in addition to maize enriched and maize cocoa. Products in this category compete with a lot of imported food products in the market. There are smaller competitors in the food products market in Nigeria but Nestlé maintains the lead in the market. Nestlé s other products in this category includes: Maggi Cube, Maggi Mix py, Maggi Chicken Tablet and Maggi Crayfish Tablet. Competitors include Unilever s Knorr and Royco Cubes. 4.2 Beverages: This includes the production and sale of Milo, Chocomilo, Nido, Nescafe and Nestlé Pure Life (water). The company launched 60cl Nestlé Pure Life Protect in 2013, a variant of its bottled water brand fortified with zinc (an essential mineral to support the immune system). To further increase its market share, the company launched Nestlé Pure Life 5litre family size bottle in 2013, the first of its kind in Nigeria. Some of the other competing products in the market are Bournvita, Ovaltine, Eva Water, Peak Milk, Cowbell Milk, RichChocó, etc. 9

10 5.0 SWOT Analysis Strengths: o Strong brand name. o Quality products in the market. o Stable Board and Management. o Technical partnership with parent company. o Access to cheaper foreign funding. o Securing raw materials via backward integration. o Consistent dividend payment. o Energy efficient production process. o Diversified products. Weakness: o Increased loans and borrowings. o Declining profit margins. o Increased foreign exchange exposure. Opportunities: o Large market size in Nigeria and neighbouring countries. o The CBN efforts to improve funding to the agriculture and the manufacturing sectors. o Improvement in products regulations and enforcements. Threats: o Stiff competition in all its products. o Naira devaluation. o Poor state of basic infrastructure in the country. o Pressure of other imported products in the market. o Weak consumers purchasing power. 10

11 6.0 Forecast: 6.1 Forecast Drivers: We considered the following factors in arriving at our 5-year forecasts: Positive Drivers: Equity Research Report Investment and innovation in plants, which should improve efficiency. Technical partnership with the parent company. Large market size in Nigeria and stable growing population. Strong demand for product at all levels. We estimate a dividend per share of N20.58 for the FY Negative Drivers: The prevailing stiff competition in the industry. The company s foreign exchange exposure and possibility of a further depreciation. Taking the foregoing factors into consideration we estimate a Turnover of N144.91bn, N168.96bn, N202.92bn, N243.71bn and N291.47bn for the periods ending December 2015, 2016, 2017, 2018 and 2019 respectively. We estimate EBIT of N26.90bn, N35.19bn, N45.95bn, N56.32bn and N67.97bn, and EBITDA of N32.79bn, N41.61bn, N53.02bn, N64.16bn and N76.74bn for the same period using EBIT margins of 18.56%, 20.83%, 22.65%, 23.11% and 23.32% respectively. Our PBT forecasts for the periods are: N21.98bn, N31.08bn, N42.03bn, N53.36bn and N65.07bn. Adjusting for tax, our PAT forecasts are N18.55bn, N21.75bn, N29.40bn, N37.33bn and N45.52bn. PAT Margin for the period are 15.17%, 18.40%, 20.71%, 21.90% and 22.32%. Our forecast final dividend for the FY 2015 is N20.58 per share. 11

12 Table 8: Income Forecast for Nestle Nigeria Plc ( ) Profit and Loss =N='bn Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Turnover (Net Sales) Cost of Sales (85.56) (96.39) (112.72) (134.88) (161.32) Gross Profit Admin, Selling & Distribution Expenses (26.55) (30.96) (37.19) (44.66) (53.41) Depreciation (5.89) (6.42) (7.07) (7.84) (8.77) EBIT EBITDA Net Finance Cost (4.92) (4.10) (3.93) (2.96) (2.91) PBT Taxation (3.44) (9.34) (12.63) (16.03) (19.55) PAT Table 9: Earnings Forecast for Nestle Nigeria Plc ( ) Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 EBITDA Margin 22.63% 24.63% 26.13% 26.33% 26.33% EBIT Margin 18.56% 20.83% 22.65% 23.11% 23.32% PBT Margin 15.17% 18.40% 20.71% 21.90% 22.32% PAT Margin 12.80% 12.87% 14.49% 15.32% 15.62% EPS(N) DPS(N) Dividend Payout 87.95% 87.95% 87.95% 87.95% 87.95% Earnings Yield * 2.50% 2.93% 3.96% 5.02% 6.13% Dividend Yield * 2.20% 2.57% 3.48% 4.42% 5.39% P/E Ratio* 40.06x 34.16x 25.27x 19.90x 16.32x Number of Shares ( bn) ROE 47.55% 50.97% 60.63% 71.47% 92.99% Collection Days Payment Days Inventory Turnover 6.75x 6.75x 6.75x 6.75x 6.75x Interest Cover *At Our Fair Value of N

13 Table 10: Comparable Analysis (Nbn) Company Nestle Cadbury Turnover (Net Sales) Gross Profit EBIT PBT PAT GP Margin 42.72% 25.99% PBT Margin 17.06% 4.81% PAT Margin 15.51% 4.96% ROE 61.87% 13.11% Net Assets Net Assets Per Share Trailing EPS PE Ratio 35.12x x Earnings Yield 2.85% 0.08% As at June 18,

14 7.0 Valuation: Equity Research Report We employed relative valuation method using Enterprise Value (EV) to Earnings Before Interest Tax Depreciation and Amortization (EBITDA) multiple. The assumptions and results of the valuation are: Assumptions: EV/EBITDA Multiple: 23.61x Debt: N31.12bn Cash: N3.70bn Number of shares in issue: mn Applying the EV/EBITDA multiple of 23.61x, we arrived at N per share as the fair value. The fair value for Nestle shares is N The current market value of Nestle share is N850.10, the highest and the lowest closing prices in the last 52 weeks are N1,150 and N respectively. The forward earnings yield and dividend yield of the company at our fair value are 2.50% and 2.20% respectively. The total return, a combination of the capital appreciation and the dividend, generates 12.68%. The company has a track record of consistent dividend payment (both interim and final) which makes a good stock to hold for large fund managers. Going by historic trend the company shares would always trade at a premium to its fair value. We therefore place a BUY on the shares of Nestle at the current price of N as of June 18,

15 For enquiries please contact us at our offices: Lagos Office: 5th-8th floors UAC House, 1/5 Odunlami Street, P.M.B Lagos. Tel: (Fax): Port Harcourt Office: Mainstreet Bank Building, (2nd floor, 5 Trans Amadi Road, Port Harcourt. Tel: (Fax) Abuja Office: Abia House, Plot 979, 1st Avenue, Off Ahmadu Bello Way, Cadastral Zone AO, Central Business District, Abuja. Tel: Website: research@fsdhgroup.com Our Reports and Prices are also Available on Bloomberg {FSDH<GO>} Disclaimer Policy This publication is produced by Limited solely for the information of users who are expected to make their own investment decisions without undue reliance on any information or opinions contained herein. The opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. Limited may invest substantially in securities of companies using information contained herein and may also perform or seek to perform investment services for companies mentioned herein. Whilst every care has been taken in preparing this document, no responsibility or liability is accepted by any member of FSDH Merchant Bank Limited for actions taken as a result of Information provided in this publication. 15

Equity Research: Nestle Nigeria Plc

Equity Research: Nestle Nigeria Plc Equity Research: Table 1: SELL Current Price N1,050 Fair Value N660.84 The turnover in Q2 June 2014 increased by 7.62% to N67.20bn. PBT increased to N13.93bn in Q2 2014, while PAT increased to N11.84bn.