Nestle Nigeria Plc (Nestle) bounced back from 2016 tough time, coming out stronger, with its recently released full-year 2017 results revealing a solid growth in earnings of N33.7 billion – its highest absolute earnings on record. Earnings reported in FY 17 translate to an EPS of N42.55 (vs. N10.00 in FY 16), a four-fold increase from the prior year. Accordingly, the company declared a final dividend per share of N27.50 which in addition to the interim dividend of N15.00 amounts to a total dividend of N42.50 (vs. N10.00 DPS in FY 16). Final dividend implies a dividend yield of 2.0% based on last trading price.
Much of the turnaround in Nestle’s FY 17 earnings reflects improved operating profit margin (+181bps to 22.8%) and lower foreign exchange losses (-31.4% YoY to N11.2 billion). Isolating Q4 17 standalone result also reveals a 44.4% YoY increase in EPS to N13.55. However, the growth in earnings was primarily driven by a lower effective tax of 13% (vs. 54% in FY 16) with before-tax earnings declining 23.0% YoY to N12.3 billion.
Subsisting input cost pressures and lower finance income were the key pressure points on Q4 PBT performance which offset a 12.8% YoY increase in revenue underpinned by higher product price. The Q4 revenue revealed a fallout from historical trend as the number was weaker than earlier quarters, with its contribution to aggregate turnover contracted to 24% (vs. 5-year average contribution of 28.3%)
As mentioned earlier, foreign exchange losses over 2017 amounted to N11.2 billion, 31.4% lower than N16.3 billion booked in 2016. The sizeable decline in FX losses reflected tamer depreciation following improved dollar liquidity as well as currency stability. Specifically, over 2017, the company paid around $111 million worth of due related party loans on which it recorded FX losses of N7.3 billion – we estimate that the company settled its dollar obligations at an exchange rate around N370/$, 16% higher than carrying value rate of N320/$.
The balance of FX losses (N3.9 billion) booked most likely stemmed from the settlement of related party trade payables during the period. Further on dollar debt, Nestle Nigeria secured another $30 million loan from its parent company – Nestle S.A – of which $15.2 billion was drawn down in the review period. Given this, Nestle’s outstanding dollar loan currently stands at $48.8 million (N18 billion) valued at a rate around N369/$ and accounting for 88% (vs. 92% as at FY 16) of its aggregate debt position.
Though, 2017 EPS is the strongest on record, Nestle Nigeria gross margin (41.3% in FY 17), is yet to recover to pre-recession average levels of 43%. The company sources 80% of its raw materials locally which exposed it to high domestic food inflation particularly for Maize (+25% YoY) and Sorghum (+38% YoY) following a deficit of these commodities in domestic markets. The foregoing applied upward pressure on COGS (+34.4% YoY) to which Nestle Nigeria effected price increases across its products portfolio in a bid to protect gross margin.
The increase in product pricing largely explains the 34.2% YoY increase in FY 17 revenue, however, in our view, pricing came short of the surge in raw materials prices as gross margin contracted 9bps over 2017. Nevertheless, contraction (-190bps) in operating expenses to sales ratio underpinned by cost reduction initiatives neutered the weakness from gross margin to drive a 181bps expansion in operating margin to 22.8%.
Currently, NESTLE trades at a P/E of 32.9x compared to Bloomberg Middle and East Africa Peers at 36.9x. Our model is under review.