Nestle Nigeria Plc 2019FY: Q4 Earnings Weighed by Higher Effective Tax

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Event: NESTLE published Q4-19 and 2019FY results yesterday, which showed that the company’s EPS declined by 10.6% y/y in Q4. The y/y EPS decline was weighed by higher finance costs and effective tax rate, both of which offset the strong operational performance. On the 2019FY EPS of NGN57.63 (+6.2% vs. 2018FY), the board has proposed a final dividend of NGN45.00/s, above our estimates, and which equates to a yield of 4.0% on last Friday’s (28 February 2020) closing price (NGN1,130.00).
Revenue grew by 15.1% y/y (2019FY: +6.7% y/y) in Q4-19, following much better than expected acceleration in revenue growth from the Beverages (+18.2% y/y) and Food (+13.3% y/y) segments. The achieved overall revenue growth halted three consecutive quarters of slower growth and is the highest since Q3-2017, with Food growing at the fastest pace since that same period, while Beverages grew at the fastest pace since Q4-17.

Sequentially, revenue grew 4.7% q/q, bucking the trend of Q4 quarterly declines over the past two years, and was underpinned by improved volume outturn from the Beverages segment (+9.8% q/q).

Gross profit margin (-20 bps y/y) shrank to 43.8% in Q4-19, and was lower than the 45.5% we estimated. This was driven by the surge in CoGs (+15.5% y/y) which outpaced revenue for the second consecutive quarter. We cannot rule out the inflationary impact of the land border closure on domestic food prices as the driver for this, as NESTLE currently sources c.80.0% of its raw materials locally.

EBITDA (+33.6% y/y) and EBITDA margin (+330bps y/y) both grew as the revenue performance offset the growth in OPEX (+23.1% y/y) in Q4-19.

NESTLE recorded net finance cost of NGN441.98 million (from NGN381.57 million net finance income in Q4-18) in Q4-19 as the company took out a working capital loan facility of NGN10.00 billion at 11.25% interest rate in the period.

Operating cashflow (+28.8% y/y) got a boost from higher net payables (NGN12.35bn) and depreciation (+24.6%).

Compared to Q3-19, EPS was down -16.5% q/q, driven by higher OPEX (+23.5% q/q) and higher effective tax rate of 39.3%, up from 34.3% and 37.1% respectively in Q3 and Q2, resulting from c. NGN3.4 billion taken from PBT from non-deductible expenses and recognition of previously unrecognised tax items.

Comment: NESTLE’s Q4 EPS is below our expectation (at -18.9% variance), and is unimpressive, in our view. However, for the full year, NESTLE’s EPS and EBITDA are above 2018FY (+6.2% and +10.4% respectively). Despite the weakness in Q4, we expect focus to be on the positive full year earnings and dividend, hence, we do not foresee a negative reaction. NESTLE’s share price is down 23.1% YTD and on our estimates, the stock is trading on 2020E P/E and EV/EBITDA of 16.2x and 10.6x, a premium to emerging market peers 15.0x and 8.8x, respectively. Our estimates are under review.

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