Equities Analysts Cut Nestle Nigeria Target Price, Keep Buy Rating
Nestle Nigeria has a price target of N1,130.50 per share, according to Cordros Securities analyst, Jennifer Chiwetelu, after the company lost 180 kobo per share deployed for business in Q1-2024. The company share price traded flattihs at N820 in the last seven trading sessions in the stock market amidst expectation of no dividend payment until 2025.
In its equity note, the investment firm said the consumer goods company target price was reduced by 5.3% from N1,194.30 previously set. The firm does not expect Nestle Nigeria to pay dividends until 2025, when its negativeshareholders fund changes to positive following asset revaluation.
Analysts said the consumer goods company would contend further with a myriad of margin dilutive pressures, though they are expecting that an improved exchange rate would reduce the company’s FX losses.
Foreign exchange losses have continuedto negativelyo impact Nestle Nigeria’s performance. The company with less than 793 million outstanding shares on the Nigerian Exchange has lost significant value in the recent past.
Nestle’s revenue performance stayed robust in Q1-24, however, margins and profitability were pressured by heightened costs and significant FX losses, Cordros Securities Limited said in its review.
Nestle Nigeria PLC revenue accelerated by 43.4% year on year in the first quarter of 2024. The push was driven by increased prices of goods to the extent allowed by the worsening inflation rate in the country.
In its equity review, Cordros Securities expects further improvement in revenue on further price increases, but noted that the company’s operating performance would be impacted by heightened cost pressures stemming from inflation and currency devaluation.
At the same price, the company’s costs of sales ran much faster than revenue growth, up by more than 76% year on year due to increased payments on raw material input. Heavy costs dragged gross profit downward by more than 5% year on year to N49.7 billion from N51.65 billion in the comparable period in 2023.
This happened at the same time when Nestle Nigeria’s operating expenses grew by 22% from N22.96 billion to N28.02 billion at the end of Q1-2024. Net finance costs rose sharply year on year due to huge forex losses in the period.
Details from its unaudited financial statement revealed that net finance costs surged by about 5700% year on year to N217 billion from N3.75 billion in the comparable period in 2023. This left the company with nothing in its first three months of operation in 2024.
Profit before tax turned red in the first quarter. Nestle Nigeria posted N196 billion as a pretax loss compared with a pretax profit of N24.90 billion in Q1-2023.
The food producer received a heavy tax credit in Q1, reducing the negative earnings performance. Details showed that Nestle Nigeria’s received a N53.4 billion tax credit. This reduced the loss after tax to N142.68 billion.
“We remain wary of the potential impact of FX challenges on the company’s earnings in the near term. Adjusting for the aforementioned, we reduce our target price by 5.3% to N1,130.50 from N1,194.35/s but maintain our “BUY” recommendation on the stock.”.
Margins to weaken on cost pressures: Following the better-than-expected revenue outturn in Q1-2024, analysts said Cordros Securities revised its revenue estimate for 2024 by 558 basis points to 27.1% year on year from 21.0% year on year. The firm estimated a cumulative average growth rate of 22.5% over 2025–2028.
“The revision in our revenue growth forecasts reflects our increased optimism in the company’s ability to sustain and potentially accelerate its revenue growth trajectory over the forecast period, supported by the resilient demand for its products and further price increases to offset rising costs.
“In contrast to our previous expectation of intensified cost-cutting measures, we now recognize a pressing issue with rising costs, affecting margins and constraining efforts to control costs,” Cordros Securities stated.
As a result, analysts foresee continued cost pressures, prompting the firm to adjust forecasts downward for both gross and EBITDA margins to 39.8% from 40.4% previously estimated and 22.2% from 22.9%, respectively.
According to the update, Cordros Securities also adjusted its FX rate assumption to N1,400.00/USD from N1,500, resulting in a lower FX loss projection of N198.50 billion, a reduction from NGN238.78 billion previously forecasted.
Cordros Securities Limited expects NESTLE to report a loss per share of N115.79, which is a significant reduction from N154.13 set previously compared with N100.26 loss per share posted in 2023. No dividend is expected in the near term: To address negative shareholders’ funds, Nestle opted to revalue its assets, thus boosting its book value.
“While we note that this should support the negative equity balance of N78.04 billion to a positive equity balance of N47.34 billion in 2024, we anticipate dividends will be postponed until profits cover the deficit in retained earnings,” a Cordros Securities analyst said in the review note.
The investment firm expects the negative retained earnings balance to worsen to NGN170.41 billion in 2024 from NGN78.63 billion and remain negative in 2025 at N84.70 billion despite projected profits.
“…We do not expect dividends until 2025, when the retained earnings balance turns positive”, Cordros Securities analyst Chiwetelu stated in the equity report on Nestle Nigeria. #Equities Analysts Cut Nestle Nigeria Target Price, Keep Buy Rating MTN Nigeria: Analysts Slash Price Expectation by 36%, Project Loss for 2024
