Nestlé Nigeria Rated Hold, Analysts Say Valuation is Overstretched
Consumer goods producer Nestlé Nigeria Plc gets a neutral or hold rating due to the company’s overstretched valuation, according to an equity report on the ticker. Valued at N1.137 trillion on about 793 million outstanding shares, its closely held nature reduce share price volatility.
Its share price trades at N1,435, rising from N1,395, according to 7-day trading data from the Nigerian Exchange. However, in an equity note, Cordros Capital sets a price target at N1,310.73; downgraded from N1,576.80 previous set for the ticker.
The company’s earnings remained strong despite the effects of the increasingly competitive landscape and existential macro challenges on its operations, Cordros Capital analysts said.
Analysts said 2021 results reiterate their positive view of Nestlé, though they added that the company’s valuation is stretched but optimistic about medium-term growth prospects.
In 2022, Cordros Capital believe Nestlé’s brand equity and product innovation will help the company circumvent the stiff competition from unlisted cheaper brands in the food segment. More likely so given the sales growth helped by prices adjustment.
Considering that Nestlé sources about 80.0% of its raw materials in Nigeria, analysts at Cordros Capital said they are concerned about the effects of the high inflationary environment on its margins amid the stifled consumer wallet.
Following the revisions to forecasts, analysts have now lowered the price target to N1, 310.73 from N1,576.80 but retain a neutral or hold rating and estimate a 2022 final dividend of N56.2.
Looking at how the consumer giant performed in the financial year 2021, there were opportunities as well as challenges in the market following pressures on the local currency and tempering household consumption.
Rising inflation gave a right for an upward price adjustment, though not enough to reduce pressures on the company’s margin. Simply put, margin tumbled as rivals scrambled for consumers’ wallets.
Cost pressures dampen earnings growth in the year, according to analysts note. Nestlé’s revenue grew markedly by 22.6% year on year amid the increasingly competitive business environment.
Analysis revealed that growth in the company’s Food and Beverages business lines supported the outturn. The financial statement shows that the food segment that accounted for 59.2% of the company’s business inched up more than 21% above the 2020 figure.
A similar trend was spotted in the Beverage segment. Accounting for 40.8% of the total revenue generated by the company in the period, the beverage segment recorded 24.4% year on year growth.
“We believe the about 5.0% increase in Maggi retail prices drove the growth in the Food segment. In the Beverages segment, we imagine the expansion was supported by higher sale volumes, as our channel checks revealed that product prices in this segment remained broadly unchanged”.
However, analysts said the effects of inflationary pressures on costs dampened profitability, which dragged margins. Consequently, EPS grew mildly by 2.1% year on year to N50.51 in 2021. For 2022, analysts at Cordros Capital said they expect volume increases across the company’s product portfolio to support top-line expansion.
As such, the firm forecasts 11.7% year on year revenue growth this year. Over the medium term (2023-2026), Cordros Capital model average annual revenue growth of 10.9%, reflecting expected sub-inflation price increases.
“We model a 150 basis points decline in the 2022 gross margin, reflecting cost pressures from the high domestic inflationary environment and currency weakness. We expect operating expenses to grow by 11.7% year on year, though we think operating costs will remain in check and expect the operating expenses-to-sales ratio to remain stable at 17.0%”.
Analysts at Cordros Capital now forecast earnings before interest tax depreciation and amortisation (EBITDA) margins to decline by 229 basis points to 22.8% following the expected drag on margins.
However, there is an expectation of 7.5% growth in earnings per share (EPS) to N56.21 in 2022, higher than a 2.1% year on year increase in 2021. Analysts at Cordros Capital downgrade their price target for Nestlé Nigeria to N1,310.73 from N1,576.80 share and keep the stock in a neutral bucket – HOLD rating.
The downgrade occurred as Cordros Capital analysts believe Nestle Nigeria’s valuation is stretched at the current market price, saying that the market has already priced in growth catalysts.
However, given the resilient earnings delivered by the company over the years, analysts said they think investors may continue to price the stock at a premium to its fair value.
Nestlé Nigeria Plc engages in the manufacture, marketing, and distribution of food and beverage products. It operates through the Food and Beverages segments. The Food segment produces and sells food products under the Maggi, Cerelac, Nutrend, Nan, Lactogen, and Golden Morn brands. READ: Nestle Nigeria unveils new Maggi product in South-South
The Beverages segment offers products under the Milo, Chocomilo, Nido, Nescafe, and Nestlé Pure Life brands. The company was founded on September 25, 1961, and is headquartered in Lagos, Nigeria. #Nestlé Nigeria Rated Hold, Analysts Say Valuation is Overstretched
