WSTC Pictures Nestlé Nigeria for 30.33% EPS Jumps

WSTC Pictures Nestlé Nigeria for 30.33% EPS Jumps

WSTC Securities has pictured Nestlé Nigeria (Ticker: Nestlé) for a 30.33% earnings per share (EPS) jumps in the financial year 2021. Analysts projected in an equity report on the ticker with the expectation that the fast moving consumer goods company’s EPS for the year will close the year at N65.05, an upgrade from N49.91.

Recall the consumer company recently reported relatively strong Q1-2021 results, with revenue of N87.26 billion, representing a 24% increase from N70.33 billion in the comparative period in 2020.

The investment firm’s analysts noted that Nestlé recorded a double digit growth of 16% in operating profit to N20.31 billion in the period from N17.54 billion in Q1-2020.

According to the company’s unaudited financial statement for Q1-2021, net income grew by 11% to N12.40 billion from N11.19 billion in a year ago.

Getting further insight, analysts spotted that across the Group’s two business segments – Food and Beverages, revenue expanded double-digit.

WSTC Pictures Nestlé Nigeria for 30.33% EPS Jumps
WSTC Pictures Nestlé Nigeria for 30.33% EPS Jumps

Revenue from the Food segment which consists of the sale of Golden Morn, Maggi, Nan, and Cerelac grew by 26% year on year to N52.36 billion in Q1-2021, while the revenue from the Beverages segment which consists of the sale of Milo, Chocomilo, and Nescafe grew by 21% to N34.90 billion in Q1-2021.

“We attribute the revenue growth in the two segments to higher prices of products during the period, to offset the impact of rising input costs”, WSTC’s analysts said.

On the cost side, analysts recognised there was a slight pressure on the company’s book.

WSTC Pictures Nestlé Nigeria for 30.33% EPS Jumps

Specifically, Nestlé Nigeria cost margin rose by 500 basis points to 60% in Q1-2021, resulting from the negative impact of the Naira devaluation and the pass-through effect on raw materials cost.

Therefore, gross margin shrunk to 40% in Q1-2021 from 45% in Q1-2020. Commenting on the gross margin position, analysts said that the decline reflected a lower profitability, despite the higher revenue generated in Q1-2021.

Effectively, it was noted that the Nestlé Nigeria partially offset the increased cost burden to the consumers during the period.

“In our view, the price sensitivity of consumers amid low household income, and persistently declining purchasing power of consumers gave rise to the margin haemorrhage”, WSTC analysts stated.

They also added that the decline in margin narrowed at the operating profit level, on the back of cost efficiencies.

Saying that, although gross margin dipped by as much as 500 basis points to 40%, the Group’s operating margin only declined by 200 basis points to 23% in Q1-2021.

Meanwhile, the company’s operating expense grew by just 2% to N14.43 billion, which analysts said implied a 300 basis points improvement in operating expense margin.

But on the downside, Nestlé Nigeria net finance cost spiked to N1.31 billion in the period from N83 million in Q1-2020, majorly as a result of FX losses incurred during the period.

Nonetheless, profit before tax grew by 9% to N19.00 billion in Q1-2021 while profit after tax grew by 11% to N12.40 billion.

Further observation from the company’s report shows that Nestlé Nigeria has maintained steady profit after tax growth over the years. In the first quarter of 2017, profit after tax was N8.59 billion, surged to N8.606 billion in Q1-2018.

Just a year after, the company delivered a profit after tax of N12.846 billion and then N11.195 billion in similar period in 2020.

Estimates

For the financial year 2021, investment analysts are expecting to see the company growth revenue as well its bottom line as prices of goods increase and optimisation of cost profile.

“We expect to see a solid revenue and profit growth in the subsequent quarters of 2021, on the back of price increases and cost optimisation, respectively.

“We also expect to see an impact of a low-base effect in Q2 2021 revenue performance. Based on our expectations of a higher revenue and profit growth, we adjusted our 2021 EPS forecast to N65.05 from N49.91”, WSTC Securities projected.

In the same manner, analysts at WSTC Securities revised fair value estimate to N1,444.98 from N1,321.67, which translates to an estimated justified price-to-earnings ratio of 22.21x.

At the stock’s current market price, the stock trades at a forward price earnings ratio of 21.52X which effectively implies a 3% price return – a level not sufficient for serious bargain hunting.

WSTC Pictures Nestlé Nigeria for 30.33% EPS Jumps