Good Food, Good Life -...
Transcript of Good Food, Good Life -...
Initiating Coverage
Nigeria | Equity | FMCG | April 2014
www.gtlgroup.com
Good Food, Good Life
Strengthened to ride through the bumps
1
CONTENTS
INVESTMENT SUMMARY .......................................................................................... 2
THE NIGERIAN CONSUMER GOODS SECTOR .................................................................. 3
COMPANY PROFILE ............................................................................................... 7
KEY GROWTH DRIVERS ..................................................................................... 10
REVIEW OF NESTLE FULL YEAR 2013 RESULTS ........................................................... 16
OUTLOOK FOR EARNINGS – 2014 AND BEYOND ........................................................... 18
VALUATION ..................................................................................................... 21
DISCLAIMER AND IMPORTANT DISCLOSURES ............................................................... 24
2
Nestlé Nigeria Plc
The Nigerian consumer market is poised to continue to
expand and a rapidly growing population as well as
rising income levels will be key drivers of consumption
growth, in our view. We believe that evolving consumer
themes will play to Nestlé’s strengths - robust capacity
(on the back of high capex investment), unique
approach to distribution channels and product
innovation.
Nestlé has recorded double-digit revenue growth over
the last decade, despite challenges within the Fast
moving consumer goods (FMCG) sector. We hold a long
term positive outlook for the sector and we believe the
company has capabilities to sustain momentum, as
pressure points in its FY-13 numbers are mostly
transient.
Over the past four years, the company has invested
heavily in capacity expansion in its Nigerian business.
We believe increased volumes from on-going expansion
will be a key driver of future revenue. This has driven
our expectations for double digit revenue and after-tax
profits growth over our forecast horizon.
While market sentiments on the counter over a five year
period reveal a price uptrend of ~83% CAGR, suggesting
the stock has been modestly over-bought, we still see
some upside as we believe the stock is current trading at
close to its intrinsic value, at current levels. At
N1215.67, our 12 month Price target is ~9% above
Nestlé’s current trading price of N1111.00. We rate
Nestle HOLD.
Nestle Nigeria
RECOMMENDATION
Current Price, NGN 1,111.00
Target Price, NGN 1210.92
Rating HOLD
Potential upside 9%
FINANCIALS
2013 2014e 2015F
Sales 133.1 165.3 203.3
EBIT 27.8 38.5 47.8
PBT 26.0 37.2 60.8
PAT 22.3 30.9 38.4
EPS 28.1 39.0 48.5
Div. Yield % 2.5 2.6 3.4
SHARE SUMMARY
Bloomberg Nestle NL
Reuters Nestle LG
Free float 36%
Market Cap, (N’mn) 911,475
Year Low (N) 958.80
Year High (N) 1,195.00
52 – Week Low (N) 879.50
52 – Week High (N) 1,249.50
RETURNS
Year to Date -4.18%
52 – Week 27.40%
Usoro Essien
Ade Alabi
Oluwaseun Dosunmu
Nelson Iziogba
INVESTMENT SUMMARY
3
THE NIGERIAN CONSUMER GOODS SECTOR
The consumer goods sector can be broadly grouped into the following
sub-sectors; white goods, brewers and bottlers, pharmaceuticals, household
and personal care, beauty as well as food & nutrition. Although dominated by
global brands such as Reckitt Benckiser, Procter and Gamble, Unilever, PZ
Cussons, Cadbury and Nestle, which are active in the Nigerian market
through their local subsidiaries, the sector remains fragmented. Other key
players within the space include Kneipe, Promasidor and United African
Company of Nigeria (UACN). Of the major players, only Unilever, Cadbury,
PZ Cussons, Nestle, Nigerian Breweries, Guinness and UACN are listed on the
Nigerian bourse.
Strong macro-fundamentals underpin positive outlook....
A review of our basket of companies in the Nigerian consumer goods space
show that revenues have grown by 15% over the past three years, while the
Nigerian food market is estimated to be growing at an average of ~9% per
annum. Major drivers include a positive shift in consumption patterns, the
emergence of a significant middle class in a sizeable population of
~167million, growth in the non-oil sector of the Nigerian economy and
annual per capita GDP growth of 3-5% for the past five years (which is
comparable to the growth seen in other emerging markets over the same
period).
Furthermore, data from the National Bureau of Statistics (NBS) show that
since 2006, the sector is the third largest recipient of foreign direct
investment (FDI), behind the oil & gas and telecoms sectors.
Our outlook for the sector is positive, underpinned by expected secular
growth in consumer demand in the near to medium term. Sub-Saharan
Africa (SSA) is now nearly as urbanized as China and also has a similar
population to urban city ratio with Europe. In addition, Mckinsey estimates
that Lagos, (together with Johannesburg and Cape Town) will generate
~$25bn in consumer spending annually by 2020, a figure comparable to its
forecast for key cities in other emerging markets such as Delhi and Mumbai.
The consumer goods
sector is poised to
continue to expand, to
be driven by continued
secular growth in
consumer demand.
4
Mckinsey also expects Ibadan, located only some 150km from Lagos, will
generate over $10bn within the same period.
Key players within the consumer goods space such as Nestle, Unilever, UACN
and PZ Cussons seem aware of these projections, and continue to invest
heavily in capacity expansion. We view this as a significant initiative, and
envisage that growth within the sector will likely be driven by these leading
brands, despite competition from smaller domestic companies whose
products have gained some prominence as cheaper substitutes, on the back
of the domestic impact of events that stemmed from the 2008 global
financial crisis. We hinge our perspective on three lines of reasoning:
First, we consider Nigeria’s most developed cities - where the leading brands
already have a strong hold - central to the growth of the fast moving
consumer goods sector, given the growth of the middle class as well as rising
urbanization.
Furthermore, rapidly expanding distribution networks as well as innovation
and versatility of the products offered by the leading FMCG companies,
suggest that the rural communities across the country will likely see
increased penetration from the leading brands in the near to medium term. A
good example is Nigerian Breweries’ acquisition of five small brewers in
October 2011, a move that has seen its mass market brands
(Maltagold, Life, Climax and Goldberg) gain traction in the second and third
tier states across Nigeria.
45% 30% 40%
73% 79% 82%
55%
70% 60% 27%
21%
18%
0
200
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1200
1400
1600
China India Africa Europe Latin
America
North
America
To
tal
Po
pu
lati
on
Urban Rural
Growth within the FMCG
sector will likely be
driven by leading
brands, despite
competition from
smaller domestic
companies.
5
Finally, we see a major advantage of scale for the leading players, especially
those with foreign parentage. These can benefit from access to cheap
financing from their parent companies, through which they can better fund
operations whilst also improving efficiency.
Thus, despite some challenge from the less popular section of the FMCG
segment, we view the leading brands as the prime beneficiaries of the
expected growth in the Nigerian FMCG sector in the foreseeable future.
Defensive players to remain strong, despite potential headwinds…
Despite a positive long term Outlook for the Nigerian consumer goods sector,
we are conscious of potential headwinds that may arise from upcoming
events in the next 24 months; notably the change in the central bank
leadership and its potential impact on monetary policies, political events in
the run-up to the 2015 elections, and plausible re-emergence of socio-
political unrest in the Northern part of the country.
Nevertheless, we expect companies in the consumer goods space with
defensive characteristics (from exposure to non-cyclical goods, especially
food) to outperform companies more involved in the production of cyclical
goods, irrespective of the occurrence or otherwise of these risk factors. We
believe that this view is corroborated by recent trends.
During the last three years, the consumer goods sector has experienced a
challenging environment due to a squeeze on consumer disposable income,
stemming from the global financial crisis, as well as structural adjustments in
the domestic economy.
As we would expect, the impact of these events was less evident on the
earnings of companies within the consumer goods space with exposure to
non-discretionary goods, as demand for these classes of products remained
relatively strong. For instance, while both Unilever and PZ Cussons, which
are major players in the non-food segment, easily delivered high teen sales
growth prior to 2009, both companies have endured single digit growth in
revenue over the past three years.
We favor companies in
the non-discretionary
FMCG segment as these
have a track record of
resilience in a
challenging business
environment.
6
On the other hand, Nestle, which is a major player in the food segment,
constantly delivered double digit growth prior to and over the corresponding
period (average of ~20% per annum).
With the ability to benefit from long-term growth in consumer demand while
also demonstrating resilience in the face of a more challenging environment,
we are naturally inclined to favor companies in the non-discretionary section
of the market, such as Nestle and UACN.
0
5000
10000
15000
20000
25000
30000
35000
40000
Q1 - 12 Q2 - 12 Q3 - 12 Q4 - 12 Q1 - 13 Q2 - 13 Q3 - 13 Q4 - 13
Trend in Revenue Growth (Q1-12) - (Q4-13)
Unilever Cadbury Nestle RHS
7
COMPANY PROFILE
Nestle Nigeria, a member of the Switzerland based multinational Nestle
Group, began trading operations in Nigeria in 1961 and was listed on the
Nigerian Stock Exchange (NSE) in 1979. The company is presently the
largest food and beverage company in Nigeria (ex-brewers), both in terms of
sales and market capitalization. Nestle Nigeria is part of the Central and
West Africa division of the Nestle Group, managed by Nestle Central & West
Africa based in Accra, Ghana. This entity is also the largest shareholder in
the Nigerian subsidiary.
The company has two manufacturing plants in Ogun state; the Agbara and
Flowergate plants. With an initial outlay of ~N30 million, the Agbara factory
came into existence ~30 years ago, and remains one of Nestlé’s largest
factories in Asia and Africa. The factory has been subject to extensive
capital expenditure over the years, as Nestle grew volumes and increased its
product portfolio in response to evolving consumer demand.
The Flowergate plant was commissioned in 2011 at an estimated cost of
~N12 billion, and has since been dedicated solely to the manufacture of
popularly positioned products (such as the Maggi brand) in order to ease
Part of the Central and
West Africa division of
Nestle Group
Two Manufacturing
plants in Ogun
state - Flower gate and
Agbara.
59.59%
3.89%
36.52%
Nestle Nigeria - Shareholer Structure
Nestle CWA Ghana
Nestle SA Switzerland
Others
Source: Company Filings, Greenwich Research
8
pressure and free up space at the Agbara plant for other product lines.
The company has also revealed plans to build a third factory in Abuja in the
near term, as it seeks to grow its presence in the Northern region.
Nestle operates a centralized distribution system with its distribution centre
in Ota, in Ogun state. The centralized distribution centre supplies a total of
74 distributors (as at Q3-13), spread across key regions in Nigeria.
Brands manufactured by Nestle Nigeria fall under eight categories as shown
below:
Table 1: Nestle Nigeria – Major Product Lines
Product Line Products
Infant Cereals Nestle Nutrient, Cerelac, Lactogen
Family Cereals Golden Morn
Beverages Milo
Confectionary Chocomilo
Bouillon Maggi - Cube/Chicken/Crayfish/Mixpy
Table Water Nestle Pure Life
Coffee Nestle Classic/3-in-1/Nescafe Breakfast
Milk Nido
The products are produced by two main strategic business units (SBUs),
namely Food and Beverages, which are defined by differing marketing
strategies and technology requirements.
Food •Maggi, Cerelac, Nutrend, Lactogen
and Golden Morn.
Beverages •Milo, Milo ready to drink, Chocomilo, Nido, Nescafe and Nestle Pure Life.
9
Over the last five years, revenues for the two strategic business units have
grown in double digits, with the Food SBU – accounting for ~61% of sales.
Nido , 3%
Nescafe , 4%
Pure Life, 9%
Golden Morn, 12%
Baby Food, 14%
Milo, 22%
Maggi, 36%
2013 - Product Contribution to Revenue
Revenues from Nestle
Nigeria’s 2SBUs - Food
and Beverages - have
grown double digits in
the past five years.
10
KEY GROWTH DRIVERS
Over the last five years, Nestle has consistently recorded double digit growth
in profitability, with revenue and net income growing at an average of ~23%
and ~26% y/y respectively. At 21%, growth in EPS lagged the bottom line
rate, owing to adjustments made to outstanding shares in FY-10,
when a bonus of one share was issued for every five held.
Portion sizes expand mass market appeal: Nestlé’s production of key
products such as Milo, Nescafe and Golden Morn in small single-use sachets
has been a major driver of volumes and market share in the last 3-4 years.
These products are designed for and appeal to low-income consumers who
constitute a large proportion of the Nigerian population, and in our view, play
a significant role in the overall consumption value chain. We observe this
strategy is being adopted industry wide, with products from Procter &
Gamble, Cadbury, Unilever and Promasidor providing competition.
Exports gaining traction: The Company commenced exporting some of its
products to neighbouring African countries such as Ghana, Togo, Mali and
Benin in 2011. We believe the move was designed to improve capacity
utilisation following the recent significant investment in capex. Although the
contribution of export sales to revenue is still minimal (two year average of
~1.5%), we envisage a steady improvement in the near term, as further
expansion plans are completed (mainly the construction of the Abuja
factory). The company’s export strategy also benefits from the Federal
Government’s favourable stance to exports in the form of subsidies.
11
Efficiency gains from improved distribution network: In our view, the
company has benefitted from changes to its distribution process that saw it
shift from wholesale to a “retail” driven distribution model. The retail model
relies heavily on secondary sales forces to push products through distribution
channels, resulting in a rationalization of the company’s distributors from a
total of about 170 to 74. This rationalization coincided with the company’s
move to a more centralized warehouse in Agbara, Ogun State.
.
As a result, Nestle now has a more structured distribution network, which
has given the company more grip over its distribution chain, while giving its
distributors more responsibility and ensuring deeper penetration across
different regions of the country.
We observe that Nestlé’s footprint continues to grow across secondary and
tertiary cities, especially locations within the northern region not rocked by
socio-political unrest, as it seeks to diversify away from those areas where
the local economy has been hit.
0
5
10
15
20
25
30
35
40
45
50
2008 2009 2010 2011 2012 9M - 13
Percen
t
Source: Company Filings, Greenwich Research
Nestle - Gross margin vs. competitors
Nestle Unilever Cadbury
Nestlé’s footprint
continues to grow in
secondary and tertiary
cities, especially areas
in the northern region
not rocked by
socio-political unrest.
12
0%
10%
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013
Cost to Sales Opex to Sales
Change in dynamics for raw material procurement: The company has
vastly improved its ability to manage typically volatile raw material costs
(which are affected by global commodity prices and exchange rates) by
ensuring a large proportion of its agricultural raw materials and packaging
materials are sourced from the domestic market. Figures from the FY-12
annual report show that ~75% of agricultural raw materials, which constitute
~60% of COGS by our estimates, are sourced locally. Key raw materials
obtained locally include cocoa, sorghum, cassava, maize and soybeans.
Furthermore, for imported raw materials, the company operates three levels
of procurement to drive supply chain efficiency: Nestle SA (at the global
level), Nestle Central and West Africa (at the regional level) and Nestle
Nigeria (at the local level). Thus, while the company is now exposed to
volatilities in domestic agricultural production, its exposure to exchange rate
volatility, which we consider the greater risk, has been significantly reduced.
We expect the trend to persist in the near term, with favourable Government
policies towards the agriculture sector providing support. Overall, this has
helped to moderate the rise in COGS and SDA expense over the last five
years, both of which have grown at a lower rate than revenues.
-5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
2008
2009
2010
2011
2012
9M - 13
Cadbury Unilever Nestle
Opex to Cost of Sales & EBIT Margins vs. Peers
~75% of agricultural
raw materials, which
constitute ~60% of
COGS by our estimates,
are sourced locally, thus
reducing significantly
exposure to exchange
rate risk.
13
0
5,000
10,000
15,000
20,000
2008 2009 2010 2011 2012 2013
Mil
lio
n ₦
Source: Company Filings, Greenwich Trust
CAPEX Investment - Nestle Vs Peers
NESTLE CADBURY UNILEVER
Tax incentives: As a result of the pioneer tax status granted by the Federal
Government’s Nigerian Investment Promotion Council (NIPC), Nestle has
enjoyed a significant moderation in its tax rate, which has fallen to ~13% in
the last two years (vs. an average of ~30% prior to 2011). This follows the
expansion and completion of the company’s Agbara and Flowergate factories
in FY 2011. The lower tax rate has boosted net margin within the period.
Trend in Net Margin and Effective Tax rate
Investment in capacity expansion: In the last decade, Nestle has
invested over N100 billion in capacity expansion, well ahead of peers, in its
bid to meet growing demand. Major completed investments include new
production lines (to increase capacity across the company’s flagship
products), the commissioning of the Flowergate factory, the completion of a
malt plant as well as an independent tri-generation power plant in the
company’s Agbara factory, which cost N3.6 billion.
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
2008 2009 2010 2011 2012 2013
Net Margin Effective Tax rate (RHS)
In the last decade,
Nestle has invested
over N100 billion in
capacity expansion,
well ahead of peers
14
In our view, investment in the new power plant is especially important as it
reduced the company’s dependence on energy from the national grid,
thereby increasing overall energy efficiency and reliability. The recent surge
in capital expenditure commenced in 2009 (with a total investment spend
~3x that of 2008) and increased further over the following two years.
Consequently, operating free cash flow (OFCF) was negative in 2009 and
2010. However, operating cash-flows remained strong, leading to a reversal
in OFCF in 2011 and 2012, despite an additional total capex outflow of ~N30
billion in both years. We expect OFCF to remain strong going forward.
We believe that the company will be close to the end of its major spending
programme, once the Abuja factory is completed. Nevertheless, we do not
expect capex to fall to pre-2009 levels (of ~N4 billion annually) as we
believe that management will continue to invest in strategic ventures to keep
the business at the forefront in the sector.
94,300
-1,120
1,721 2,101
19,047 28,186
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
-30,000
-10,000
10,000
30,000
50,000
70,000
90,000
110,000
2008 2009 2010 2011 2012 2013
Th
ou
san
ds
Trend in OFCF and CAPEX
OFCF CAPEX (RHS)
15
100% 93%
102%
67%
85%
66%
50% 47%
85%
0%
20%
40%
60%
80%
100%
120%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Company Filings, Greenwich Research
Trend in Dividend Payout Ratio
Net Income Dividend Pay Out Ratio
Expansion plans drive debt and lower dividends…
Nestlé's balance sheet shows that, prior to 2008, the company was fully
equity financed. Since then, Nestlé’s debt to total capital has hovered
between 40% - 60%, with bulk of the debt financing (> 75%) obtained from
the parent – Nestle SA.
Nestle maintained close to 100% dividend pay-out policy until 2008, where a
change in strategy engendered investments in capacity expansion. Over the
last four years, the dividend pay-out ratio has averaged 62%. We expect the
company to increase pay-out in the near term, as the construction of Abuja
factory nears its completion.
0
20
40
60
80
100
120
140
160
180
200
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2008 2009 2010 2011 2012 2013
Source: Company Filings, Greenwich Research
Nestle - Debt Coverage
Interest Cover (x) RHS Interest Expense
16
REVIEW OF NESTLE FULL YEAR 2013 RESULTS
Revenue growth slows…
Nestle Nigeria recently released its FY-13 results, reporting revenue and net
profit of N133.1 billion and N22.3 billion respectively, representing a 14.0%
and 5.3% rise from the comparable period in 2012. Q4-13 revenue rose by
~14% q/q (19% y/y) to N37.7 billion. Management proposed a final dividend
of N24.00, which brings the total dividend for FY-13 to N25.50, a rise of
~28% from the prior year.
Further analysis revealed that input cost pressures weighed on the Q4-13
cost of sales, which surged 32% y/y (24% q/q) to N22.6billion. The impact
was however lower on the full year figures with the FY-13 COGS rising 15%
y/y to N76.3 billion, ~300 bps below the 3-year trailing average.
At 42.7%, the FY-13 gross margin was 30 bps lower than the previous year
and 200 bps below Nestlé’s five year historical average. In our view, this was
partly due to the slower than expected top-line growth, which expanded at
its weakest pace in four years. We believe the slow growth in top-line was
due to negative consumer reaction to a price increase in Nestlé’s Maggi line
in H1-13.
Nevertheless, top-line performance improved somewhat in H2-13, as the
company rolled back some of its pricing decisions and also benefited from
stronger volume sales in its Milo line, following more aggressive pricing of its
main rival Bournvita by Cadbury during the same period.
As Higher Operating Expenses Crimp FY-13 Earnings…
Higher operating expenses y/y (admin costs up 13% to N6 billion, selling and
distribution costs up ~22% to N19 billion), were driven by an increase in
staff wages, a trend seen industry-wide in FY-13, as well as higher
distribution spending stemming from the company’s expansion into 2nd and
3rd tier states under its new retail distributorship model (designed to protect
market share, especially in the north).
FY-13 and Q4-13
revenues both rose
~14% to N133.1 billion
and N37.7 billion
respectively.
Net profit for FY-13 was
N22.3 billion, equating
to a 5.3% increase y/y
and resulting in an EPS
of N28.10k
(vs. N26.7 in FY-12).
Slower than expected
top-line growth and
input cost pressures in
Q4-13 drove FY-13
gross margin to 47.2%,
30bps lower than FY-12
17
As a result, the opex to sales ratio rose 100pbs to 21.8% (vs. 20.7% in
FY-12) with the EBIT margin falling by a similar proportion to 20.9%. FY-13
profit before tax came in at N26.0 billion, up ~4% y/y. For Q4-13 PBT
declined 16% y/y (21% q/q) to N5.7 billion, despite a steep ~71% fall in
finance costs to N185.5 million. Net profit for the year was N22.3 billion,
equating to a 5.3% y/y increase and resulting in FY-13 EPS of N28.10k (vs.
N26.7 in FY-12).
18
OUTLOOK FOR EARNINGS – 2014 AND BEYOND
Nestle Global has made a firm commitment to expansion in emerging
markets which has been reflected in its Nigerian operations. Approximately
20% revenue CAGR over the past six years, effectively doubling revenues
once every three years, has been driven by continued investment in capacity
expansion. Based on the high capex outlay in the last 3-4 years, together
with the strengthening of the company’s distribution network (designed to
cater for increased market penetration), we believe the company still sees
opportunities for volume expansion in Nigeria in the near to medium term, to
be driven by expected strong consumer demand and favorable
demographics.
Nevertheless, as seen in the recent results, some pressure points have
emerged. These include a slowdown in revenue growth, a sharp rise in
operating expenses (driven predominantly by a rise in distribution spending),
as well as the impact of a weakening domestic currency on input costs and
interest payments on the company’s long-term borrowings, a significant
portion of which are dollar denominated.
While we anticipate stiffer competition across our forecast horizon, on the
back of a growing influx of packaged food manufacturers such as Tiger
Brands and forward integration of existing food businesses by companies
such as Flour Mills of Nigeria (all of which we expect to wield the same
supply chain control that has proven an effective competitive advantage for
Nestle) we believe that Nestlé’s scale, pricing power and its better
understanding of the domestic terrain will ensure that it maintains a leading
market position.
Based on the negative consumer reaction to product price increases by FMCG
players in H1-13, which adversely impacted Nestlé’s FY-13 revenues, our
view is that the players that will deliver the most impressive top-line
performance in the near to medium term are those able to adopt innovative
strategies that will ensure higher volumes sales with minimal price
increments.
~20% revenue CAGR
over the past six years,
effectively doubling
revenues once every
three years, has been
driven by continued
investment in capacity
expansion.
Slowdown in revenue
growth, sharp rise in
opex and impact of
weakening currency on
input costs are key
pressure points from
FY-13 results
Despite stiffer
competition on the
horizon, we believe
Nestlé’s scale, pricing
power and its better
understanding of the
domestic terrain will
ensure it maintains a
leading market position
19
We believe the ability to push volumes and achieve scale is strongly
dependent on three main factors, namely; available capacity, depth and
efficiency of distribution and appeal to diverse consumer classes.
In our view, the themes that will likely unfold in the medium-term play to
Nestlé’s strengths, and drive our expectation of strong top-line growth across
our forecast horizon. Furthermore, we expect recent pressure on consumer
spending to ease after Nigeria’s 2015 elections, with the expected
subsequent pick-up in spending supporting growth in Nestlé’s top line. On
this basis, we expect only a mild recovery in 2014 and expect revenues to
grow ~15% (similar to FY-13 run rate), we however forecast 18% growth in
revenue (CAGR) through to 2016, largely in line the company’s five-year
trailing average (pre – FY-13).
On the cost side, we expect to still see higher distribution spending, albeit at
a lower rate than the FY-13 level. We therefore anticipate a mild progressive
uptrend in operating expenses of ~100bps annually over the next 3-5 years,
as a rise in administration and marketing expenses will mask savings from
lower distribution spending relative to FY-13.
We see scope for pressure on the domestic currency to persist in the near
term. Nevertheless, barring domestic shocks to agricultural outputs relevant
to Nestlé’s business, we do not foresee that volatility in global commodity
prices and the value of the domestic currency will materially affect the
company’s input costs going forward, as Nestle now sources ~75% of its
input requirements locally.
In addition, while a significant portion of Nestlé's long-term debt is dollar
denominated, we expect to see a reduction in the face value of its total long-
term exposure over the next 2-3 years, as the company enters the final
phase of its capacity expansion programme which – in our opinion - is the
reason for the inclusion of debt in its capital structure. Overall, the impact of
a depreciating naira on Nestlé’s numbers will likely not be as severe as it has
been in the past and interest expense will likely continue to decline across
our forecast horizon.
The themes that will
likely unfold in the
medium-term play to
Nestlé’s strengths, and
drive our expectation of
strong top-line growth
across our forecast
horizon.
20
We expect operating free cashflow to increase significantly going forward, as
the company’s capex spend declines from the levels seen over the last four
years. We deem it unlikely that a large and growing cash position will be left
sitting on the company’s books, and expect any surplus will be put to use by
means of one or both of the following means:
Repayment of long-term debt, ~75% of which was obtained from Nestle SA
for the latest capacity expansion. Although significantly below domestic
rates, we believe this borrowing exposes the company to a depreciating
naira.
The dividend payout ratio (currently at ~90% in FY-13) may also increase as
it benefits from the increase in OFCF mostly from decline in capex.
21
VALUATION
In valuing Nestle, we have employed a combination of discounted cash flow
(DCF), dividend discount model (DDM) and relative valuation methodology
(P/E).
Table 3:DDM Summary 2014e 2015F 2016F 2017F
Dividend Per Share 29.28 38.76 44.68 55.42
Terminal Value 1455.51
Present Value 29.28 38.76 44.68 55.42
Implied Value per Share 939.83
Table 2: DCF – Valuation Parameters
Risk Free Rate 13.8%
Return on the Market 14.0%
Beta 0.6
Average Tax Rate 16%
Terminal Growth Rate 10.3%
Cost of Equity 14.52%
Table 4: Peer Comparables
Domestic Market Emerging Market
2013 EPS FWRD EPS TRLN PE(x) FWRD PE(x) 2013 EPS FWRD EPS TRLN PE(x) FWRD PE(x)
Nestle 28.10 30.96 36.70 33.60 Nestle 28.10 30.96 36.70 33.60
Unilever 1.48 1.54 42.10 39.70 T.Brands 16.24 17.59 16.83 15.66
Cadbury 1.10 1.58 36.50 36.00 Spar 6.97 7.17 16.73 15.86
PZ 1.23 1.23 21.40 32.10 Savola 3.37 3.68 19.86 18.22
Guinness 9.95 6.76 28.20 36.40 AVI 3.41 3.67 15.55 15.45
NB 5.03 5.81 26.40 29.60 Almarai 2.50 2.94 25.06 21.33
Flour mills 2.91 6.09 28.80 13.70
Peer AVG. 30.57 31.25 Peer AVG. 30.57 31.25
22
For the DCF and DDM valuation methodologies, details of the relevant
parameters are given in Tables 2 and 3 above, which results in a 12 month
target (TP) of N1,355.45 and N1272.40 per share respectively. Our DDM
assumptions factor in expectations of dividend payout from 2014 forward.
While the payout has declined from historical levels, especially during a
period of high capex outlays (FY-09 till FY-12), we anticipate dividend payout
will return to near historical levels as the company is set to complete its
capex investment cycle in the near term.
The average trailing and forward P/E for local food producers (excluding
Nestle) is 30.6x and 31.3x respectively. At 36.7x, Nestle currently trades at
a premium to its local peers, a premium we however believe is justified. Our
P/E relative valuation (based on a domestic peer simple average) implies a
12 month TP of N822.68 per share for Nestle.
A blend of our three valuation methodologies result in a final 12 month TP of
N1,215.67, just ~9% above the current trading price of N1,111.00.
Consequently, we place a HOLD rating on Nestle Nigeria.
Conclusion
In our view, Nestlé’s valuation reflects its commitment to product quality and
innovation, the benefits from recent capacity expansion and deeper country
coverage through its powerful distribution, our expectations of a rise in
consumer disposable income post 2015 elections and Nestlé’s marketing
capabilities. While competition will likely be more intense going forward, we
believe the company is well positioned to take advantage of growth
opportunities that will emerge in the near to medium term, as the Nigerian
growth story continues to unfold.
23
P&L (Mn) ₦ 2013 2014e 2015F 2016F
Turnover 133,084 151,716 179,025 211,249
COGS (76,298) (83,444) (98,464) (116,187)
Gross Profit 56,786 68,272 80,561 110,737
Operating Costs (28,953) (32,138) (35,673) (39,597)
Operating Profit 27,833 36,134 44,888 71,140
Profit Before Taxation 26,048 34,016 42,303 68,080
Taxation (3,789) (6,293) (7,811) (13,667)
Profit After Taxation 22,259 27,723 34,492 54,413
Bal Sheet(Mn) ₦
Fixed Assets 70,621 78,227 84,344 92,807
Stocks 9,854 11,319 13,922 15,403
Trade Debtors 17,885 18,110 22,276 24,528
Total Assets 108,207 122,852 142,337 177,579
Trade Creditors 16,256 13,863 17,174 20,907
Total Liabilities 67,613 138,306 144,900 144,067
Net Assets 40,595 51,133 58,815 72,817
Key Ratios
Gross Margin 42.67% 45.00% 45.00% 52.42%
Operating Margin 20.91% 23.82% 23.07% 33.68%
Net Margin 16.73% 18.27% 19.27% 25.76%
Return on Assets 13.62% 14.02% 15.13% 13.99%
Return on Equity 33.53% 33.69% 36.61% 36.13%
Capex/depreciation (x) 0.83 0.98 1.18 1.03
Current ratio (x) 1.44 1.68 1.81 1.85
Quick ratio (x) 1.14 1.37 1.50 1.55
Cash Convetrsatino Cycle 31.37 27.79 26.98 26.52
24
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