Event

Nestle Nigeria (‘the Company’) reported Q1 2022 results recently. Revenue was N110.23bn, up by 26% YoY, majorly driven by solid double-digit growth across its two reporting segments – Food Products and Beverages. The operating margin was 24% (up 100 basis points YoY), spurred by higher pricing. Net profit grew by 45% YoY to N17.98bn.

Why is it Significant?

We were impressed by the strong revenue growth recorded by the Company. Specifically, the Company reported a N100bn level of quarterly revenue – a record. We expected to see deterioration in margins, owing to increased cost pressures with limited ability to raise prices due to the competitive landscape of the consumer goods market. However, an industry-wide action of price increase surprised us. Clearly, the cost pressures due to persistent supply chain disruptions were further exacerbated by the geopolitical tensions in Eastern Europe. Beyond supply chain disruption, the situation impacted the global commodity market in the form of a general high level of prices.

However, the revenue generated came at a slight cost as trade receivables grew by 26% on a year-to-date basis. On a year-to-year basis, it grew by 89%. This implies higher credit sales during the period, as the Company possibly took advantage of its robust cash balance which stood at N95.59bn as at the end of Q1 2022.

We expect revenue and earnings growth to sustain in the subsequent quarters, as cost pressures are likely to remain unchanged.

How do Valuations Look Now?

The stock trades at 20.24x our FY 2022 EPS forecast, which we see as attractive. We recommend a BUY with an estimated fair value of N1,562.02, which implies a justified P/E of 22.55x. Our multiple is 300 basis points below the past two years average, which we see as appropriate given the current weak business environment. The main risks to our valuation and attainment of our fair value are escalation of the geopolitical tensions between Russia and Ukraine, political risks associated with elections, and dynamics in the fixed income market.

Please follow the link “Nestle Nigeria Q1 2022 – Impressive Topline Growth Expands Profit Margins”  to view the whole report.