BY BAMIDELE FAMOOFO
Nestle Nigeria Plc, a leading food company in Nigeria grew its revenue by 22.6 percent year on year (y/y) at the end of the 2021 financial year amid the increasingly competitive business environment.
The Food segment of the business which recorded a growth of 21.3 percent emerged a major contributor to gross revenue at 59.2 percent. Beverages contributed 40.8 percent to revenue having increased by 24.4 percent in the review period.
“We believe the c. 5.0 percent increase in Maggi retail prices drove the growth in the Food segment. In the Beverages segment, we imagine the expansion was supported by higher sales volumes, as our channel checks revealed that product prices in this segment remained broadly unchanged. However, the effects of inflationary pressures on costs dampened profitability, which dragged margins. Consequently, EPS grew mildly by 2.1% y/y to N50.51 in 2021FY,” Stock Analysts at Cordros Research explained.
Projecting into 2020, it is expected that volume-led growth will support the topline.
“For 2022E, we expect volume increases across the company’s product portfolio to support top-line expansion. As such, we forecast 11.7% y/y revenue growth in 2022E. Over the medium term (2023-2026E), we model average annual revenue growth of 10.9%, reflecting expected sub-inflation price increases. We model a 150bps decline in the 2022E gross margin, reflecting cost pressures from the high domestic inflationary environment and currency weakness. We expect operating expenses to grow by 11.7% y/y, though we think operating costs will remain in check and expect the OPEX-to-sales ratio to remain stable at 17.0%.”
Meanwhile, EBITDA margins are tipped to decline by 229bps to 22.8 percent following the expected drag on margins. It is also forecasted that EPS will increase by 7.5 percent y/y to N56.21 in 2022E (+2.1% y/y in 2021FY). “Further out, we forecast an EPS CAGR of 14.7% in 2023-2026E. Our EPS forecast tracks below Bloomberg’s consensus estimate of N60.50 in 2022E,” Analysts disclosed.
Cordros believes NESTLE’s valuation is stretched at the current market price as the market has already priced in growth catalysts. “However, given the resilient earnings delivered by the company over the years, we think investors may continue to price the stock at a premium to its fair value. On our estimates, NESTLE trades at a 2022E P/E and EV/EBITDA of 24.1x and 13.1x, a discount to its 5-year average of 25.6x and 14.5x, respectively.”
