Nestle Nigeria Plc Faces Margin Pressures Despite Robust Q1-24 Revenue, Target Price Reduced by 5.3%

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The Nestle Nigeria Plc (NESTLE) disclosed its Q1-24 results, revealing robust revenue performance but facing margin challenges due to heightened costs and significant FX losses. Although revenue remained strong, margins experienced declines, with gross margin down by 136 basis points year-on-year to 26.4% and EBITDA margin down by 116 basis points year-on-year to 12.9%. This was attributed to a substantial increase in costs by 76.1% year-on-year and significant FX losses amounting to NGN191.67 billion.

Despite the positive revenue outlook, the company’s operating performance is anticipated to be impacted by continued cost pressures stemming from inflation and currency devaluation. Analysts expect further revenue improvement through price increases, but margin challenges are likely to persist, hindering profitability in the near term.

In response to these developments, analysts have adjusted their target price for NESTLE, reducing it by 5.3% to NGN1,130.50 per share, down from the previous NGN1,194.35 per share. However, they maintain a “BUY” recommendation on the stock. NESTLE’s current trading multiple stands at 7.2x its 2024 estimated EV/EBITDA, compared to the average of 9.7x for its Middle East and African (MEA) peers.

**Margin Weakening Due to Cost Pressures:**

Following a better-than-expected revenue outcome in Q1-24, analysts have revised their revenue estimate for 2024 upwards by 558 basis points to 27.1% year-on-year, with a compound annual growth rate (CAGR) of 22.5% projected over 2025-2028. This adjustment reflects increased optimism in the company’s revenue growth potential, driven by resilient product demand and anticipated price increases to offset rising costs.

Contrary to previous expectations of intensified cost-cutting measures, analysts now recognize rising costs as a pressing issue, impacting margins and limiting cost control efforts. Consequently, forecasts for both gross and EBITDA margins have been adjusted downwards to 39.8% and 22.2%, respectively. Additionally, the FX rate assumption has been revised to NGN1,400.00/USD, resulting in a lower FX loss projection of NGN198.50 billion.

As a result of these revisions, analysts now anticipate NESTLE to report a loss per share of NGN115.79 for 2024, compared to the previous estimate of NGN154.13 and NGN100.26 reported in 2023.

**No Dividends Expected in the Near Term:**

NESTLE has chosen to address negative shareholders’ funds by revaluing its assets, thereby improving its book value. While this should support the positive equity balance in 2024E, dividends are expected to be postponed until profits cover the deficit in retained earnings. Consequently, the negative retained earnings balance is forecasted to worsen in 2024E to NGN170.41 billion, with further negative balances projected for 2025E, despite anticipated profits. Dividends are not expected until 2026E, when the retained earnings balance turns positive.

**Valuation:**

The target price of NGN1,130.50 per share is derived from a 60/40 blend of the Discounted Cash Flow Model (DCF) and sector-relative valuation approach (EV/EBITDA). The EV/EBITDA valuation utilized the Bloomberg EM peer average (9.7x), resulting in a fair value estimate of NGN1,593.03 per share. Meanwhile, the DCF fair value estimate stands at NGN822.16 per share, assuming a 22.9% weighted average cost of capital (WACC) and a 4.0% terminal growth rate.


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