Sunday, July 25, 2021

    Nestle, Guinness: Why analysts want you to sell

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    Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

    The early results of corporate institutions quoted on the Nigerian Stock Exchange, NSE, for the period, first quarter 2018 (Q1’18) have pointed to a continued leveraging of the positive vibes eliciting from macroeconomic environment.

    But not all companies have impressive stories though they are good all the same. Before now the full year 2017 (FY’17) had witnessed robust corporate performance also on the heels of many reported rebounds in macroeconomic indicators.

    We have been presenting the analytics of some of the corporate performances against the backdrop of what the investors’ responses have been on the stocks.

    The stock market has been largely bearish for the past eight weeks at a time the impressive results were being announced, a development which, though unprecedented in the history of the Nigerian Bourse, has been explained as a form of market correction against the massive bullish run that pre-empted the results.

    Starting today we are presenting the first batch of analytics for some Q1’18. Though so many more of the FY’17 would have been presented but the inflow of Q1’18 early batch results appears to have overshadowed the FY’17, and the stock market trend is now based on the Q1’18.

    A mild recovery in the stock market has so far been recorded since the Q118 results two weeks ago, but the market sentiment appears too weak to sustain recovery on the strength of the latest results.

    Here are the analytics of some of the FY’17 results: Nestle’s revenue rose 10.3% to N67.5 billion in the Q1’18 in line with estimates by some analysts. But on quarterly basis the fourth quarter 2017 (Q4’17) came brighter at 14.5% growth.

    Also, after tax profit in Q1’18 rose by a paltry 3.0% to N8.6 billion, slower than most analysts’ projection. However, the result indicates that growth in top line was driven by a pick-up in volumes even as prices gradually decline.

    On a segment level, the company’s beverage unit recorded the most improvement with a 17.0% year-on-year (YoY) growth (+11.4% QoQ) while the food segment – major contributor to revenue at 63.8% – also grew remarkably by 6.9% YoY (+16.4% QoQ).

    Gross margin was relatively flat YoY at 38.2% (Q1’17, 38.4%). However, compared to the preceding quarter, this was weaker (Q4’17, 42.4%), reflecting the impact of higher production cost during the quarter.

    Operating profit margin was fairly unchanged during the quarter at 21.5% (Q1’17, 21.6%; Q4’17, 21.4%), highlighting stability in OPEX management. FX losses came in lower by 38.1% YoY to N638.7 million, but this was not enough to offset the impact of much lower interest income at N281 million (Q1’17 – N2.6 billion).

    Thus, the company recorded a net finance cost of N878 million compared to net finance income of N1.1 billion in Q1’17. Q1’18 profit after taxes rose 3.0% YoY to N8.6 billion.

    On a QoQ basis, however, this came in lower by 19.9% due to a much higher effective tax rate at 36.8% (Q4’17 – 13.0%). Reflecting on this result, analysts at Cardinal Stone Partners stated: ‘‘We like that Nestle was able to grow volumes in Q1’18, hence surpassing its top line performance in the previous quarter.

    However, a key highlight in the result is the higher cost-to-sales margin (61.8% compared to an average of 57.7% in the last three quarters), which we believe if not constrained going forward, will dent margin expansion opportunities.

    Based on our last review, Nestle has a price target of N1,147.38, which is a 26.9% downside to last close price of N1,570.00, hence we retain our SELL rating on the counter.

    Guinness Nigeria Plc, operating a different financial year cycle, released its nine-month (for the period ending March 2018) with a moderate revenue growth of 17.4% YoY to N105.5 billion, in line with analysts’ estimate of N103.0 billion.

    But after tax earnings skyrocketed to N5.1 billion, from a loss of N2.6 billion in the corresponding period of the last financial year, beating analysts’ projection of N3.4 billion.

    In spite of the increasing competition in the brewery space, quarterly revenues grew 15.0% YoY to N34.9 billion, propelled by improving volumes in the firm’s mainstream spirit and beer brands, despite that prices were higher in the corresponding quarter.

    Notably, the observed 14.1% quarter-on-quarter (QoQ) decline in sales compared to the previous quarter largely reflects the impact of seasonality. The 21.52 percentage points (ppts) YoY decline in gross profit margin to 33.2% (Q3’16/17- 54.7%) reflects increases in production costs compared to the corresponding quarter last year.

    But notable is the impact of higher product prices in Q3’16/17 that also led to significantly high margin Guinness increased prices to offset against the effect of inflationary pressure and foreign exchange constraints on raw material and other input costs.

    However, gross margin was relatively flat on a QoQ basis at 33.2% in current quarter compared to 33.5% in the preceding quarter.

    Operating profit margin improved QoQ to 11.5% (Q3’16/17 – 9.8%) even as the company continues to enhance its processes for greater productivity. Management had previously hinted at efforts to streamline its operations to reduce cost.

    This is more evident in the 38.4% YoY decline in marketing and distribution expenses (Q3’17/18 at N7.7 billion; Q3’16/17 at N12.5 billion), despite improved growth in revenues. Guinness recorded an impressive 97.9% YoY and 24.3% QoQ growth in profits before taxes during the quarter.

    This was also supported by net finance income of N320 million, compared to net finance costs of N2.1 billion and N500 million recorded in Q3’16/17 and Q2’17/18 respectively.

    Overall, per share earnings came in strongly at N1.35, 141.4% higher than consensus estimate of N0.56. Reflecting on this performance, analysts at Cardinal Stone Partners stated: ‘‘We think the result is impressive and this enhances our optimism for Guinness Nigeria Plc’s.

    ‘‘It is obvious that management is strengthening its strategies to drive down costs as over the past three quarters, operating expenses in relation to sales have averaged 24.2% compared to the 31.0% observed in the whole of FY’16/17.

    ‘‘We expect this trend to persist till the end of the current financial year. We also believe that Guinness will continue to drive volumes especially in the mainstream spirit and beer segments. ‘‘This comes, even as competition intensifies in the brewery landscape amidst depressed consumer spending.

    ‘‘The company has also paid off over 59% of its Diageo loan portfolio. This should continue to have positive implications on bottom line through the year. ‘‘As a result, we have revised our Profit After Tax (PAT) and Earnings Per Share (EPS) forecasts for FY’17/18 to N7.4 billion (previous: N6.7 billion) and N4.02 (previous: N3.63) respectively.

    We have also reviewed our target price upwards to N97.81 (previous: N82.11). ‘‘This, however is still a discount of 5.0% to current market price of N103.00, hence we retain our SELL rating on the counter.’’

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