Nestle and Unilever: Underlying fundamentals remain solid   
Oct 12 (Lagos) - Analysts at ARM Securities Lds make changes to their valuation for Nestle Nigeria ( NESTLE ) and Unilever Nigeria ( UNILEVER ). 



They use a blend of DCF and relative valuation (PE and EV/EBITDA) with equal weighting and arrive at a target price of N1,287.54 (previous: N998.21) and N50.98 (previous: N34.30) for Nestle and Unilever respectively. 



Accordingly, we maintain our SELL rating on Nestle while we upgrade our recommendation on Unilever to an OVERWEIGHT rating. Earnings growth for the two companies averaged 17.4% as at H1 18 and we remain optimistic on the companies’ ability to sustain earnings momentum in FY 18 and FY 19. We forecast EPS of N59.87 (+40.7% YoY) for Nestle and N2.13 (+19.7% YoY) for Unilever in FY 18.



Topline expected to remain resilient: 



For FY 18, we forecast revenue growth of 12.3% and 13.1% to N274.3 billion and N102.7 billion for Nestle and Unilever. Over our forecast horizon (FY 18-22), we expect revenue to grow by a 5-year CAGR of 7.4% and 8.1% for the respective companies. Across our consumer coverage universe, Nestle and Unilever were the only two companies to report revenue growth as at H1 18. 



Particularly, we estimate that Nestle and Unilever reported volume growth of 5% and 6% respectively during the first half amidst increased importation of imported substitutes as well as still pressured consumer wallets which combined depressed revenue for other consumer companies. In our view, this speaks to strong consumer loyalty for their brands, enhanced route-to-market, product innovation (particularly Nestle) and product repackaging to capture the low-end of the market.



Unilever’s FY18 EBIT margin will be weaker, but only temporary. Supported by lower input costs and stable foreign exchange, we forecast EBIT margin of 25.4% (+259bps) and 14.1% (-15bps) for Nestle and Unilever respectively. 



We note that Unilever’s 15bps margin contraction is largely driven by the unusual increase in operating expense in Q2 18 (OPEX to sales ratio printed 24.1% in Q2 18 vs. 14% and 16.8% in Q1 18 and Q4 17 respectively) which we believe is related to the sale of its spread business. We therefore view this as a one-off increase and do not expect a re-occurrence. 



Over our forecast horizon, we forecast an average EBIT margin of 15.7% for Unilever and 26.4% for Nestle.



Still a strong balance sheet: For the two companies, we observed further balance sheet deleveraging in H1 18. Nestle total debt is down 27.7% to N17.4 billion (N24.1 billion as at FY 17) while Unilever’s debt is down to N4.3 million (N674 million as at FY 17). While Nestle’s lower debt was the result of repayment of due debt obligations using its robust cash – particularly from operating activities, Unilever used proceeds from its right issue of Q3 17 to repay ~ N20 billion worth of borrowings. Accordingly, Unilever’s debt-to-equity ratio in H1 18 declined to 0% from 0.89% in FY 17 while Nestle’s D/E ratio declined to 39% in H1 18 from 54% in FY 17. With lower debt and relatively higher cash for the companies, Nestle reported a net cash of N8.5 billion (vs. net debt of N9.0 billion as at FY 17) while Unilever reported net cash of N47.9 billion (vs. N49.8 billion as at FY 17). 



Valuation: We have a TP of N1,287.54 and N50.98 on NESTLE and UNILEVER translating to a SELL and OVERWEIGHT rating respectively. On our numbers, Nestle and Unilever trades at a forward P/E of 23.9x and 21.1x compared to historical 5-year average of average of 28.1x and 33.5x and MENA peers of 24.9x and 21.4x respectively. In terms of EV/EBITDA, Nestle and Unilever trades at 16.8x apiece, compared to MENA peer average of 11.9x and 13.6x respectively.
Topline expected to remain resilient: 



For FY 18, we forecast revenue growth of 12.3% and 13.1% to N274.3 billion and N102.7 billion for Nestle and Unilever. Over our forecast horizon (FY 18-22), we expect revenue to grow by a 5-year CAGR of 7.4% and 8.1% for the respective companies. Across our consumer coverage universe, Nestle and Unilever were the only two companies to report revenue growth as at H1 18. 



Particularly, we estimate that Nestle and Unilever reported volume growth of 5% and 6% respectively during the first half amidst increased importation of imported substitutes as well as still pressured consumer wallets which combined depressed revenue for other consumer companies. In our view, this speaks to strong consumer loyalty for their brands, enhanced route-to-market, product innovation (particularly Nestle) and product repackaging to capture the low-end of the market.



Unilever’s FY18 EBIT margin will be weaker, but only temporary. Supported by lower input costs and stable foreign exchange, we forecast EBIT margin of 25.4% (+259bps) and 14.1% (-15bps) for Nestle and Unilever respectively. 



We note that Unilever’s 15bps margin contraction is largely driven by the unusual increase in operating expense in Q2 18 (OPEX to sales ratio printed 24.1% in Q2 18 vs. 14% and 16.8% in Q1 18 and Q4 17 respectively) which we believe is related to the sale of its spread business. We therefore view this as a one-off increase and do not expect a re-occurrence. 



Over our forecast horizon, we forecast an average EBIT margin of 15.7% for Unilever and 26.4% for Nestle.



Still a strong balance sheet: For the two companies, we observed further balance sheet deleveraging in H1 18. Nestle total debt is down 27.7% to N17.4 billion (N24.1 billion as at FY 17) while Unilever’s debt is down to N4.3 million (N674 million as at FY 17). While Nestle’s lower debt was the result of repayment of due debt obligations using its robust cash – particularly from operating activities, Unilever used proceeds from its right issue of Q3 17 to repay ~ N20 billion worth of borrowings. Accordingly, Unilever’s debt-to-equity ratio in H1 18 declined to 0% from 0.89% in FY 17 while Nestle’s D/E ratio declined to 39% in H1 18 from 54% in FY 17. With lower debt and relatively higher cash for the companies, Nestle reported a net cash of N8.5 billion (vs. net debt of N9.0 billion as at FY 17) while Unilever reported net cash of N47.9 billion (vs. N49.8 billion as at FY 17). 



Valuation: We have a TP of N1,287.54 and N50.98 on NESTLE and UNILEVER translating to a SELL and OVERWEIGHT rating respectively. On our numbers, Nestle and Unilever trades at a forward P/E of 23.9x and 21.1x compared to historical 5-year average of average of 28.1x and 33.5x and MENA peers of 24.9x and 21.4x respectively. In terms of EV/EBITDA, Nestle and Unilever trades at 16.8x apiece, compared to MENA peer average of 11.9x and 13.6x respectively.







reporting for easykobo.com on Friday, Oct 12 2018 from Lagos, Nigeria


NOT TO REPRODUCED WITHOUT EXPRESS CONSENT OF ARM SECURITIES LTD. THIS ARTICLE IS COPYRIGHT OF ARM SECURITIES LTD. 
Copyright @ 2010-2019 Easykobo.com by Naija infotech & solar energy ltd. All rights reserved