Forex restriction on milk: Experts downgrade Nestle Nigeria
Analysts at WSTC Financial Service limited, formerly Wall Street Trust Company has downgraded Nestlé Nigeria Plc, citing potential impact of the Central Bank of Nigeria’s restriction of access to forex for milk importation which is a major ingredient in some of its products just as competition gets stiffer in the Fast Moving Consumers Goods (FMCG) sector.
With market capitalisation of N1.03 trillion, Nestle stock has plunged more than 20% year to date. At the closing price of N1, 299.50 on July 30, 2019, WSTC Financial said the stock was trading at 15% premium to its fair value estimate.
In its review, WSTC Financial said that the released HY1’19 result was relatively in line with its estimates as at Q1’19. However, it lowered its revenue growth forecast to 5% for FY’19 compared with 7% previously estimated, owing to increased competition and rising pressure in consumer demand.
“Nonetheless, we expect the Group to leverage its operating efficiency in cost of sales, although we maintain that the Group will incur higher operating expenses in HY2’19, to boost the bottom line.
“Consequently, we project a FY’19 revenue and profit before tax of N279.59 billion and N70.65 billion respectively. We also expect the Group to report a profit after tax of N51.49 billion,” WSTC Financial stated.
In the first half of 2019, Nestle Nigeria Plc maintained a 5% growth in top-line from N135.29 billion recorded in first half of 2018 (HY1’18), to N141.91 billion.
The company’s cost of sales declined by the same rate of 5% from N79.72 billion in H1’18, to N75.83 billion in HY1’19, thereby resulting in an impressive growth of 19% in gross profit, from N55.57 billion in HY1’18 to N66.01 billion in HY1’19.
In a similar trend, operating income rose by 26%, from N32.2 billion in HY1’18 to N40.4 billion in HY1’19.
This sterling performance strengthened the bottom line. Nestlé’s profit before tax grew by 27%, from N31.9 billion in HY1’18 to N40.4 billion in H1’19 while profit after tax grew by 22%, from N21.5 billion in HY1’18 to N26.2 billion in HY1’19.
WSTC Financial also said it downgraded its rating on Nestle, on the back of weaker, but stable, revenue growth in the near to medium term. Also, a potential loss of market share, resulting from increased competition, a potential impact of CBN policy on forex restriction for milk importation; which is a major ingredient in some products, and weak demand.
The firm stated that apart from these, there is dim macroeconomic outlook, thereby resulting in increased unemployment, lower income and which by extension, is expected to result to lower demand. In addition, there is reduction in cash flows generation, with the assumption that there will be no material upward adjustments in prices, following heightened competition in the market.
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