By Emeka Anaeto, Business Editor

Investors’ adverse sentiment in the stock of Nestle Nigeria Plc, the most expensive in the Nigerian Stock Exchange, NSE, seemed to have bottomed out, if the significant up-turn last weekend is anything to go by.

But this was against analysts’ negative projections, despite a seemingly impressive full year 2017 financial results, FY‘17.

The share price which had trended at high point of N1400 previous week nose-dived to N1,375 following the results announcement, but did a quick recovery to N1,381 by close of trade last Friday.

However, the seeming recovery is a far cry from this year’s high point of N1,555.99, indicating that the stock was still one of the most unfavourable amongst the blue chips this year so far, losing -11.2 percent to date.Nestle’s shares appreciated by 92 percent in 2017.

But going by the mixed-fortune in the overall performance scorecard in the FY’17 as well as foreign investor sentiment that had worked for the stock for a long time, it is expected that further recovery in the share price would happen this week, having suffered enough punishment for the downsides in the scorecards.

The Financials

Nestle had reported a 34.2 percent year-on-year (YoY) rise in turnover to N244.2 billion. After tax earnings increased impressively by 325.5 percent YoY to  N33.7 billion.

On a quarterly basis, revenues grew by 12.4 percent YoY to  N58.9 billion (Q4’16-  N52.4 billion) with the food segment remaining the mainstay of total revenues. Notwithstanding, the company recorded a slowdown in growth on a QoQ basis (declined 7% compared to the  N63.3 billion reported in Q3’17). This is significant given that Q4 has historically been the firm’s strongest quarter. However, with a topline of  N58.9 billion, Q4 was the firm’s weakest quarter in 2017.

Cost pressures on gross margin remain high, inching higher by 220 bases points (bps) YoY and 100bps QoQ respectively to 57.6%. Consequently, gross margin moderated by 220bps YoY and 100bps QoQ to 42.4 percent in Q4’17 (Q4’16- 44.6%; Q3’17- 43.4%).

Operating expenses did not moderate either, worsening the impact on Earnings Before Interest and Tax, EBIT, margin which slipped 310bps YoY and 440bps QoQ to 21.4 percent, the lowest in five quarters.

Net finance expenses for the quarter under review declined 96 percent QoQ to  N263 million largely due to the  improvement in Nigeria’s FX situation following the introduction of the I&E window in April 2017. Consequently, overall, foreign exchange losses came in 31.3 percent lower than the previous year (FY’17-  N11.2 billion; FY’16-  N16.3 billion). Interest expenses also declined 13.9% during the year to  N3.9 billion.

Quarterly after tax earnings improved significantly by 44.4 percent YoY and 67 percent QoQ to  N10.7 billion. However, this was also supported by a much lower effective tax rate applied (Q4’17- 13.0%; Q4’16- 53.8%; Q3’17- 36.0%).

Nestle’s results indicated that it has continued to leverage on its staple products in the food and beverage categories as its food segment posted a YoY revenue growth of 36% while the beverage segment grew by 31% YoY.

The remarkable topline performance of N244.1billion in FY’17 from N181.9billion in FY’16 was largely driven by the food segment which accounts for 61 percent of revenue and higher product pricing. But cost of sales grew in line with revenue to N143.3billion in FY’17 from N106.6billion in FY’16 and supported gross profit margin which remained flat at 41 percent.

Nestle recorded significant gains in operating efficiency as operating profit increased markedly by 46 percent to N55.7billion in FY’17 from N38.2billion in FY’16. Operating margins expanded by 23 percent in FY’17 from 21 percent in FY’16.

Net finance cost had declined markedly by 47 percent to N8.9billion in FY’18 from N16.7billion in FY’17, due largely to a significant decline in interest expense and foreign exchange loss on foreign denominated loans which reduced from N16.3billion in FY’16 to N11.2billion in FY’17 given the relative stability in FX during the period.

Export revenue increased by nearly a billion from N1.9 billion in 2016 to N3 billion in 2017. Revenue from Ghana more than doubled from N974 million in 2016 to N2.6 billion in 2017. Revenue from Nigeria also doubled from N62 million in 2016 to N132 million in 2017.

Revenue from other segments, however, fell from N274 million in 2016 to N244 million in 2017.

Nestle declared a final dividend of N27.5 per share, which in addition to the interim dividend of N15.0 per  Nestle had earlier paid an interim dividend of N15 per share (comprising N13 from pioneer profits and N2 from its retained earnings).  These  amount to a total dividend of N42.5 per share, a massive 175 percent jump from N10.0 dividend per share total dividend in FY: 2016.  This  comes to a payout ratio of 99.8%, one of the boldest in the NSE so far.

Analysts Recommendations

In their review of the Nestle stock last week, investment analysts at WSTC Financial Services Limited stated: “We believe growth in volume will be constrained by higher competition from import substitutes given the improvement in FX liquidity and we do not expect any significant price increase.

“Thus, we believe growth in revenue will moderate significantly to 7.0 percent in FY’18. We have a fair value estimate of N1,197.14 for the stock. At the current market price of N1,380.0, Nestle is trading at a 15% premium to our fair value estimate.

“We have made appropriate adjustments to our valuation and we revise our recommendation on the stock to a ‘HOLD’ at the current market price of N1,380.0.”

But some other analysts as at Monday last week, had noted that since the stock was then trading N1,400 it carries an earnings yield of 3.03 percent and earnings per share of N42.55. It also has a dividend yield of 3.03 percent.

This means the stock was trading at 30 times earnings, making it overpriced. Nestle, traditionally trades at a premium, due to its blue-chip nature, and being a favourite of foreign investors. The stock also has a thin float since 66.18 percent of the 792 million shares in issue are held by Nestle S.A. Switzerland.

Some observers believe that while earnings per share and dividend per share are relatively high, the high share price makes the stock unattractive at its current price.