Despite the food inflation that has slightly accelerated over the past two months, which is affecting the purchasing power of Nigerians, analysts in EFH Hermes Research indicate that Nestle Nigeria Plc (NN) remains a major stock to watch in the Consumer segment of the Nigerian Stock Exchange.
With further competition that would impact margins and significantly increase Capital Expenditure (capex), Nestle’s returns are expected to remain strong and well above its Weighted Average Cost of Capital (WACC), Returns on Equity as it would continue generating value over the coming years.
The research firm’s expectations is not a mirage as they are tied to certain key drivers that are believed gave the conglomerate an edge over its counterparts.
Products and targets
EFG Hermes argued that NN is less exposed to impulsive or non-discretionary consumption than its peer, which provides some defences to its top line, as all its products can be considered ‘everyday’ products (Milo ready-to-drink). In contrast, Unilever has a household & personal care segment, which are not necessarily purchased every day. Also, Cadbury has impulse products in its portfolio (Clorets, TomTom).
As of Full Year 2018, over 80% of NN’s raw & packaging materials were sourced domestically and the company still plans to increase this by the end of 2019. EFH Hermes see the development as a comparative advantage relative to peers. For instance, 55% of Unilever Nigeria’s raw materials are imported. Though sourcing raw materials locally does not totally eliminate its foreign exchange (FX) risks, it allows NN to be less susceptible to FX shocks.
Proximity to shoppers
According to the research firm, proximity to consumers and giving access to products to the vast majority of the population are some of the key drivers of NN’s top-line growth. “The number of NN product’s distributors continues to grow Year-on-Year (Y-o-Y). By the end of 2018, NN had 121 key distributors, which is 20% more than Unilever Nigeria and more than the double that of Cadbury,” the report stated.
Strong brand equity, affordable prices
The firm also argued that NN enjoys brand loyalty across the nation as it derives from its global brand and remain affordable to the mass market. Consumers get access to a premium brand that is not more expensive than its direct peers. For example, Maggi Chicken (400g) is priced at a 25% discount to its major competitor, Knorr Chicken (400g) for the same packaging & size.