Equity Research Report

On

NESTLE NIGERIA PLC

July 2009

This report is based upon information from various sources that we believe are reliable. However, no representation is made
that is not accurate or complete. This report is not an offer to buy or sell, nor a solicitation to buy or sell the securities
mentioned therein. This report is provided solely for the information of clients of LeadCapital Plc (LeadCapital) who are
expected to make their own investment decisions without sole reliance on this report. LeadCapital accepts no liability for any
direct or consequential loss arising from any use of this report or its contents. Investments can fluctuate in price and value and
the investor may get back less than was originally invested. Past performance is not necessarily a guide to future performance.
This information has been issued by LeadCapital, which is licensed by the Securities and Exchange Commission (SEC) and the
Nigerian Stock Exchange (NSE)
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THE ECONOMY
Over the years, the Nigerian economy has experienced a series of reforms and restructuring of its various
key sectors. Such reforms include the financial, petroleum, power sector, among others. The financial
sector has been the most noticeable beneficiary of the reforms as the banks and insurance companies were
asked to recapitalize/consolidate in line with government regulatory requirements. The telecommunications
industry also experienced a major transformation when the general system for mobile telecommunications
(GSM) was introduced in 2001. The deregulation of the downstream petroleum sector and privatization of
many previously government-owned parastatals also represent some of the many structural changes that
have been made in recent years.

In nominal terms, the size of the economy as measured by the country’s Gross Domestic Product (GDP) has
increased by a compound annual growth rate of 20.68% between 2001 and 2007. An important trend in
the economy’s growth is the increasing contribution of the non-oil sector, particularly the agricultural and
telecommunication sectors to the nation’s GDP.

Unfortunately, falling oil prices, precipitated by the global recession has diminished the capacity for the
country to continue along the growth path. Decline in the overall growth is anticipated for 2009 and likely
2010. In 2008, the exchange rate of the Naira, which had appreciated for the past 4 years, suffered 20%
depreciation in December 2008 alone. Inflation rate is back in double digits while external reserves are
gradually being eroded. The medium term outlook for the economy is not very bright.

On the political front, the country has experienced 9 years uninterrupted democratic ruling for the first time
in its recent history and for the first time in the post-independence period, political power has been
successfully transferred from one civilian government to another. Furthermore, the country has retained its
BB- credit rating by S&P and Fitch and has continued to receive rave reviews both locally and internationally
as a result of its ongoing reforms and agendas. Sustainability of these government initiatives will however
remain a major challenge in the years to come.

Since the inception of the present administration, in 2007, the country have witnessed policy reversals in
the areas of privatization, anti-corruption crusade etc. In fact the reform train appeared to have slow
down. The government appeared tardy in taking decisions, while the machinery of administration appears
inept. This may adversely affect future ratings for the country and likely reverse the positive impact that
past ratings had conferred on Nigeria.

However, it is not gloom all the way on the political terrain. For the first time in the countries history, we
have witnessed the judiciary, through the law courts, overturning election results based on the point of the
law. A few state Governors have been sent packing due to court judgments. However no sanctions were
recommended for rigged elections. Aside from a few religious and ethnic clashes in the Jos and more
recently in Bauchi (Both Northern towns), there seems to a general atmosphere of political stability in the
country. Therefore, the prospect of a political upheaval is slim.

THE INDUSTRY
Since the reintroduction of democracy in Nigeria in 1999, the Consumer goods industry have shown
considerable growth as government policies (allied with increasing oil prices) channel more cash to
consumers. As at 2007, the industry is estimated to be approximately $2.0 billion with an estimated
growth of around 20% per year. Total number of players is estimated around 100. Difficulties in
ascertaining this number arise as a number of players operate in the informal sector. Of the registered
functioning companies, 35% are processors while six out of the overall number are publicly quoted

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companies. The advent of a democratic government has led to a more business friendly environment and
privatization policies have led to an increase in the size of the private sector in the country.

The sector faces many challenges caused by the environment in Nigeria such as poor infrastructure, poor
standards of education, and high levels of corruption and a generally low level of disposable income of the
population. There is little manufacturing for export, but a significant activity exists in the manufacture of
fast moving consumer goods aimed at the domestic market. In recent years, multinational corporations
have increased their investment in physical plants, information technology and staff training with a view to
improving their operational performance.

The consumer goods sector is a major part of the manufacturing sector in Nigeria. And like all other
manufacturers, the consumer goods industry is characterized by low valued added production. What we
see are processors who process imported raw materials into finished products, with very little value added.
Multinational companies operating in this industry hardly add value because they import concentrates from
their parent companies, which they convert into finished products with minimal value added.

The industry is dominated by wholesalers and distributors. In fact, distributors and wholesalers account for
over 50% of total sales within the industry. Their dominance is as a result of fragmentation nature at the
retail end of the market. The retail end lacked adequate supermarket and glossary stores. They mainly
comprise of roadside kiosks, stores, and small sized restaurants, whose sales volumes are generally low.
Distribution to the retail market is hampered by huge investments required for delivery trucks general bad
road network.

Consumer goods industry in Nigeria is highly fragmented, with the presence of multinationals, domestic
and foreign companies. Except in categories where domestic players are protected by legislation,
multinationals usually dominate. Notable players include Cadbury Nigeria Plc, Nestlé Nigeria Plc, UAC
Foods, Wamco Nigeria Plc. It is common for large international companies to form alliances with Nigerian
companies, to repackage and/or market their products in Nigeria. This lowers the risk of market entry, as
well as enabling the international company to benefit from the existing marketing and distribution
capabilities of the Nigerian company.

A positive outlook is forecast for consumer goods in Nigeria during 2008-2013. One of the main
contributory factors will be the country’s political and economic stability. Higher disposable incomes and
increasing company advertising are expected to boost value growth. The average Nigerian will spend more
on packaged food, especially on items previously regarded as luxuries. Value growth will also benefit from
the increasing sophistication of Nigerian consumers and improving product quality. Food items that are
fast and convenient, such as pasta and noodles, will continue to post dynamic value growth.

THE COMPANY
Nestle Nigeria Plc (Nestle) is a member of the respected and trustworthy nutrition; health and wellness
company renowned world-wide for its high quality products. The company commenced simple trading
operations in Nigeria in1961 and has today grown into a leading food manufacturing and marketing
company. Nestle was listed on the Nigerian Stock Exchange on April 20, 1979. Nestle S.A. of Switzerland
and Nestle CWA Limited, Ghana are the major shareholders of the company, controlling 3.17% and
59.13% of the company respectively.

Nestle focus is food processing with an emphasis on cereals baby food, food seasoning and beverages. All
offered under a stable of the following brands - Range of the Maggi brand of food seasoning ( Maggi

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Bouillon Cubes, Maggi Chicken, Cray fish and super onion spices) - Nestle Nutrend ,Cerelac, Nan - Baby
food, Nestle Golden Morn - Cereal, Nestle Nido, Carnation - Milk and Nestle Milo (Chocolate drinks) and
Nescafe (Coffee) brand of beverages. Nestle S.A. of Switzerland and Nestle CWA Limited, Ghana are the
major shareholders of the company, controlling 3.17% and 59.13% of the company respectively.

The company has a general license agreement with Societe Des Produits Nestle S.A., Nestec S.A and Nestle
S. A for the provision of technical and other support services. The agreement was made with the approval
of the National Office for Technology Acquisition and Promotion and payments are made to Societe Des
Produits Nestle S.A. Nestle Nigeria manufactures and markets an impressive array of high quality brands:

Products

Infant Family Beverage Confectionery Seasoning Sauce Table Coffee Milk

Cereals Cereals Drink Water Product

Nestle Nestle Nestle Nestle MAGGI MAGGI Nestle NESCAFE Nestle

Nutrend Golden MILO CHOCOMILO Cube Machop Pure Life Classic NIDO
Nestle Morn MAGGI NESCAFE
CERELAC Chicken 3-in-1
MAGGI
Crayfish
MAGGI
Maxi
Cube

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5
FINANCIAL PERFORMANCE
The company’s turnover grew steadily over the past 5 years. Bottom line also exhibited steady growth.
Turnover increased by 16% CAGR over the past five years while PAT increased by 18% CAGR. Total Assets
also grew by 21% CAGR within the same period.

The company’s diversified product range seems to have ensured steady growth in profitability. The
performance in profitability is reflected in the company’s returns.

Profitability Ratios 2008 2007 2006 2005 2004

Return on Equity (%) 92.25% 87.26% 88.99% 88.68% 87.64%
Return on Assets (%) 28.57% 25.61% 29.94% 31.43% 28.62%
Gross Profit Margin (%) 39.51% 36.85%

Between 2007 and 2008, gross profit margin improved from 36.85% in 2007 to 39.51% in 2008. While
the return on assets reflected mixed performance over the last 5 years, return on equity has remained
above 85%. In 2008, it improved considerable to 92.25%, which shows promising returns to shareholders.

6
The recession (melt down) seems to have slowed down business activities. While we have seen
improvement in profitability, the activity rate slewed down. Asset turnover reduced from 2.07% to 1.77%
while stock turnover also dropped to 4.88% in 2008 from 5.23% in 2007. The company’s debtor and

Activity Ratios 2008 2007

Asset Turnover (times) 1.77 2.07
Stock Turnover (times 4.88 5.32
Trade Debtor Turnover (times) 12.02 19.15
Trade Creditor Turnover (times) 10.43 11.61
Debtors Collection Period (days) 29.95 18.80
Creditors Collection Period (days) 34.52 31.00

creditor turnover also dropped, a reflection of difficult business environment, while creditor’s and debtor’s
collection period increased between 2007 and 2008. It shows that the debtor were not meeting their
obligation to the company as at when due. On the other side, the company appears to meet creditor’s
obligation, though with slight delay.

Nestle’s liquidity position has improved steadily over the years. Current ratio has improved from

Liquidity Ratio 2008 2007 2006 2005 2004

Current Ratio 1.38 1.31 1.58 1.43 1.56
Quick Ratio 0.80 0.68 1.58 1.43 1.56

1.56 In 2004 to 1.38 in 2008. Likewise the quick ratio has shown significant improvement particularly in
2007 and 2008. The longer days in debtors collection period between 2007 and 2008 probably accounts
for the deterioration in the quick ratio from 0.68 to 0.80 in 2008.

STRENGTH AND CHALLENGES

Strength Challenges
• Strong brand • Declining purchasing power
• Excellent management with multinational • Increasing cost of production
backing • Threat of foreign (smuggled products)
• Large market share of seasoning and
beverage market
• Product breadth and innovation
• Excellent terms of trade with distributors
and suppliers’
• Good profitability
• Strong cash flow
• Adequate working capital

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STOCK MARKET PERFORMANCE
Nestle Nigeria Plc price performance on the exchange since the beginning of the year reflects the average
market performance. When compared with its peers in the consumer goods sector, Nestle’s performance
has been mixed. While the likes of PZ Industries have done 64% in price movement since the beginning of
the year, out performing the market, Nestle price movement has remained in the negative territory.
Recently restructured Unilever and resilient Dangote Sugar has also recorded significant price gains.

Nestle Nigeria Plc joined the flour millers whose performance remained negative. The slow price movement

YE
FORECAST YE FORECAST DIVIDEND YIELD YE FORECAST EARNINGS YIELD
COMPANY P/E(x) (%) (%) PB (x)
Dangote Sugar 11.63 7.4 8.6 5.62
Dangote Flour Mills 9.90 5.5 10.1 2.13
Flour Mills Nigeria 35.22 1.4 2.8 1.57
Nestle Foods Nigeria 14.92 6.0 6.7 13.82
PZ Industries 19.61 2.5 5.1 1.92
Unilever Nigeria 10.99 4.6 9.1 9.40

Is an indication of the value the market placed on the stock. When compared with its peers, Nestle’s price
to book is the highest. However its PE ratio is average but still perceived as an expensive stock when
compared with Unilever, Dangote Sugar and Dangote Flour

OUTLOOK
Over the next two years, the company aims to construct a new manufacturing plant in Ogun state, South
West Nigeria. This company believes would increase its reach and ensures steady supply of products. We
are also of the view that the growth we see in turnover in 2007 and 2008 was driven by consumer
spending. This was also accompanied by significant increases in the costs of raw materials used for
production. Vital materials like milk, sorghum, soya and packaging are becoming scarce in the economy
due to higher global commodity prices. Also, Nestle currently generates about 70.0% of its energy needs,

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up from 60.0% in 2007, further escalating the cost of production. We believe this trend would continue in
the coming years.

VALUATION
The following methodologies were adopted in estimating the ranges of value of the company:

Traditional Methods

1. Net Asset Basis

2. Maintainable Earning Basis - Simple Average
3. Maintainable Earning Basis - Weighted Average

Other Methods:

4. Current Earnings
5. Projected Earnings
6. Discounted Cash Flow (DCF) method

Net Asset Basis

The method establishes market value of the assets of the company and deducts liabilities. This is very useful
where the business is worth more in terms of its net asset value than as a going concern. It is regarded as
the break-up value. It might be used to determine a minimum transaction price, but it does not tend to
establish a fair market value.

This method values Nestle N13.67k per 50k ordinary share as at December 2008.

Maintainable Earning Basis - Simple Average

This method considers the simple mean of the maintainable earnings of the company over a period of
time, for the purpose of this valuation past five years results were considered. The mean earnings are
capitalized at an appropriate yield to arrive at the value of the company. The average peer P/E ratio was
used in valuing Nestle Nigeria Plc.

This method values Nestle at the following prices;

P/E Share Price (N)

Average Peer P/E 110.11

Maintainable Earning Basis - Weighted Average

This method is similar to simple average; however it considers the weighted mean of the maintainable
earnings of the company over a period of time, for the purpose of this valuation past five years results were
considered. The mean earnings are capitalized at an appropriate yield to arrive at the value of the
company. The average peer P/E ratio was used in valuing Nestle Nigeria Plc.

This method values Nestle at the following prices;

P/E Share Price (N)

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 Average Peer P/E 180.05

Other Possible Methods

Current Earnings
This method attempts to place a value based on the premise that current earnings can be sustained in the
future.

This method values Nestle at the following prices;

P/E Share Price (N)

Average Peer P/E 148.34

Projected Earnings
This method values a company on the basis of forecast Profit after taxation. The average forecast PAT is
then capitalized at a Forecast P/E.

This method values Nestle at the following price;

P/E Share Price (N)

Average Peer P/E 155.88

Discounted Cash Flow Method

This method values a company on the basis of future ability of the company to generate cash flow. This
stream of cash flow is discounted with a discounting factor that is arrived at after carefully putting into
consideration the risk free rate, premium for taking risk and volatility of returns.

The assumptions used were:

Cost of Equity Calculation

Risk Free Interest 10.18% Benchmarking 10 year FGN Bond yield rate
Beta Factor 1.05 The volatility of returns in the sector is relatively stable.
Benchmarking fixed income products guaranteed by fund
Equity Premium 18.00% managers @15%
Cost of Equity 29.08%
It expected that a good economy stability shall rule the
Terminal Cost of Capital 15.00% economy with declining beta factor and risk premium.

Terminal Growth Rate 0.15%

Terminal Value Period (Years) 25

Using this approach the company has been valued at N96.02 per 50k ordinary share.

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Summary of Results

Using traditional and other possible valuation methods we have assessed the value of the company and set
out the results in the table below.

Method Value/Share (N) per share

Net Assets 13.67
Maintainable Earnings (Simple Average) 110.11
Maintainable Earnings (Weighted Average) 180.05
Current Earnings 148.34
Projected Earnings (Five year average) 155.88
DCF 96.02

The Company’s share price is found to range from N13.67 to N180.05 per 50 kobo share. The current
market price is N183 (27/06/09) per 50k share. In our opinion,

1. Nestle Nigeria Plc appears to be overvalued at current market price

2. The premium paid on the company could be driven by technical and qualitative factors
3. Based on the outcome of our valuation we recommend a HOLD for Nestle Nigeria Plc

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Appendix 1

Balance Sheet position as at 31/12/2008

2008 2007
N'000 N'000
13,817,348 10,435,952
FIXED ASSETS

CURRENT ASSETS
STOCKS 6,415,165 5,225,829
DEBTORS AND REPAYMENTS 4,304,928 2,299,073
AMOUNT DUE FROM RELATED COMPANIES 122,627 284,014
FOREIGN CURRENCIES PURCHASED FOR IMPORTS 856,351 671,759
BANK BALANCES AND CASH-IN-HAND 3,643,133 2,335,693
TOTAL ASSETS 29,159,552 21,252,320

CAPITAL AND RESERVES

SHARE CAPITAL 330,273 330,273
SHARE PREMIUM 32,262 32,262
REVALUATION RESERVE 186,491 186,491
RETAINED EARNINGS 8,482,214 5,687,495
SHAREHOLDER'S FUND 9,031,240 6,236,521

CURRENT LIABILITIES
TRADE CREDITORS 3,001,440 2,394,634
OTHER CREDITORS AND ACCRUALS 1,831,059 1,117,217
TAXATION 1,982,067 2,362,998
DIVIDEND PAYABLE 583,920 595,634
AMOUNT DUE TO RELATED COMPANIES 3,695,131 1,766,313

LONG TERM LIABILITIES

INTER-COMPANY LOAN 5,980,438
DEFERRED TAXATION 2,606,588 1,180,061
PROVISION FOR GRATUITY AND OTHER
LONG-TERM EMPLOYEE BENEFITS 447,669 5,598,942
TOTAL EQUITY AND LIABILITIES 29,159,552 21,252,320

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Appendix 2

Income Statement as at 31/12/2008

2008 2007
N'000 N'000

TURNOVER 51,742,302 44,027,525

- -
COST OF SALES 31,300,680 27,805,162
GROSS PROFIT 20,441,622 16,222,363
MARKETING AND DISTRIBUTION EXPENSES -6,058,720 -5,553,636
ADMINISTRATIVE EXPENSES -2,479,275 -2,272,579

OPERATING PROFIT 11,903,627 8,396,148

INTEREST RECEIVED 26,024 95,705
INTEREST EXPENSE -67,438 -28,065
PROFIT BEFORE TAXATION 11,862,213 8,463,788

TAXATION -3,530,614 -3,021,889

PROFIT AFTER TAXATION 8,331,599 5,441,899

APPROPRIATIONS
TRANSFER TO RETAINED EARNINGS 8,331,599 5,441.90

EARNINGS PER SHARE N12.61 N8.79

ADJUSTED EARNINGS PER SHARE N12.61 N8.24

DIVIDEND PER SHARE N8.40 N8.99

ADJUSTED DIVIDEND PER SHARE N8.40 N8.43

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Appendix 3

Cash flow statement as at 31/12/2008

2008 2007
N'000 N'000

CASH FLOWS FROM OPERATING ACTIVITIES

Operating profit before working capital changes 13,818,876 11,135,038
working capital changes 31,070 -273,920
income tax paid -2,485,018 -2,750,194
Gratuity paid -5,788,707 -314,919

Net Cash Inflow from Operating Activities 5,576,221 7,796,005

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets -4,677,329 -4,343,306
Proceeds from sale of fixed assets 18,118 15,605
Interest received 26,024 95,705
Net Cash Outflow from Investing Activities -4,633,187 -4,231,996

CASH FLOWS FROM FINANCING ACTIVITIES

Dividend paid -5,548,594 -5,326,258
Interest charges -67,438 -28,065
Loan received 5,980,438 -

Net Cash Inflow/(outflow) from Financing activities 364,406 -5,354,323

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 1,307,440 -1,790,314

CASH AND CASH EQUIVALENTS, beginning of year 2,335,693 4,126,007
CASH AND CASH EQUIVALENTS, end of year 3,643,133 2,335,693

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