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Competition gradually blighting the Food business.

• Central to the Q2 19 earnings of Nestle and Unilever is the telling impact of increased competition in the food business and improved input cost management. For Nestle, EPS grew 4.3% YoY to N16.90 due to gains from increased local sourcing of raw materials and higher sales. On the flipside, having restated its Q2 18 financials, Unilever reported 30% YoY decline in EPS to N0.35 reflecting increased input and finance cost following exchange rate differentials relative to prior year.

• Over the rest of 2019, we expect normalization in margins for both companies while we expect the competition from other brands to remain drag on sales. However, after adjusting for the improved cost management over H1 19, we raised our NESTLE FVE to N1,447.39 which translates to an OVERWEIGHT rating. Nestle trades at a 2019P/E of 23.01x, relative to Bloomberg MENA peers of 15.49x. Elsewhere slow recovery in revenue guides our downward revision of Unilever FVE to N31.95 (previously: N35.82), which translates to UNDERWEIGHT rating. Unilever trades at a 2019 P/E of 26.1x relative to Bloomberg MENA peers of 16.1x.

• Food business faces increasing challenge: Amidst flat pricing, competition in food business from smaller seasoning brands (Ginomax, Terra cubes, Onga cubes) became more apparent over Q2 19, with both companies recording low to mid-single digit growth in revenue, relative double digit recorded in prior years. To begin, Nestle’s revenue from the food business grew by just 1.6% YoY over the review period. However, support from its beverage business drove the 4.6% YoY expansion in its overall revenue. Elsewhere Unilever’s revenue recovered from a downbeat in Q1 19, with food business expanding by 6.3%, following the measures put in place to drive topline. To clarify, we recall management’s guidance during its Q1 19 conference call to drive sales by partnering with banks to provide liquidity to its distributors. However, persistent struggle in the HPC segment drove overall revenue lower by 1.7% YoY to N23.4 billion.

• We are positive on Nestle: Nestle still posted a modest performance notwithstanding the tensed environment, due to savings from its cost. Elsewhere, exchange loss worth N219.5 million, recorded in Unilever’s finance cost coupled with input cost pressure drove earnings lower. In coming quarters, we expect the competitive environment to remain unchanged, albeit with a normalization in gross margin. That said, gains from improved sales and lower cost is expected to support growth in Nestle FY 19 EPS by 26.5% YoY to N68.7. On other hand, Unilever’s EPS is expected to decline by 22.9% YoY to N1.23 due to struggling sales, impact of currency convergence on its input cost and less shield from its finance income, given its lower cash balance.

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