Nestle Nigeria Plc Resilient Amid Challenging Operating Environment

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Nestle Nigeria - Beverage to outpace Food Revenue Growth
Mr Mauricio Alarcon, Managing Director and CEO, Nestle Nigeria PLC while responding to questions during the 21st Edition Milo Basketball Championship Press Conference in Lagos.

Nestle Nigeria Plc reported a topline growth of 4% from N203.14bn in 9M 2018 to N211.35bn in 9M 2019. YoY, cost of sales declined by 2%, while operating profit increased by 16% notwithstanding the higher operating expenses for the period. Profit before tax (PBT) grew YoY by 18%, while profit after tax (PAT) increased YoY by 11% to N36.84bn (9M 2018: N33.12bn) on the back of higher effective tax rate. Management declared an interim dividend of N25.00k (9M 2018: N20.00k).

Sustained topline growth amid pressured consumers’ wallet

Nestle continues to impress, though at a slower pace in driving revenue growth despite the challenging operating environment amid pressured consumers’ wallet. In its 9M 2019  report, revenue grew by 4% to N211.35bn in 9M 2019, driven by a 2% and 7% growth in the food and beverage segment of the business. Revenue from the food segment grew  YoY from N129.07bn to N131.80bn in 9M 2019, while revenue from beverage segment advanced from N74.07bn to N79.55bn in 9M 2019. We attribute this growth to brand loyalty and continued proactive stance by management in meeting the changing taste and needs of consumers by way of new product launch and innovative packaging.

On the other hand, while revenue grew, the group continue to optimize its production expense as evidenced by the YoY decline in cost of sales. Expressly, cost of sales declined  YoY by 2% from N116.98bn to N115.03bn in 9M 2019. Quarter-on-quarter (QoQ), it increased at a faster pace to revenue. While revenue grew QoQ by 3% to N69.44bn in Q3  2019, cost of sales rose faster by 5% to N39.21bn in Q3 2019, eroding the gains in production cost margin by 100bps from 53% in H1 2019 to 54% in 9M 2019. Though no disclosure notes for the cost of sales in the 9M report, we believe that the YoY decline was due to local input cost substitution. The group has successfully introduced the use of locally produced items such as soya bean, maize, cocoa, palm olein and sorghum in its products.  As a result, gross profit grew YoY by 12% from N86.15bn to N96.31bn in 9M 2019.

Higher operating expenses cushioned by lower net finance cost

The group’s operating expenses increased YoY by 7% from N36.79bn to N39.26bn in 9M  2019, driven by higher marketing and distribution expenses for the period. Marketing and distribution expenses grew YoY by 9% from N29.74bn to N32.31bn in 9M 2019, a reflection of competition as the group drive marketing and promotional activities to retain market share. Supported by a 1% decrease in administrative expenses, operating profit YoY grew from N49.36bn to N57.05bn in 9M 2019.

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On the strength of a 61% decline in net finance cost from N1.27bn to N496mn in 9M 2019,  PBT grew by 18% to print N56.55bn in 9M 2019 (9M 2018: N48.09bn).

Historical Performance

N’m n 9M’15 9M’16 9M’17 9M’18 9M’19
Revenue 107,986 129,482 185,242 203,135 211,347
Cost of Sales (59,975) (77,549) (109,362) (116,985) (115,035)
Gross Profit 48,011 51,933 75,881 86,150 96,312
Operating Profit 24,676 25,370 43,085 49,360 40,434
Profit Before Tax 20,814 5,504 34,479 48,089 56,554

Source: Company accounts

Recommendation

We applaud management for consistent topline growth, albeit, at a slower pace amid the challenging operating environment. We expect the group’s goodwill, marketing and promotional activities to continue to support revenue growth. Also, we expect the group’s cost optimization drive to continue to support bottom-line.

Overall, we have a revised EPS of N63.55k and a fair value estimate of N1,088.41k on the stock. At the market price of N1,150.00k, the stock is trading at 5% premium to our fair value estimate. Thus, we revised our recommendation on the stock to a HOLD.

Financial Statement Summary

Nestle Nigeria Plc Resilient Amid Challenging Operating Environment - Brand Spur

WSTC Securities Limited