Nestle Earnings Weakened by Increase in OPEX in Q1:2020

Must Read

List of Guaranty Trust Bank Sort Codes & Branches (with addresses) in Nigeria

The sort code is a number that usually identifies both the bank and the branch where an account is...

List of latest Ponzi schemes in Nigeria

These are the latest and past Ponzi scams and shady investment products that Nigerians are putting their monies into. What...

List of Access Bank Sort Codes & Branches (with addresses) in Nigeria

The sort code is a number which usually identifies both the bank and the branch where an account is...

Topline Contracts for the First Time in Fifteen Quarters

In its Q1:2020 financial scorecard, NESTLE recorded a marginal contraction in revenue (-0.90%) to NGN70.33bn from NGN70.97bn in the corresponding quarter of 2019. This is the first time the food producer would record a slow-down in sales in its Q1 top-line performance since Q1:2015. Despite a 1.81% growth in export sales, overall revenue suffered a decline on the back of a drop in domestic sales (-1.29%) to NGN69.05bn from NGN69.95bn in Q1:2019. The muted performance recorded during the period mirrors the trend witnessed in the first three quarters of the previous year, as weak consumer purchasing power weighed considerably on top-line. While there are no indications of a potential improvement in disposable income in the near term, we anticipate a turnaround in top-line performance hinged on increased demand for food and essential commodities in the face of the COVID-19 pandemic. Against this premise, we project a 7.28% growth in 2020FY revenue to NGN304.71bn from NGN284.04bn in 2019FY.

Slight Moderation in Direct Costs Support Gross Margin

The decline in cost of sales (-2.09%) outpaced the fall-off in revenue (-0.90%), giving rise to a slight moderation in cost to sales to 54.99% from 55.66% in Q1:2019. As a result, gross margin pegged higher at 45.01%, up from 44.34% in the corresponding period. Operating expenses, however, turned a corner, climbing by +14.03% to NGN14.12bn (vs. NGN12.38bn in Q1:2019). The expansion in OPEX stemmed from increased spending on both marketing & distribution expenses (+6.47% YoY to NGN11.04bn) and administrative expenses (+53.07% YoY to NGN3.08bn) during the period. The increase in OPEX, consequently, wiped out the gains recorded on direct costs, resulting in an 8.12% decline in operating profit to NGN17.54bn. Operating margin, thus, moderated to 24.94% from 26.90% in Q1:2019.

Read Also:  Nestlé And Veolia Join Forces To Tackle Plastics Leakage Into The Environment And Develop Recycling Schemes
- Advertisement -

Finance costs pegged lower at NGN417.93mn (vs. NGN469.35mn in Q1:2019) as interest-bearing liabilities fell from NGN13.21bn as at 2019FY to NGN1.05bn in Q1:2019. Finance income also declined by 50.34% to NGN335.24mn. PBT thus came in at NGN17.45bn, an 8.71% decline from Q1:2019 levels. An increase in the effective tax rate to 35.86% (vs. 32.82% in Q1:2019) pressured bottom-line further, resulting in a 12.85% decline to NGN11.20bn (vs. NGN12.85bn in Q1:2019). This implies a net margin of 15.92%, down from 18.10% in Q1:2019. While we anticipate a continued uptrend in OPEX in the near term, our expectation of an improvement in topline fuels our earnings projections. Hence, we forecast a 5.18% growth in bottom-line to NGN48.05bn from NGN45.68bn in 2019FY.

Improvement in Earnings Quality

Earnings quality improved during the period as net cashflow from operating activities exceeded net income by 88.83%, resulting in a negative net operating accrual of NGN9.94bn. During the period, the firm’s current ratio also expanded slightly to 0.90x (vs. 0.85x as at 2019FY), indicating an improvement in the company’s ability to meet its short term obligations.

Read Also:  NCS, FIRS, DPR SHARE N22.45BILLION FROM FAAC IN JULY – NBS

Outlook and Recommendation

- Advertisement -

Premised on the above-mentioned, we maintain our expected EPS of NGN60.00 and a target P/E of 20.00x, implying a 2020FY target price of NGN1,200. This represents an upside potential of 20.00% on its closing price of NGN1,000 on May 12th, 2020. Hence, we rate NESTLE BUY.

Meristem Securities

- Advertisement -
Nestle Earnings Weakened by Increase in OPEX in Q1:2020Nestle Earnings Weakened by Increase in OPEX in Q1:2020

Subscribe to BrandSpur Ng

Subscribe for latest updates. Signup to best of brands and business news, informed analysis and opinions among others that can propel you, your business or brand to greater heights.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Nestle Earnings Weakened by Increase in OPEX in Q1:2020Nestle Earnings Weakened by Increase in OPEX in Q1:2020

Latest News

Lagos Business School emerges as the only African business school on 2020 Economist ranking

Lagos Business School (LBS) has become the only business school in Africa to be featured on The Economist 2020...

Nigeria H2’20 Outlook – The viral shock

The year 2020 has been a struggle. A global pandemic is in full swing and is poised to upend lives and livelihoods, obliterating any...

BUA Group to set up 3 million Metric-ton Cement Company, 50MW Power Plant in Adamawa

The Bua Group announced that it is set to establish a three million metric tonnes cement plant and 50 megawatts power plant in Guyuk...

Economic Slowdown – Quick Response But No Quick Fix (LBS Executive Breakfast Session – July 2020)

Nigerian manufacturers are mostly anxious about two things today: How long will the pandemic lockdown continue before demand for my products recover? (X) - Unknown When will...

Equities Market: Lagos Bourse Plunges by 1.98% amid Sell-Offs

In the just concluded week, the domestic equities market closed in red amid renewed selloffs as investors took profit on stocks such as GLAXOSMITH,...
- Advertisement -
BrandsPur Weekly Cartoons
- Advertisement -Nestle Earnings Weakened by Increase in OPEX in Q1:2020Nestle Earnings Weakened by Increase in OPEX in Q1:2020