Nestle Nigeria Plc reported a 1% YoY decrease in revenue in its H1 2020 result. Gross profit dipped YoY by 8% due to higher direct cost. Similarly, operating profit fell by 15% owing to a higher administrative cost. Profit before tax declined by 16% while profit after tax reduced by 15%. EPS for the period stood at N27.53k (H1 2019: N33.11k).
Lower revenue from food segment amid weak domestic sales drags group topline
Nestle Nigeria’s revenue YoY declined again in Q2 2020 though at a slower pace than the Q1 2020 decrease. Revenue in Q1 2020 fell by 90bps and declined by 35bps in Q2 2020 mainly due to the weak revenue from the food segment.
Sales in the food segment (61% of the group’s revenue) decrease YoY by 3% from N88.24bn to N86.03bn in H1 2020, which we attribute to competition and weak macros evidenced in the weak domestic sales. Sales in Nigeria declined from N139.77bn to N138.07bn in H1 2020 while export revenue grew impressively by 38% from N2.14bn to N2.95bn in H1 2020.
Supply chain disruption and FX adjustment compress gross profit
Nestle Nigeria’s production cost declined YoY by 2% in Q1 2020. But the trend changed in
Q2 2020 following the supply chain disruption occasioned by the pandemic and FX
adjustment by the CBN. Primarily, the cost of sales in Q2 2020 grew materially YoY by
14% from N36.33bn in Q2 2019 to N41.52bn in Q2 2020. We believe that the primary
driver for the increase was the group’s inability to raise prices following repricing of its
input cost sourced both local and externally. As a result, the group’s cost of sales in H1
2020 increased YoY by 6% from N75.83bn to N80.19bn.
Consequently, gross profit declined by 8% from N66.08bn in H1 2019 to N60.84bn in H1
2020. Gross profit margin also contracted 343bps to 43% in H1 2020.
Following appropriate adjustments, we have a revised forward EPS of N53.39k (Q1 2020 estimate: N58.11k) on the stock informed by higher cost. We think that the cost pressure will persist given the inflationary environment and inclusion of maize (an input component of the group) in CBN FX exclusion list. Given the weak macros, we think that the group has limited scope for price increases.
Thus, we have a fair value estimate of N1,117.39k on the stock and maintain our HOLD recommendation.