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NESTLE 9M'20: Muted Revenue Growth Amidst Increased Production Cost
#1
NESTLE 9M'20: Muted Revenue Growth Amidst Increased Production Cost

By WSTC

Performance highlight
Nestle Nigeria Plc in its 9M’2020 report grew revenue by 1% YoY to N212.73bn. Occasioned by a 7% increase in production cost YoY to N122.71bn in 9M’2020, gross profit declined by 7% to N90.03bn in 9M’2020 from N96.31bn posted in 9M’2019. Operating income also dropped by 12% YoY to N50.19bn in 9M’2020 on the back of higher administrative cost. Profit after tax declined by 13% informed by a higher effective tax rate of 35.2% (9M’2019: 34.9%) to N31.94bn in 9M’2020. EPS for the period printed at N40.29k (9M’2019: N46.48k). The group declared an interim dividend of N25.00k with qualification date on November 20, 2020.

Higher production cost weakens gross profit
Revenue grew YoY by 1% from N211.35bn to N212.73bn in 9M'2020 driven by doubledigit growth in revenue from the beverage segment. Income from the beverage segment grew YoY by 12% from N79.55bn in 9M'2019 to N89.35bn in 9M'2020. In contrast, revenue from the food segment declined YoY by 6% to N123.38bn in 9M'2020. While domestic sales remained flat in the period, export sales grew markedly by 16% YoY. We believe that weak revenue growth was reflective of the weak macros as well as depressed consumers' purchasing power.

Elsewhere, while revenue grew YoY by 1%, production cost increased by 7% from N115.04bn to 122.71bn in 9M'2020. We attribute the relative higher increase in production cost to foreign exchange adjustment, an increase in energy cost as well as adverse weather conditions which disrupted local food production. As a result, gross profit decreased YoY by 7% from N96.31bn to N90.03bn in 9M'2020 compressing gross profit margin to 42% (9M'2019: 46%).

Mounting administrative cost further dampens operating profit
The group's operating expenses for the period increased by 1% from N39.26bn to N39.84bn in 9M'2020. While marketing and distribution cost declined by 4% YoY to N30.86bn in 9M'2020, administrative expenses grew by 26% YoY to N8.98bn in 9M'2020. The increase in administrative expense was driven by personnel cost, which rose by 12% to N20.42bn in 9M'2020. Also, general licence fees grew 8% from N7.75bn to N8.35bn in 9M'2020. Due to the weak gross profit, operating profit decreased by 12% from N57.05bn to N50.19bn in 9M'2020.


Valuation
We note with concerns the group’s increased production cost amid muted revenue growth. While we believe that the challenge is systemic, given the persistent general prices increases, we remain concerned about the group’s ability to pass these cost increases to consumers. We also note the continued illiquidity that has characterised the FX market. While the group had over the years relied on local inputs, adverse weather conditions, and the incidence of flooding across states will inadvertently continue to pressure food prices and by extension, depress margins. We also note that the CBN inclusion of maize in FX restrictive list portents a downside risk to the group. Overall, we have a revised forward EPS of N53.69k and a fair value of N1333.70k on the stock. At the current market price of N1421.70k, the stock offers a total one-year return of -6%. Thus, we recommend a HOLD.

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