Nestlé Nigeria Earnings Deflates as Cost Pressure Mounts
In the first half of 2020, Nestlé Nigeria Plc (Nestlé) earnings per share (EPS) was down by 16.8% year on year to N55.07, tracking behind Chapel Hill Denham analysts’ estimate of N71.90 for the year.
In the second quarter (Q2), Nestlé’ Nigeria expended some 58.7% of its revenue on its direct cost thereby thinned down gross profit margin.
Nestlé across the world: Nigeria is cheap
Traded at N1,175.00, equity analysts at Chapel Hill’s forecasted price target of N1,645.55 as they consider that the stock is trading slightly ahead of its consumer sector average of 14.0x and 11.1x on price earnings.
However, Chapel Hill said the stock is materially cheap when compared to the trading multiples of other countries where Nestlé is listed.
In Nigeria, analysts recognised that Nestlé services a huge population of consumers with strong product brands, in its food and beverage segments.
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The leading consumers’ goods company products are widely accepted and demanded across market segments.
“We are projecting a dividend yield of 5.8% for Nestlé in for 2020, compared to our coverage average of 6.2%”, analysts stated.
Explaining the positive side of the performance, Chapel Hill said operating expenses dropped significantly.
In Q2-20, Nestlé’s OPEX dropped 23.9% year on year.
“This was largely influenced by lower selling expenses that declined by 18.5% to N8.89bn in Q2-20, reflecting the impact of the lockdown on logistics, marketing and preference for social media and online based advertisements”, analysts explained.
Also, the company was cash positive in the period as operating activities yielded results despite tough economic environment.
However, Nestlé’s net operating cash flow (NOCF) remained resilient at N26.32bn in H1-20.
Despite a 15.1% year on year decline in operating income, the company had a positive change in working capital, which supported cash flows in H1-20.
Notably, trade and other receivables declined by 39.1% from the beginning of the year to date to N40.09bn.
Meanwhile trade and other payables increased by 35.7% to N106.40bn in the same period.
However, inventories increased by 28.1% from the beginning of the year, likely reflecting slow sales in the period.
Also, net capital expenditure (CAPEX) was stable at N2.51bn, thus CAPEX intensity unchanged at 1.8% in H1-20).
Expressing its concerns about the results, Chapel Hill stated that Nestlé’s turnover slowed in Q2-20 and in H1-20 respectively.
Based on the unaudited Q2-20 results, the company’s food sales rose by 4.1% year on year to N44.53bn, while beverage sales surprised dropped off surprisingly.
It declined by 7.1% year on year to N26.16bn.
“We equally highlight that annualised H1-20 revenue outturn of N282.05bn is tracking about 9.3% behind our 2020 estimate of N310.82bn”, analysts stated.
In the period, cost pressures lifted cost of sales higher in Q2-20 at +14.3% and up 5.7% H1-20 respectively.
Nestlé’s costs of sales surprised negatively in Q2-20, rising by 14.3% year compared to 0.3% decline in revenue year on year.
Chapel Hill said this reflects costs inefficiency, with cost-to-sales ratio increasing to 58.7% in Q2-20 from 51.2% in Q2-19.
We link this to disruptions in local supply chains, which likely impacted logistics and prices of inputs sourced locally as Nestlé purchases a significant amount of raw materials locally. For context, local sugar prices (based on our survey) rose from an average of N13,500/50KG in FY-2019 to N19,000/50KG in H1-20. Similarly, data from the National Bureau of Statistics (NBS) showed that local prices of Yellow Maize rose by 27.0% yoy as at June 2020, while milk increased by 3.8% yoy as at June 2020.
Valuation
We have a BUY rating on Nestlé with a 12-month target price of N1,645.55. Nestlé trades at a FY-20E EV/EBITDA of 10.7x and P/E of 17.3x, compared to EM and global peers average of 21.9x and 16.8x respectively.
Nestlé Nigeria Earnings Deflates as Cost Pressure Mounts
