Nestlé Nigeria

Nestlé’s Nigeria gets Hold rating on flat earnings, food segment concern

Nestlé’s Nigeria Plc.’s performance curve flattened from across board in what seems like an effect of weak macroeconomic pressure and competition from industry’s rivals.

One of the large cap consumers good sell its share at pricey ₦1000, but analysts are advising investors to dump the stock due to potential downside.

At ₦1000, Nestle Nigeria market capitalisation settled at ₦792.656 billion on 792,656,252 shares outstanding.

When WSTC Securities limited recommend HOLD rating, the firm means that estimated change in price is between negative 10% and 15% of current market price.

By the first quarter result (Q1) 2020, Nestlé’s Nigeria performance came weak given the fact that government has closed border; thus limited infiltration of competing products.

Nestle Nigeria Plc reported a 1% decline in revenue in its Q1 2020 result. While gross profit grew by 1% due to a lower production cost, operating profit decreased by 8% because of a higher operating expense.

Profit before tax (PBT) declined by 9% which also resulted to sloppy profit after tax (PAT) which then decreased by 13%.

The resultant effect of relatively weak profit performance was that EPS for the period stood dropped off at ₦14.12k compare to ₦16.21k in the comparable period.

Pressure on demand due to macroeconomic condition on one part and competition on the other hand reflected on turnover.

The company’s revenue declines, but lower production cost lifts gross profit.

A review of the consumer goods company shows that the group’s revenue declined mildly from ₦70.97 billion to ₦70.33 billion in Q1 2020.

The flat revenue in Q1 2020 was primarily due to the decline in revenue from the food segment.

Revenue from the food segment slacked 9% to ₦41.49 billion in Q1 2020.

While revenue from the beverage segment increased by 13% to ₦28.84 billion, the decline in the food segment – which accounted for 59% of the group’s total revenue- offset the growth in the beverage segment.

Similarly, cost of sales declined by 2% from ₦39.50 billion to ₦38.67 billion in Q1 2020 as the group continue to gain traction with the sourcing of material locally.

Then, gross profit grew from ₦31.47 billion to ₦31.66 billion in Q1 2020, and gross profit margin strengthened by 70 basis points to 45%.

Operating cost dampens operating profit

Nestlé’s operating cost spiked by 14% eroding the gains of a lower production cost due to a 53% increase in administrative expenses.

Administrative overheads grew from ₦2.01 billion to ₦3.08 billion in Q1 2020.

Also, marketing and distribution expenses rose by 7% from ₦10.37 billion to ₦11.04 billion in Q1 2020.

On the weight of higher operating expenses, operating profit declined by 8% from ₦19.09 billion to ₦17.54 billion in Q1 2020.

More so, increased payments to providers of fund affected the company’s profitability.

In Q1 2020, Nestlé’s net finance cost drags bottom-line PBT declined by 9% from ₦19.12 billion to ₦17.46 billion.

Net finance cost for the period was ₦82.69 billion against net finance income of ₦34.65 billion in Q1 2019.

Down the line, the results show profit after tax settled at ₦11.20 billion, which was a 13% decrease from ₦12.85 billion in Q1 2019.


Analysts at WSTC note the revenue decline in the food segment of the business, but not the cause for the decrease due to limited disclosure.

However, WSTC pointed out that the group deleveraged its balance sheet during the period by paying down on its borrowings.

The pay down cut across its foreign as well as domestic loans. Meanwhile, long term borrowings of ₦5.52 billion in 2019 was fully paid-off.

Also, short term borrowings of ₦4.96 billion as of December 2019 has reduced to ₦158.52 million in Q1 2020.

“We believe that the resultant cost savings will provide respite for the group in subsequent periods”, analysts stated.

However, WSTC revised its forward EPS of ₦58.11k compare to ₦62.40k estimated in 2019 on the stock and a fair value estimate of ₦1,066.39k.

At the market price of ₦1,000.00k, the stock is trading at 7% discount to our fair value estimate.

Thus, analysts advised customers to HOLD on Nestlé’s stock.

Nestlé’s Nigeria gets Hold rating on flat earnings, food segment concern

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