Rising Costs Eclipsed Nestlé Nigeria Tenacity to Boost Earnings

Rising Costs Eclipsed Nestlé Nigeria Tenacity to Boost Earnings

Rising costs eclipsed Nestlé Nigeria (Ticker: NESTLE) tenacity to boost earnings in the first half of the financial year 2021. The leading consumers’ goods producers saw topline growth but could not translate the same to improve the return for its shareholders in the period.

The company was faced with multiple pressures amidst tightened operating environment amidst rising inflation rate and devaluation of the local currency which worsened its foreign currency exposures.

In the first half, a key driver of the company’s rising cost profile includes its raw materials and financing costs in addition to bloated operational expenses.

Investors currently value the company at N1.109 trillion on about 793 million outstanding shares as the company shares traded in the Nigerian Exchange at N1,400 on Friday.

The stock market has corrected the stock price after Meristem Securities went neutral on Nestlé Nigeria withhold recommendation on August 16 when the share price was quoted at N1,5400.

Analysts at Meristem Securities retained 2021 target price of N1,482.13 on the back of expected earnings per share of N51.51 and a target price to earnings ratio of 28.77x.

Demonstrated tenacity in the second quarter of 2021, Meristem Securities said in its equity report as the consumer giant revenue printed at N84.18 billion, rising 19.08% from N70.70 billion in the corresponding period last year.

This stellar topline performance came from a combination of robust sales volume and an upward price review in the period.

“We like that Nestlé has maintained topline growth despite the heightened competition in its operating environment”, analysts at Cordros Capital noted in a review.

Cumulatively, the consumer company’s revenue for the first half amounted to N171.44 billion, a 21.57% growth relative to the record achieved in the comparable period in 2020.

Although export revenue was down to N2.89 billion from N2.95 billion a year ago, analysts at Meristem Securities review showed that domestic sales expanded by 22.58% to N169.25 billion during the first half.

It was noted that the company’s food segment – which typically accounts for about 62.09% of the total sales – improved by 17.58% to N101.15 billion in H1:2021 on account of increased demand for the company’s products, specifically the seasoning product- Maggi.

The beverage segment also made significant strides, expanding by +27.80% year on year in the first half of 2021 on the back of stronger demand for the company’s most notable beverage product (Milo).

Cordros Capital said channel checks revealed that the growth in this segment was influenced by an estimated average price increase of about 13.5% implemented in the first quarter of the financial year 2021. The time when Nigeria’s headline inflation rate peaked after rising for 19 consecutive months.

Meristem Securities said the revenue outlook for the full year remains positive primarily influenced by the robust performance recorded so far and the expectation of improved demand relative to the corresponding period last year.

On this note, analysts at the firm project 11.71% growth for the financial year 2021 to N320.70 billion from N287.08 billion in the pandemic year 2020.

Rising Costs Eclipsed Nestlé Nigeria Tenacity to Boost Earnings

Increased production cost reported drags the company’s profitability: During the period, the cost of sales jerked up 30.95% to N105.01 billion, the level analysts considered the highest increase in direct costs since the first half of 2017, outpacing the improvement in revenue.

Cost to sales, therefore, settled at 61.25% from 56.86% due to inflationary pressure and sales volume growth in the period.

Analysts expressed the view that rising sales costs were indicative of the weaker currency and much higher local sourcing costs, noting that Nestlé sourced about 80% of its raw materials in Nigeria in the second quarter.

Meristem said in its equity report that the improvement in revenue provided marginal respite to operating profit that expanded 5.83%, despite the 17.86% increase in marketing and distribution expenses.

However, the company’s operating margin contracted slightly from 24.34% in the first half of 2020 to 21.19% a year after as the rising cost profile left indelible marks on the result.

There was a 262.15% increase in finance cost to N3.39 billion from N937 million in the first half of 2020, influenced by higher intercompany borrowings incurred during the period.

The company’s financials shows that total debt increased by 30.5% to N52.48 billion as of the first half of 2021 from the N40.21 billion recorded at the year-end 2020, raising interest payments obligations.

Analysts noted that the company’s interest coverage ratio contracted significantly to 8.17x in the period from 36.62x in the first half of 2020, compared with a five-year average of 15.02x.

On a balance of these factors, pretax profit moderated by 1.43% to N33.38 billion while the company’s bottom-line declined even further by 0.43% to N21.73 billion.

“Our earnings expectation for the end of the year is largely contingent on topline outlook and the ability of the firm to manage cost pressures”, Meristem said.

Ultimately, the investment firm’s analysts forecast a 2021 profit after tax to print at N40.83 billion, implying a net margin of 12.73% from 13.66% in 2020.

During the year, the management decision to engage in borrowings helped boost liquidity position amidst tightening working capital conditions.

Nestlé’s total debt ratio edged higher slightly to 0.20x in the first half of 2021, according to Meristem as against 0.16x in the financial year-end 2020.

Analysts see the gearing ratio also increased to 2.27x from 1.37x in 2020, riding on the back of the company’s most recent intercompany loan, which pushed the cash position higher from N23.34 billion to N88.34 billion.

Consequently, analysts said the company’s working capital rebounded from its negative position of -N14.53 billion in 2020 to N1.73 billion in the first half of 2021.

Nevertheless, notwithstanding the weakness in margins, we expect the company to maintain positive earnings over the rest of the year, analysts at Cordros Capital stated.

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Rising Costs Eclipsed Nestlé Nigeria Tenacity to Boost Earnings