Nestle Nigeria Q4 2018 Result: Higher Opex/Sales Drags Down PBT Performance

May 6, 2019/InvestmentOne report

 ·         Higher topline growth: up 12.40% q/q; 5.19% y/y.

·         Improved gross profit margin: up 36bps q/q; 616bps y/y.

·         Mixed opex to sales ratio: down 867bps q/q, up 79bps y/y.

·         Higher PBT margin: up 847bps q/q; 672bps y/y.

Nestle Nigeria Plc released its Q1 2019 scorecard last week, which showed a 672bps y/y expansion in PBT margin to 26.94%. The improvement in PBT margin in Q1 2019 was driven by a 616bps y/y rise in gross profit margin and a net finance income of N34.65million in Q1 2019 as against a net finance cost of N878.59million in Q1 2018, which outweighed the 79bps y/y rise in opex/sales ratio. 

Cost Efficiency Props Up Gross Margin 

Nestle Nigeria Plc posted a 5.19% y/y topline growth in Q1 2019, the weakest in recent times. The published growth in topline was driven by both the 5.71% y/y and 4.29% y/y increase in revenue generated from the food and beverage segments respectively. Despite the slower growth rate recorded, gross margin rose by 616bps y/y to 44.34% following the 5.29% y/y decline in the cost of sales. The reduction in the cost of sales may be partly attributed to the absence of one-off cost in Q1 2019. We recall that management in Q1 2018 took an impairment loss of N3.41billion, which pressured margin at that time. Consequently, gross profit grew by 22.17% in Q1 2019 to N31.47billion. 

On a sequential basis, topline grew by 12.40% faster than the 11.67% q/q rise in the cost of sales. As a result, gross profit was up by 13.32% q/q, largely on account of volume as margin was somewhat flat, up 36bps q/q.  

Sustained Management Of Operating Expenses

Nestle continued to maintain effective management in its operating expense, with opex/sales ratio rising by just 79bps y/y to 17.45% in Q1 2019. The uptick in opex/sales ratio was solely driven by the 14.86% y/y increase in marketing and distribution expenses which overshadowed the 8.97% decline in administrative expenses. The rise in marketing and distribution expenses may have been informed by the rising competition in the consumer space amidst fragile consumer spending. Recall we earlier highlighted that Nestle’s y/y topline growth in the quarter came in the weakest in recent time, which may be linked to the competitiveness in the consumer space. 

On a q/q basis, opex/sales ratio declined by 867bps, supported by the 24.57% q/q and 26.60% q/q reduction in selling and administration expenses. 

Q1 2019 Net Finance Income Against Q1 2018 Net Finance Cost

Asides from the 62.93% y/y decline in total outstanding debt to N6.71billion, which supported a 6.33% reduction in interest expenses on financial liabilities to N488.21million, Nestle posted a net foreign exchange gain of N18.85million in Q1 2019 as against a foreign exchange loss of N638.67million in Q1 2018. Overall, interest expenses fell by 59.33% y/y in Q1 2019 to N469million. In the same vein, interest income grew by 79.17% y/y to N504million. This may have been driven by the 19.45% y/y rise in cash and cash equivalent in Q1 2019. 

On a sequential basis, Nestle posted a lower net finance income, 90.2% lower than was published in Q4 2018. 

Going forward, topline growth may continue to be moderated by intense competition in the consumer space. However, we expect topline performance in the near term to see support from modest recovery in the economy as well as the implementation of the approved increase in minimum wage. We expect Nestle to sustain its operating strategies as this may continue to bode well for bottom line performance. This said, our downside risk remains poor implementation of the 2018 budget, delayed passage of the 2019 budget as well as a potential disruption in the FX space.   

Our pricing model is under review. 

Nestle Nigeria Plc Q1 2019 figures. YE: DEC (N ‘millions)

Q1 2019

Q/Q

Y/Y

Sales

70,967

12.40%

5.19%

Cost of Sales

-39,498

11.67%

-5.29%

Gross Profit

31,469

13.32%

22.17%

Gross margin

44.34%

36bps

616bps

OPEX

-12,382

-24.91%

10.17%

OPEX/Sales

17.45%

-867bps

79bps

PBT

19,121

63.96%

40.18%

PBT margin

26.94%

847bps

672bps

Tax

-6,275

254.00%

24.64%

Tax rate

32.82%

1762bps

-409bps

PAT

12,846

29.90%

49.27%

PAT margin

18.10%

244bps

535bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Source: Company financials, Investment One Research

 

 

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