Nestle Nigeria H1 2020 Results: Bottom Line Unaided by Weak Earnings and Rising Opex

August 6, 2020/InvestmentOne Report 

·         Stable topline performance: up 0.5% q/q, down 0.3% y/y.

·         Declining gross profit margin: down 370bps q/q; 750bps y/y.

·         Fall in Opex to sales ratio to 20.1%: down 260bps q/q; 120bps y/y.

·         Weakened PBT margin: down 160bps q/q; 680bps y/y.

The earlier released Q2 2020 Nestle Nigeria scorecard reflected some of the COVID-19 inspired challenges. Topline remained stable, driven by a 4.1% y/y revenue growth in the Food segment, which cushioned a 7.1% y/y decline in the Beverages segment. A drop in GPM, a deterioration in Opex/sales ratio by 120bps y/y and a fall PBT margin printing at 23.2%, shedding 680bps y/y, underpinned the company’s performance.  

PBT Unaided by Weak Earnings and Rising Opex//Food Revenue Supports Topline  

On a y/y basis, Nestle recorded a flat turnover (-0.3%) on the back of a 4.1% revenue growth in the Food segment which was enough to offset a 7.1% drop in the Beverage segment. We highlight that the improvement in the Food segment may not have been unconnected with the increased stay and work at home orders put in place, general stability in demand for staple food products and a reversal in price increase undertaken in Q1 2020. On the other hand, we opine that the deterioration witnessed in the Beverages segment may be in direct relation to its recent price increase and a possible loss in market share.  

Increasing Input Cost to be a Challenge

Going down the P&L, gross profit margin weakened to 41.3%, the lowest since Q1 2018, reflecting the absence of revenue growth and heightened inflationary pressures relating to recent devaluation developments and higher cost of locally sourced inputs. We highlight that local farmers have been vocal regarding significant challenges in respect to the inability to source for inputs, restrictions on farming activities and difficulty in transporting goods across the various states. Going forward, we expect this to continue to be a challenge for FMCG companies.  

Notwithstanding, it is pertinent to note that the company sources 80% of its products locally, thus shielding it from the weakening of the NGN to an extent.  Additionally, we spotted a 101% surge in raw and packaging materials, a follow up build from Q1 2020, suggesting the company is employing a stockpiling strategy in anticipation of further increased input costs. This portends an upside for its Gross Profit performance in the near term.  

PAT Hampered by Increasing COGS

Taking a look at the bottom line, the company’s net profit margin printed at 14.4%, 450bps worse than Q2 2019. The dip in PAT (-24.3% y/y to 10.12billion) was largely driven by the rise in COGS, a jump in net finance cost (from 32million to 383million) and a 100bps increase in effective tax rate, which combine to offset the 6.6% drop in operating expense during the quarter. The aforementioned drop in operating expense was reflective of an 18.5% fall in marketing and distribution costs, which was enough to offset a 48.6% jump in administrative expenses. Opex/ sales ratio for the quarter printed at an impressive 17.5%, showcasing the company’s cost management ability amidst weak earnings prospects.  

Weathering the Storm

On a half year basis, the FMCG leader has recorded a 16.9% drop in net profit following a 7.9% fall in gross profit driven by higher COGS and a net finance cost position of N465million (vs N2.4million net finance income in H1 2019). These were enough to offset the 3.4% decline in opex and a 15.2% drop in tax charge. It is pertinent to note that Nestle is faring significantly better than peers (Unilever’s H1 2020 PAT is down 114.7%).  

Outlook

Going forward, we expect that topline growth may continue to be stifled by intense competition in the consumer space, particularly as the economic effects of the COVID-19 pandemic hampers consumer demand. This may further limit the company’s ability to undertake price increases in line with economic realities. However, we expect company performance to see support from the recent deleveraging exercise, net FX gains, its superior ability to price cost reflectively and brand loyalty.  

Additionally, strong market share in other regions of the country besides Lagos as well as being placed in a favorable position relating to local sourcing (80:20 domestic to foreign sourcing of raw materials) places the company in pole position compared to competitors. Nestle ’s inclusion in the list of companies allowed to import milk should also bode well for company operations.  

Our concern, however, lies in the prospect of dollar illiquidity particularly in the context of a devaluation, as its supply chain is still subject to FX risks relating to pricing. With that said, we expect Nestle to sustain its cost management strategies, which should be supportive for bottom line performance in the near term.  

YE(DEC) N’million

Q2 2020

Q/Q

Y/Y

H1 2020

Y/Y

Sales

70,696

0.5%

-0.3%

141,025

-0.6%

Cost of Sales

(41,516)

7.4%

-14.3%

(80,188)

5.8%

Gross Profit

29,179

-7.8%

-15.7%

60,837

-7.9%

Gross margin

41.3%

-370bps

-750bps

43.7%

-290bps

OPEX

(12,390)

-12.3%

–6.6%

(26,510)

-3.4%

Opex/sales

17.5%

-260bps

-120bps

18.8%

70bps

Net Finance Cost

(383)

-362.8%

1087.2%

(465)

N/A

PBT

16,407

-6.0%

-23.0%

33,862

-16.3%

PBT margin

23.2%

-160bps

-680bps

24.0%

-450bps

Tax Credit/ (Expense)

(6,258)

0.0%

-20.9%

(12,037)

-15.2%

Tax rate

38.1

230bps

100bps

35.6%

50bps

PAT

10,149

-9.3%

-24.3%

21,825

-16.9%

PAT margin

14.4%

-160bps

-450bps

15.5%

-300bps

Source: Company’s Financials, Investment One Research

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