Nestlé Nigeria Plc. records a significant 24% year on year growth in topline to ₦87.3 billion in the first quarter (Q1) of financial year 2021, thus outperformed Vetiva Capital ₦74.1 billion estimate.
At the local bourse, the leading fast moving consumers company has market valuation of about N1.1 trillion amidst the ongoing market corrections.
The strong demand recovery seen in Q1 also drive significant 11% year on year growth in the leading consumers goods company’s profit after tax to ₦12.4 billion, coming ahead of ₦12.1 billion projected by Vetiva Capital.
Equity analysts at Vetiva Capital said in a new report that the consumers’ goods company is bracing for a better year, though it advised investors to sell the stock which it currently believes is overpriced.
Food segment rebounds in Q1:
Nestlé’s Nigeria revenue growth came from a combined 37% upsurge in revenue from beverages to ₦34.9 billion and a 15% year on year growth in Food revenue to ₦52.4 billion.
Although impressive, analysts at Vetiva Capital said they are unsurprised by the growth in the beverage segment, as it had showed a consistent growth trend in the past year even while the company’s total revenue declined.
“What stands out for us, however, is the growth in revenue from Food as, we had observed consistent declines in Revenue from this segment in the past year.
“We believe the turnaround in Food Revenue growth has come from an increase in prices as well as an improvement in demand for seasoning cubes as restaurants and food service companies are now seeing a remarkable rebound in traffic”, Vetiva Capital remarked.
Analysts added that Nestle remains a market leader, especially in the food segment of the FMCG sector.
Despite the competition from Unilever’s Knorr, Promasidor’s Onga and other smaller brands, analysts at Vetiva Capital said they expect Food revenue to maintain this growth trajectory, given the paced increase in economic activities, and its position as a moderately-priced seasoning cube.
Nestlé Nigeria Records Significant Earnings Lift in Q1-2021
Although revenue from exports remained flat year on year, analysts at Vetiva Capital said they remain optimistic on an improvement in revenue from exports based on the prospects that the AfCFTA provides.
“Based on this and the impressive outperformance of our initial forecast, we revise our full year revenue estimate to ₦322.1 billion from ₦296.3 billion”.
Costs dampen margins
Rising costs profile in the fast moving consumers’ goods sector derived from persistent rise in headline inflation pressure Nestlé Nigeria profit margin in the period.
Although gross profit increased 10% year on year to ₦34.7 billion, gross margin declined 5 percentage points to 40%, which analysts explained it is largely in line with expectation.
The company reported quarterly average of 42% in 2020, as the Q1 margin was noted to have been dragged by the 36% increase in cost of sales that expanded to ₦52.5 billion.
On a milder note, Vetiva Capital hinted that although Nestlé’s admin expenses increased 8% to ₦3.3 billion, selling and distribution was flat at ₦11.1 billion, dampening the jump in operating expenses by 2% as it closed at ₦14.4 billion.
Nestlé’ Nigeria recorded earnings before interest and tax (EBIT) jumps in the period, rising to ₦20.3 billion after 16% year on year uptick which analysts noted was majorly influenced by the impressive revenue performance, although EBIT margin declined 2 percentage points to 23%.
“Although we had expected a moderation in full year operating expenses at the beginning of this quarter, the mild upswing in Q1 expenses profile causes us to revise operating expenses forecast and estimate a 9% increase in the line item to ₦59.6 billion”, Vetiva stated.
Profit Expectation Revised
Vetiva Capital said this quarter, Nestlé Nigeria added N9.1 billion intercompany loans to its borrowing position.
“In line with our expectation of elevated finance expense, finance costs did jump 3.4 times year on year to N1.4 billion”, Vetiva Capital explained.
Analysts said it is interesting to note that whilst the intercompany loan is denominated in foreign currencies, Nestlé Nigeria did not record any foreign exchange loss in the period.
“On the other hand, finance income remained low year on year, although there was an improvement when compare with preceding quarters.”
Vetiva Capital said for the rest of the year, given the upward rate trajectory in the fixed income market, the firm expects finance income to continuously improve. Especially, given that remaining quarters of 2020 were low-based periods.
Analysts added that with the increased recorded in foreign denominated loans and borrowings, as well as expectation of possible rate depreciation, finance cost is expected to grow.
Overall, analysts said they are expecting the company’s net finance costs to rise 25% to N4.7billion in 2021.
This put Vetiva Capital profit expectation from Nestle Nigeria at N64.5 billion, translating to 9% growth above 2020 record while after tax profit is expected to settle at N41.7 billion.
Nestlé Nigeria parent company, a Swiss multinational accounts for about 70% ownership of the company after it mopped up shares in the local bourse.
Commenting on the results, The Managing Director and CEO of Nestlé Nigeria PLC, Mr. Wassim Elhusseini said, “I am inspired by the way our team has performed under difficult circumstances.
“With three more quarters still ahead of us, we will continue to drive sustainable growth despite the challenges of the COVID-19 pandemic.”
“With the roll-out of COVID-19 vaccination in progress, we are optimistic that the business environment will continue to improve”.
Nestlé’ Nigeria Chief Executive added that the company’s priorities will remain keeping its people safe, assuring continued supply of essential nutritious food and beverages to consumers and caring for communities and business partners.