Q3-19 revenue grew by 2.4% y/y, but was below our estimate for the quarter by 4.3%. Compared to Q2-19 however, revenue declined by 2.1%, and surprisingly so, given that Q3 has historically been a relatively strong quarter for NESTLE. This is the first Q3 q/q decline since 2010.

The weak July-September revenue performance is in line with performance of the other listed FMCG players that have published earnings thus far. However, NESTLE’s slower q/q revenue growth is linked to the Beverages segment where revenue declined for the first time in three quarters, by 8.1% q/q (+8.3% y/y). This is similar to the corresponding period of the previous year, wherein Beverages revenue declined by 7.1% q/q, and can be linked to weaker demand in the absence of the Ramadan and Easter festivities, which boosted volumes in Q2.

Elsewhere, the Food (-0.9% y/y) segment recorded its first year-on-year revenue decline since the company started reporting quarterly segment numbers in 2016, sustaining the downward year-on-year growth trend that has been observed since Q4-18. The revenue decline is indicative of weaker volume outturn amidst higher pricing compared to last year.  
 
Gross profit margin contracted by 339 bps y/y to 43.5%, much lower than the 49.2% we estimated for the quarter, and the lowest since Q1-18.  Margin pressure was due to faster growth in CoGS than in revenue likely due to (1) weaker sales, and (2) higher input costs due to the negative impacts of the border closure – prices of locally sourced commodities e.g. palm oil, sugar, etc. have risen due to reduced supply from smugglers. Our channel checks also revealed NESTLE has faced logistical challenges with some shipments of production inputs at the border.

OPEX rose by 1.9% y/y, with the ratio-to-revenue coming in at 19.6%, in line with our estimates. This combined with the faster COGS growth and narrower gross margin, weighed down EBIT and EBITDA, which declined by 3.4% y/y and 21.6% y/y, with the associated margins coming in at 23.9% (-566 bps) and 26.5% (-2,339 bps), respectively.
 
NESTLE recorded net finance cost of NGN498.67 million (up from NGN32.23 million in Q2-19) in Q3-19 – albeit lower by 49.7% y/y – with interest income (-66.5% y/y) declining faster than finance cost (-55.7% y/y).
 
Compared to Q2-18, EPS was down 20.9%, weighed down by lower revenue (-2.1%), a spike in COGS (+7.9%), and higher OPEX (+2.7%). Effective tax rate in the quarter was 34.3%, compared to 37.1% and 32.8% in Q2 and Q1 respectively.
 
Comment: NESTLE’s Q3-19 EPS is below our expectations (-27.4% variance), and is unimpressive, in our view. Despite the weakness in Q3, we expect focus to be on the still positive 9M earnings and dividend, hence, we do not foresee a negative reaction. The stock is trading at forward (2019E) P/E and EV/EBITDA multiples of 20.7x and 11.7x respectively, a premium to Middle East and Africa peer averages of 17.9x and 10.6x, respectively. Our estimates are under review.