May 11, 2021/InvestmentOne Report

·          Improved topline performance: up 17.4% q/q, 24.1% y/y.

·        Mixed gross profit margin performance: up 60bps q/q; down 520bps y/y.

·        Improving Opex to sales ratio to 16.5%: down 360bps q/q; 350bps y/y.

·        Mixed PBT margin: up 650 bps q/q; down 300bps y/y.

Nestle Nigeria recently released its Q1 2021 scorecard which showed much improved fortunes driven by better performance from the Food and Beverages segments. Cumulatively, topline was up by 24.1% y/y, supported by a stronger business environment. The company was able to expertly manage its input cost and operating costs, leading to a 15.8% y/y rise in operating profit. Although net finance cost saw a surge during the quarter to N1.3billion from N83million in Q1 2020, the benefits of the aforementioned trickled down to bottom line, with PBT up y/y by 8.9%. 

Weathering Rising Cost Pressures

Nestle Nigeria in Q1 2021 was able to drive its topline by 24.1% y/y. We recall that the comparison period was the onset of the pandemic; lockdown related measures notably hampered the company’s operations. We believe stronger consumer demand for staple foods, improvements in the nation’s supply chain and price increases could have been supportive of the company’s performance. We draw attention to the 43.4% decline in goods in transit and commend the reduction in receivables as the company focuses on cash collection. As a result of the aforementioned factors, the Food and Beverages segments grew by 26.2% and 21.0% y/y respectively. With the backdrop of challenges in sourcing for key raw materials and packaging materials, cost of goods sold rose by 35.8% y/y. In similar fashion, gross profit margin deteriorated y/y by 520bps, in the face of heightened food inflation and devaluation. Going forward, we expect cost factors to be a challenge for FMCG companies given the recent trend witnessed. Notwithstanding, it is pertinent to note that the company sources about 70-80% of its products locally, thus shielding it from the weakening of the NGN to an extent. We see food inflation as a major worry, which could serve to threaten the company’s local sourcing strategy if not checked. We noticed that, similar to previous quarters, the company’s inventories have remained heightened (up 19.3% y/y), driven by a 96% y/y surge in raw and packaging materials. This stockpiling strategy may present a defence for GPM performance going forward, albeit only a minimal one.  

Input and Finance Costs Bite Recovery

Taking a look at the bottom line, the company’s net profit margin printed at 14.2%, slightly lower by 170bps y/y, even as PAT rose by 10.8% to N12.4billion. This was due to the deterioration in gross margin as earlier highlighted and a surge in net finance cost led by a material hike in interest expense which combine to offset the positives of improved opex/sales (down 350bps). We believe the rise in interest expense may be attributable to the company paying down on its bank loans and taking up fresh borrowings as total loans and borrowings rose by 11.44% y/y. We highlight the company has had issues paying on its foreign loans due to dollar illiquidity.

Positives on the Horizon

Taking a sequential look, we saw a similar performance as the company’s bottom-line improved by a material 59.9% q/q. This was led by a 17.4% q/q rise in turnover following an 8.3% and 34.2% rise in Food and Beverages revenue segments respectively. We attribute this to strong brand loyalty, continuous easing of lockdown measures and consumer demand, particularly for food items, seeing some recovery, and supply chain improvements as goods in transit eased slightly compared to Q4. Furthermore, gross profit rose by 19.0%, while total opex was down by 3.5% driven by a drop in distribution cost to the tune of 14.4%. Also slightly supportive was the 33.7% decline in interest expense, which trickled down to a 54.1% fall in net finance cost. 

Cost Factors to Remain Investor Focus

Going forward, we expect that topline growth may face challenges on the back of intense competition in the consumer space, particularly as the economic effects of the COVID-19 pandemic pose a threat to consumer demand, albeit dwindling. This may further limit the company’s ability to undertake price increases in line with economic realities. However, we expect company performance to continue to see support from its stockpiling strategy, the relatively low interest rate environment, its superior ability to price cost reflectively and brand loyalty. Additionally, strong market shares in other regions of the country besides Lagos as well as being placed in a favourable position relating to local sourcing puts the company in pole position compared to competitors. Our major concern, however, lies on the impacts of heightened inflationary pressures, which has continued to bite into the company’s margins. Persistent challenges in the country’s food supply chain relating to conflicts across the country, FX risks and more broadly fragile consumer demand may mar the outlook for the FMCG leader. With that said, we expect Nestle to sustain its cost management strategies, which should be supportive for bottom line performance in the near term.

Source: Company’s Financials, Investment One Research