July 30, 2021/CSL Research

In its latest H1 2021 financial scorecard, Nestle reported a 21.6% y/y growth in Revenue to N171.4bn in H1 2021 from N141.0bn in H1 2020. The growth in Revenue was driven by growth in the company’s Food and Beverage business which was up 17.6% y/y to N101.1bn and 27.8% y/y to N70.3bn in H1 2021, respectively. On a q/q basis, Revenue also grew, up by 19.1% y/y to N84.2bn in Q2 2021 from N70.7bn in Q1 2021. We believe the increase in Food Revenue was likely supported by Maggi cube’s price increase while the growth seen in Beverage Revenue feeds off a suspected price increase in the period.

Cost of Sales (adjusted for depreciation) increased 31.9% y/y to N102.0bn in H1 2021 from N77.3bn in H1 2020. The increase in Cost of Sales outpaced the increase in Revenue which implies some pressure from input cost. We think the source of input cost pressure was from supply chain induced disruption, causing increase in local prices of cash crops (maize, wheat, cocoa etc.) to which Nestle has significant exposure as it buys most of its raw materials locally. Against this backdrop, Gross Margin contracted by 4.7ppts y/y to 40.5% in H1 2021 while Gross Profit increased 9.0% y/y to N69.5bn in H1 2021 from N63.5bn in H1 2020.    

Nestle recorded a 13.9% y/y increase in Operating Expenses (adjusted for depreciation) to N29.1bn in H1 2021 from N25.5bn in H1 2020. The increase in Operating Expenses was driven largely by Marketing & Distribution Expenses (adjusted for depreciation), up 18.4% y/y to N22.7bn in H1 2021 as Administrative Expenses (adjusted for depreciation) grew marginally, up 0.4 y/y to N6.4bn in H1 2021. The pressure from higher OPEX slowed EBITDA compared to Gross profit, as it grew 5.7% y/y to N40.4bn in H1 2021 from N38.2bn in H1 2020.

Amid the 4.9% y/y increase in Depreciation & Amortization to N4.1bn in H1 2021, Operating Profit still grew, up 5.8% y/y to N36.3bn in H1 2021 from N34.3bn in H1 2020. The company recorded a surge in Net Finance Cost of N3.0bn in H1 2021 from N465m in H1 2020, following a 50.2% rise in its Loans and other Borrowings and foreign exchange loss in the period. This was due to the blend of a sharp increase in Finance Cost (up 262.2% y/y to N3.4bn) and a 5.8% y/y decrease in Finance Income to N444.6m in H1 2021.  Consequently, PBT declined marginally, down 1.4% y/y to N33.4bn in H1 2021 from N33.9bn in H1 2020. 

Effective tax rate was down to 34.9% in H1 2021 from 35.5% in H1 2020. Despite the reduction in tax rate, Net Income declined by 0.4% y/y to N21.7bn in H1 2021 from N21.8bn in H1 2020. Earnings per Share declined to N27.42/s in H1 2021 from N27.53/s in H1 2020.

We are currently reviewing the numbers. Current Price: N1,540/s Tentative target price: N1,235.53/s