August 1, 2022/CSL Research

Despite a steady growth in Revenue, Nestle Nigeria plc’s Gross Margin caved-in to inflationary pressure. The FMCG giant retained its upbeat Revenue growth, up 29.8% y/y to N222.45bn (H1 2022) from N171.44bn (H1 2021). This was supported by growth in both Food Products and Beverages segments. Maggi seasoning, Cerelac, Nan and other household names in the company’s Foods category retained a dominant position, contributing 59.5% to total Revenue and up 30.9% y/y to N132.45bn (H1 2022) from N101.15bn (H1 2021). Also, the household delight, Milo, Nescafe, Pure Life, and their recent variants in the beverages segment contributed 40.5% to total Revenue while growing 28% y/y to N90bn (H1 2022) from N70.29bn (H1 2021). However, on a q/q basis, the Revenue grew slightly by 1.8% to N112.23bn in Q2 2022 from N110.23bn recorded in Q1 2022. We note that the Beverages segment grew faster by 4.1% to N45.91bn in Q2 2022 from N44.09bn recorded in Q1 2022 while Food Products grew marginally by 0.3% to N66.31bn in Q2 2022 from N66.13bn recorded in Q1 2022. We believe the increase in Revenue is reflective of the upward price review in H2 2021 and some volume growth.

Despite the company’s ability to source c.80% of its raw materials locally, the Cost of Sales (adjusted for depreciation) bowed to global inflation and local FX pressures as it grew faster than Revenue, up 36.1% y/y to N139.04bn in H1 2022 from N102.16bn in H1 2021. Consequently, Gross Margin shrank to 37.5% in H1 2022 from 40.4% in H1 2021. This wasn’t surprising, given the prevailing global supply chain disruption coupled with the Nigerian FX illiquidity situation However, Gross Profit was up 20.4% y/y to N83.41bn in H1 2022 from N69.28bn in H1 2021.

We note that Operating Expenses (adjusted for depreciation) remained under control as Administrative Expenses (adjusted for depreciation) declined by 16% to N5.21bn in H1 2022 from N6.21bn in H1 2021. However, Marketing & Distribution Expenses (adjusted for depreciation) increased by 21% to N27.44bn in H1 2022 from N22.68bn in H1 2021. The management has sustained its products innovations and campaigns having introduced Nescafe Malty, a blend of Nescafe 3-in-1 and malt in 2022. Consequently, EBITDA ticked northward by 25.7% y/y to N50.76bn in H1 2022 from N40.39bn in H1 2021. However, EBITDA Margin ducked slightly by 0.7ppts to 22.8% in H1 2022 from 23.6% in H1 2021. The decline in EBITDA Margin was largely driven by the increase in Cost of Sales.  

Depreciation & Amortisation increased by 12.7% y/y to N4.58bn in H1 2022 from N4.06bn in H1 2021. In the absence of Other Income, Earnings Before Interest and Tax (EBIT) grew higher by 27.1% y/y to N46.18bn in H1 2022 from N36.33bn in H1 2021.  

The company’s Finance Income jumped 916.9% to N4.52bn in H1 2022 from N445m in H1 2021. This was driven by a 267.53% jump in Interest Income to N1.63bn in H1 2022 from N445m in H1 2021 and an Exchange Rate gain of N2.88bn in H1 2022 compared with zero position in H1 2021. Meanwhile, Cash and Cash Equivalents declined by 12.3% to N88.14bn in H1 2022 from N100.52bn in H1 2021. We believe the management may have repriced interest rates on balances with the banks in line with the rising rate environment. On the flip side, Interest Expense increased by 44% to N4.84bn in H1 2022 from N3.36bn in H1 2021 as long-term Loans & Borrowings increased by 16.86% to N89.32bn in H1 2022 from N76.43bn in H1 2021. Also, the foreign currency denominated (related party) loans triggered an FX loss which jumped by 5,886% to N2.13bn in H1 2022 from N36m in H1 2021. Accordingly, Finance Cost leaped by 105.1%, to N6.96bn in H1 2022 from N3.40bn in H1 2021. Overall, Net Finance Loss moderated by 17.1% to N2.44bn in H1 2022 from N2.95bn in H1 2021. 

Consequently, Net Profit grew by 27.7% y/y to N27.75bn in H1 2022 from N21.73bn in H1 2021. 

Our estimates are under review. Current Price: N1,262.30.

Nestle Nigeria, H1 2022 (Nm)

Source: Company, CSL Research