October 31, 2022/Cordros Report

Nestle Nigeria Plc (NESTLE) published its Q3-22 unaudited results over the weekend, reporting a 4.6% y/y increase in Q3-22 standalone PAT with an EPS of NGN15.65 (Q3-21: NGN14.95), bringing the 9M-22 EPS to NGN50.66 (+19.6% y/y; 9M-21: NGN42.37). The EPS increase in Q3-22 was primarily driven by the stronger topline outturn (+23.2% y/y). NESTLE’s board has proposed an interim dividend of NGN25.00/s, implying a yield of 2.1% based on the last closing price of NGN1,215.00/s.

Revenue grew markedly by 23.2% y/y in Q3-22, supported by growth across the business’ Food (+27.5% y/y | 61.1% of revenue) and Beverages (+16.9% y/y | 38.9% of revenue) business lines. However, on a quarter-on-quarter basis, revenue declined marginally by 1.1%, underpinned by the slower pace of growth from the Food (+2.3% q/q) segment and a decline in Beverage (-5.9% q/q) sales in the period.

Gross margin dipped by 527bps y/y to 33.4% in Q3-22, as cost of sales (+33.7% y/y) increased faster relative to revenue (+23.2% y/y). As evident in the previous quarters of the year, the higher cost reflects the effects of inflationary pressures. Consequently, EBITDA (-527bps y/y) and EBIT (-512bps y/y) margins both declined to 19.1% and 16.8%, respectively, with further pressures emanating from operating expenses (+22.0% y/y) – marketing and distribution expenses (+24.0% y/y).

Further down, NESTLE’s net finance cost grew by 155.2% y/y in the quarter, owing to higher finance costs in the period. For clarity, finance costs for the period (NGN4.05 billion vs NGN1.59 billion in Q3-21) represented the entirety of the net finance print. As of 9M-22, interest expense on financial liabilities and net foreign exchange loss increased to NGN7.38 billion (9M-21: NGN5.17 billion) and NGN1.69 billion (9M-21: NGN562.84 million), respectively.

Overall, PBT declined by 19.6% y/y to NGN14.65 billion in Q3-22. Following a tax expense of NGN2.24 billion, profit after tax (+4.6% y/y) printed NGN12.40 billion in Q3-22.

Comment: Although revenue growth remained positive, we remain concerned about the effects of inflationary pressures and FX inadequacies on NESTLE’s margins.  For the rest of the year, we maintain our expectation of resilient earnings driven by NESTLE’s brand equity and product innovation amid stiff competition from unlisted cheaper brands. Our estimates are under review.