May 2, 2023/Cordros Report

NESTLE published its Q1-23 unaudited results on Friday (28 April), reporting a 9.8% y/y decline in EPS to NGN20.45 (Q1-22: NGN22.68) on higher finance costs (+125.8% y/y).
 
Revenue advanced by 16.1% y/y in Q1-23, following sturdy growth in NESTLE’s Food (+22.7% y/y | 63.4% of revenue) and Beverages (+6.1% y/y | 36.6% of revenue) segments, reflecting consumer’s resilient demand for NESTLE’s products. Also, our channel checks revealed that average prices in the food and beverage segments increased by 9.8% and 1.9%, respectively, during the period. However, NESTLE’s exports in the quarter declined significantly by 87.3% y/y to NGN256.61 million (Q1-22: NGN2.03 billion). Nevertheless, its domestic revenue still accounted for the bulk of its top-line, maintaining its c. 99.8% contribution to revenue.
 
Remarkably, the gross profit margin expanded by 113bps y/y to 40.4% in Q1-23, as revenue (+16.1% y/y) grew faster than the cost of sales (+13.9% y/y), reflective of the inflationary pressures on the cost of domestic food prices.
 
Nevertheless, EBITDA (-147bps) and EBIT (-156bps) margins both contracted to 24.5% and 22.4%, respectively, following a 36.6% y/y increase in operating expenses.
 
The company recorded a net finance cost of NGN3.75 billion in Q1-23 (vs a net finance income of NGN1.45 billion in Q1-22), owing to a huge increase in its finance cost (Q1-23: NGN5.34 billion | Q1-22: NGN2.37 billion) and a 58.2% decline in finance income. On the former, higher interest expense on financial liabilities of N5.89 billion in Q1-23 (Q1-22: NGN2.37 billion) underpinned the increase in finance cost, amid a net foreign exchange gain of NGN545.05 billion. While the lower finance income can be attributed to the decline in short-term investments (-11.5% to NGN89.18 billion) in the period.
 
Conclusively, pre-tax profit declined by 10.6% y/y to NGN24.90 billion in Q1-23. A lower income tax expense of NGN8.69 billion in Q1-23 (-11.9% y/y) led to a profit after tax of NGN16.21 billion (-9.8% y/y).
 
Comment: While NESTLE’s topline performance remained solid in Q1-23, the higher finance cost pressured profitability in the period. Looking ahead, we believe the company’s brand equity and product innovation will remain supportive of its performance amid the stiff competition from unlisted cheaper brands. However, concerns remain around the ballooning finance costs amidst the much larger foreign currency debt profile and the lingering naira weakness. Our estimates are under review.