July 31, 2023/Cordros Report

NESTLE published its Q2-23 unaudited results on Friday (28 July), revealing a standalone loss per share of NGN74.04 (vs EPS of NGN12.33 in Q2-23). As a result, the H1-23 loss per share amounted to NGN63.06 (vs EPS of NGN35.01 in H1-22). The decline in earnings is attributed to the surge in net finance cost (Q2-23: NGN121.69 billion | Q2-22: NGN4.60 billion).

Revenue increased by 19.2% y/y in Q2-23 (H1-22: +17.7% y/y), supported by growth across the Food (+28.3% y/y) and Beverage (+6.1% y/y) business segments. We believe both pricing improvements and increased volumes drove the revenue outturn. According to our channel’s checks, average prices in the Food and Beverage segments increased by c.12.5% and c.6.5%, respectively. Sequentially, revenue demonstrated a solid 4.6% q/q growth, with resilience observed in both the Food (+4.8% q/q) and Beverage (+4.1% q/q) segments.
 
Remarkably, gross margin expanded by 868bps y/y, to 41.6%, the highest print since Q2-20 (41.3%), as the revenue growth (+19.2% y/y) outpaced the slightly higher cost of sales (+3.8% y/y).
 
Consequently, EBIT and EBITDA margins improved significantly to 24.0% (+640bps y/y) and 26.1% (+637bps y/y), respectively, amid a 16.6% y/y decline in operating expenses.
 
Nonetheless, net finance costs surged by 29.5x in the quarter (NGN118.66 billion | Q2-22: NGN3.89 billion), owing to a higher finance cost (Q2-23: NGN121.69 billion | Q2-22: NGN4.60 billion) outturn. The higher finance cost is attributable to the NGN123.77 billion net FX loss (H1-22: NGN2.13 billion) recorded in the period, reflecting the impact of the naira devaluation.
 
Consequently, the finance cost pressure triggered a pre-tax loss of NGN86.22 billion (vs PBT of NGN15.89 billion in Q2-22). Accordingly, NESTLE recorded a post-tax loss of NGN58.69 billion (vs PAT of NGN9.77 billion in Q2-22), with an income tax credit amounting to NGN27.83 billion.
 
Comment: Despite the resilience of NESTLE’s operating performance, the company experienced a significant downturn in earnings due to the substantial finance cost resulting from the impact of the naira devaluation. Looking ahead, we expect NESTLE’s stable and robust business, as Nigeria’s largest food company with a diverse product portfolio, to sustain consistent operating performance in the medium term. However, we believe the company’s earnings will remain negatively affected by the recent devaluation of the naira through 2023E. Our estimates are under review.