September 5,2023/CSL Research

Nestle Nigeria Plc’s (Nestle) reported Revenue growth rate of 17.7% y/y to N261.77bn in its H1 2023 earnings result from N222.45bn in H1 2022. The company’s EBITDA also advanced by 30.6% y/y to N66.27bn from N50.76bn in H1 2022. However, Nestle’s Net Finance Cost grew significantly to N129.91bn from N2.44bn in H1 2022. This resulted in a Loss before tax of N69.19bn in H1 2023 compared with a profit before tax of N43.74bn in H1 2022.

The company has shown resilience in its revenue generation historically even amid the COVID-19 outbreak. Therefore, we believe that Revenue growth will be undeterred by inflationary pressures as the company has carved a niche for itself in the food production and consumables market. 

We hold a Buy recommendation on Nestle with a price target of N1,414.70.  We derive our price target using a combination of Discounted Cash Flow (DCF) and Relative valuation, assigning a weighting of 60:40.

Nestle H1 2023

CSL Research

Revenue buoyed by its Food contribution 

Nestle’s food and beverage products were not impacted by low consumer demand. The company’s Revenue advanced by 17.7% y/y in H1 2023 to N261.77bn from N222.45bn in H1 2022. On a q/q basis, Revenue also increased by 4.6% q/q to N133.80bn from N127.97bn. With staple products such as maggi, cerelac, SMA, NAN, lactogen and golden morn in its food segment, the segment contributed 63.52% to the company’s total Revenue. 

Revenue from the company’s food segment was up 25.5% y/y to N166.27bn in H1 2023 from N132.49bn in H1 2022. Q/q, the food segment also grew by 4.8% q/q to N85.10bn in Q2 2023 from N81.18bn in Q1 2023. The beverage segment which has staple consumer products such as Milo, chocomilo, Nescafe, Milo ready-to-drink (rtd), Nestle pure life drinking water and Coffee rtd contributed 36.48% to the total Revenue. Elevated demand for the beverage products of Nestle caused the segment to grow by 6.1% y/y and 4.1% q/q to N95.50bn and N48.70bn in H1 2023 and Q2 2023 from N90.03bn and N46.79bn in H1 2022 and Q1 2023 respectively.   

Going further, sales in the domestic market was the main driver of Revenue, growing to N261.39bn in H1 2023 from N220.14bn in H1 2022 while the company’s export business plunged by 83.7% y/y to N377m from N2.3bn as exports to Ghana which contributed c.80% to the company’s export sales has been declining since FY 2022.  

Elevated operating profits despite high cost of operations  

Cost of sales rose 8.57% y/y to N154.43bn in H1 2023 from N142.245bn in H1 2022. The company’s Gross Profit grew to N107.36bn in H1 2023 from N80.21bn in H1 2022 and the gross profit margin went up by 5.00ppts to 42.5% from 37.5% in H1 2022.  

Nestle’s total operating expense grew by 36.8% y/y to N46.54bn in H1 2023 from N34.02bn in H1 2022 while its opex margin settled at 17.2% in H1 2023 from 14.7% in H1 2022. Analysis of the company’s expenses showed that marketing and distribution expenses contributed 86.61% to its total expense. This was spent on product research, marketing and distribution of food products in the period. On the other hand, administrative expenses advanced by 9.9% y/y to N6.32bn in H1 2023 from N5.67bn in H1 2022. Overall, Operating Profit increased by 31.6% y/y to N60.79bn in H1 2023 from N46.18bn in H1 2022.  

The technical devaluation of the nation’s currency increased Nestle’s Finance Cost. Nestle reported Finance Income of N7.81bn in H1 2023 from N4.25bn in H1 2022 which came from interest income on bank deposits and Net foreign exchange gain of N2.52bn and N5.29bn in H1 2023. Nevertheless, the Finance Income growth was unable to cushion the effects of the high Finance Cost which grew significantly to N137.73bn in H1 2023 from N6.96bn in H1 2022, exacerbated by the reported Net foreign exchange loss of N123.77bn in H1 2023 compared withN2.13bn in H1 2022. In addition to this, the 188.5% growth in Nestle’s lnterest expense on financial liabilities to N13.96bn in H1 2023 from N4.84bn in H1 2022 also contributed to the growth in Finance Cost in H1 2023.

Consequently, the company’s Net Finance Cost grew to N129.91bn in H1 2023 from N2.44bn in H1 2022.  Overall, the company reported a huge loss before tax of N69.12bn in H1 2023 compared with a Pre-tax Profit of N43.74bn in H1 2022. With a deferred tax of  N19.14bn in the period, Nestle’s Net Profit came to N49.98bn from N27.75bn in H1 2022. 

Outlook  

The company has shown resilience in its revenue generation historically and even amid the COVID-19 outbreak. Therefore, we believe that Revenue growth will be undeterred by inflationary pressures as the company has carved for itself a significant market share in the food production and consumables market. Its brand equity over the years ensures consumer loyalty to its products. Also, the employment of more marketing strategies to ensure patronage of the company’s food and beverage products is expected to keep an elevated topline performance in FY 2023, therefore, we estimate a 13% y/y growth in its Revenue to N506.65bn from N446.82bn in H1 2022. However, due to the technical devaluation of the Naira, we forecast a Loss After Tax of N83.11bn in FY 2023. 

Valuation

We hold a Buy recommendation on Nestle with a price target of N1,414.70.  We derive our price target using a combination of Discounted Cash Flow (DCF) and Relative valuation, assigning a weighting of 60:40.