November 17, 2023/United Capital Research
Nestle Nigeria Plc (“the company” or “Nestlé”) recorded a modest growth in its topline for 9M-2023, posting a 19.0% y/y increase in total turnover (Revenue), from N333.5bn in 9M-2022 to N396.6bn. The company’s turnover rate (19.0%) for the period under review had more pace compared to the 9.4% y/y climb in total Cost of Sales (CoS) for the period under review. The company recorded a significant 41.2% y/y climb in its operating profit in 9M-2023, from N64.9bn to N91.6bn. Conversely, Nestle Nigeria Plc recorded a whopping 1,625.8% y/y climb in finance cost, ultimately posting a loss for the period, 9M-2023. Thus, the company’s bottom line printed a loss of (N43.1bn), down by -207.3% y/y from a profit position of N40.2bn.
Strategic Cost Optimization: Bolstering Operating Profits through Efficient Resource Management and Financial Agility
When the exchange rate of a country’s currency is high, its exports become more expensive, which can reduce demand for its products in the global market. This was quite evident in the 83.1% y/y decline in the value of Nestlé’s exports (from N2.9bn to N488.0mn) in 9M-2023. Nestle Nigeria Plc’s top line expanded at a decent pace (+19.0% y/y) in 9M-2023, with revenue from Nigeria accounting for 99.9% of the company’s total revenue (N396.6bn) for the period. “Strong brand name and preference played a key role in the company’s recorded turnover rate. Consumers remained willing to pay a premium for the company’s products.” The company tilted more toward a cost optimization strategy, ramping up its local sourcing for raw materials. In June, the food and beverages manufacturer disclosed that its businesses in Nigeria and other African countries have as a priority, increased local sourcing for starch and turmeric, which are key raw materials. To that effect, Nestlé disclosed the replacement of imported corn starch with cassava starch (which will be locally sourced). It further disclosed it has invested in the growth and expansion of seven (7) local suppliers, in terms of capacity expansion, to meet its supply needs and backward integration objective. That said, the company recorded a significant 36.6% y/y increase in its gross profit for 9M-2023 (which printed at N160.2bn from N117.3bn in 9M-2022), supported by a very reasonable 9.4% y/y climb in its CoS. Nestlé recorded a significant 41.2% y/y improvement in its operating profit (from N64.9bn in 9M-2022 to N91.6bn) for the period, despite posting a 30.9% y/y increase in operating expenses (OPEX).
Outlook & Investment Recommendation (HOLD: Target Price N1115.50/share)
Looking ahead, we expect the Brewer’s revenue to continue to improve, growing by a Compound Annual Growth Rate (CAGR) of 26.7% in the next five years, underpinned by the company’s product superiority. As a result of the enormous foreign currency revaluation loss incurred by the company in 9M-2023, the company’s bottom line for FY-2023 is expected to be negative. The elevated interest rate environment is also expected to place further strain on the company’s net finance income, underpinned by the company’s capital structure, as a highly levered manufacturer. Given the company’s cost optimization strategy, by ramping up its local sourcing for raw materials, we expect continuous improvement in its operating profit in FY-2024. Also, FG and CBN’s moves to douse the pressure on the Naira via improving local supply of the Dollar, will continue to stand as an upside for manufacturers in the consumer goods sector.
That said, based on earnings forecasts and valuation multiples, we project a target price of N1115.50/share. Investors may opt to HOLD the company’s shares for dividend and growth potentials.
