November 24, 2023/CSL Research

In its 9M 2023 earnings result, Nestle’s Revenue grew by 18.93% y/y to N396.59bn from N333.47bn in 9M 2022. The food segment grew by 27.0% y/y to N254.38bn in 9M 2023 from N200.26bn in 9M 2022 and contributed the most to the company’s revenue by (64.1%). The company’s beverage segment (Milo, Nescafe, Nido and others) also grew by 6.8% y/y to N142.21bn in 9M 2023 from N133.22bn in 9M 2022. We forecast Revenue growth of 13% and 14% y/y from its Food and Beverage segments and project FY 2023 Revenue growth of 13% y/y to N506.65bn.

The company’s high Net Finance Cost of N148.24bn however impeded bottom lin e growth resulting in a Net Loss of N43.07bn in 9M 2023 compared with profit of N40.15bn in 9M 2022. We do not expect as steep a devaluation of the currency as seen in FY 2023, so we forecast lower finance cost ahead. We estimate the company will return to profitability in FY 2024 with Net Profit of N51.91bn.

We have revised our target price up to N1,834.56/s from N1,414,70/s and we retain a Buy recommendation. We arrive at our target price using the discounted cash flow (DCF) and relative valuation methodologies in a ratio of 60:40

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Source: Company, CSL Research

9M 2023 Review

Nestlé remains optimistic about future growth

In its 9M 2023 earnings result, Nestle’s Revenue grew by 18.93% y/y to N396.59bn from N333.47bn in 9M 2022. The Food Segment with its multiple products of golden morn, cerelac, milo and others grew by 27.0% y/y to N254.38bn in 9M 2023 from N200.26bn in 9M 2022 and contributed the most to the company’s revenue by (64.1%). The company’s beverage segment (Milo, Nescafe, Nido and others) also grew by 6.8% y/y to N142.21bn in 9M 2023 from N133.22bn in 9M 2022. We forecast Revenue growth of 13% and 14% y/y from its Food and Beverage segments and project FY 2023 Revenue growth of 13% y/y to N506.65bn.

High cost of operations increases OPEX margin

The company recorded moderate growth in Cost-of-Sales (adjusted for depreciation) which rose by 9.09% y/y to N230.43bn in 9M 2023 from N211.23bn in 9M 2022. This resulted in an increase in the company’s Gross Profit to N166.17bn (+35.93% y/y) in 9M 2023 from N122.42bn in 9M 2022 and as such its Gross profit margin settled at 41.9% (+5.2ppts), up from 36.7% in 9M 2022.

Players in the consumer goods sector have witnessed cost pressures with the rising cost of energy and the depreciation of the Naira, and Nestle was not left behind. The company’s Operating Expenses adjusted for depreciation (Opex) advanced by 31.28% y/y to N66.02bn in 9M 2023 from N50.28bn which was largely driven by the 35.98% y/y hike in its Marketing and Administration Expenses to N58.03bn from N42.67bn in 9M 2022. The Selling and Distribution Expenses also grew by 4.97% y/y to N7.99bn from N7.61bn in 9M 2023. This brought the company’s Opex margin higher to 16.6% (+1.6ppts) in 9M 2023 from 15.1% in 9M 2022.

Overall, the company’s EBITDA grew to N100.15bn in 9M 2023 from N71.96bn in 9M 2022. The expected increases import duties, energy prices and other factors may leave the company’s Operating Expense elevated in the near term. Therefore, we forecast a 33.82% y/y increase in its Opex to N88.90bn for FY 2023 from N66.43bn in FY 2022. We also forecast EBITDA will grow by 38.66% to N134.02bn in 2023e with an EBITDA Margin of 26.45% for the period.

High Net Finance Cost depresses profitability

The depreciation of the currency caused the company to report a significant growth in Finance Cost to N156.53bn in 9M 2023 from N9.01bn in 9M 2022 which resulted in a Net Finance Cost of N148.24bn in 9M 2023 (vs N6.49bn in 9M 2022) despite a surge of 221.27% y/y in its Finance Income to N8.29bn in 9M 2023 from N2.58bn in 9M 2022. The high Finance Cost resulted in the company reporting a Loss Before Tax of N56.66bn from a Profit of N58.38bn in 9M 2022.The tax relief of N13.59bn in 9M 2023 tempered the company’s Loss After Tax to N43.07bn in the period from a Profit After Tax of N40.15bn in 9M 2022. We forecast a Loss After Tax of N76.19bn for FY 2023.

Valuation

We revise Nestle’s target price to N1,834.56/share from N1,414.70 previously. This was derived from the combined use of Discounted Cash Flow (DCF) and Relative valuation, assigning a weighting of 60:40.

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