Analysts’ Sentiments on Nestlé’s Nigeria Stock Drop over Disappointing Outing
Nestlé’s Nigeria Plc.’s shares were rated hold by a number of equity analysts after disappointing outing in the third quarter despite interim dividend payment.
Amidst hostile operating environment that characterised the year, Nestlé’s Nigeria reported that its revenue grew marginally by 0.7% year on year to ₦212.73 billion.
Analysts at WSTC Securities Limited, a leading financial service firm downgrade Nestlé’s Nigeria stock to hold.
The firm explained that at the reference market price of ₦1421.70k, the stock offers a total one-year return of -6%.
Also, CSL Stockbrokers’ analysts said they have a HOLD recommendation on the stock with a target price of ₦1, 235.53 per share at reference price of ₦1,421.70.
A slew of analysts have remained largely bearish on Nestlé’s stock due to disappointing performance rivalry, economic challenges persist.
Analysts explained that the consumer goods producer is faced with multiple challenges, from input side to foreign exchange pressure and lower consumers’ purchasing power.
On a quarter on quarter basis, revenue growth was marginal, up 1.4% to ₦71.7 billion in Q3-2020 from ₦70.7 billion in Q2-2020.
On an annualised basis, CSL Stockbrokers said its 9M-2020 revenue marginally lags analysts’ estimate of ₦284.6 billion.
Across business segments, food revenue disappointed, down 6.4% y/y to ₦123.4 billion, thus, masking the impressive double-digit growth in beverage revenue which surged 12.3% year on year to ₦89.3 billion.
CSL Stockbrokers explained that the disappointing year on year decline in food revenue reflects weak demand in Q3-2020 as food revenue declined 16.1% quarter on quarter.
“We think Nestle may have ceded some market share in seasoning cubes and cereal business to competitors”, analysts added.
Meanwhile, the company’s report shows that beverage revenue continued to grow in Q3, up 31.3% over the previous quarter.
Occasioned by a 7% increase in production cost to ₦122.71 billion in 9M-2020, gross profit declined 7% to ₦90.03 billion in 9M-2020 from ₦96.31 billion posted in 9M-2019.
Nestlé’s Nigeria cost of sales as adjusted for depreciation rose faster than revenue, up 6.5% year on year to ₦118.4 billion in 9M-2020 from ₦111.2 billion in 9M 2019.
On a quarter on quarter basis, cost of sales adjusted for depreciation was higher by 2.5% against. 1.4% quarter on quarter increase in revenue.
“We believe the company continues to face input cost pressures that have been prevalent all through the year in the face of double-digit inflation.
“We note that the company sources a significant portion of its raw materials from local farmers who have had to deal with significant disruption to farming activities due to flooding and covid-19 induced supply chain disruptions”, CSL Stockbrokers explained.
Nestlé’s Nigeria’s gross profit fell 5.8% year on year to ₦94.4 billion in 9M-2020 from ₦100.2 billion in 9M 2019.
Down the line, the company’s operating income plunged 12% year on year to ₦50.19 billion in 9M-2020 due to higher administrative cost.
The review shows that pressure at the top line impacted profitability in the period amidst cost and other operating challenges.
Nestlé’s profit after tax declined by 13%, the downward trend that was informed by a higher effective tax rate of 35.2% (9M-2019: 34.9%) to ₦31.94 billion in 9M-2020.
As expectedly, earnings per share for the period printed at ₦40.29k, a downward movement when compare with ₦46.48k in the comparable period in 2019.
In spite of its lower than expected performance, the group declared an interim dividend of ₦25.00k with qualification date on November 20, 2020.
How higher production cost weakens gross profit:
Revenue grew year on year by 1% from ₦211.35 billion to ₦212.73billion in 9M-2020 driven by double-digit growth in revenue from the beverage segment.
Meanwhile, income from the beverage segment grew by 12% from ₦79.55 billion in 9M-2019 to ₦89.35 billion in 9M-2020.
In contrast, revenue from the food segment declined by 6% to ₦123.38billion in 9M-2020.
While domestic sales remained flat in the period, Nestlé’s export sales grew markedly by 16% year on year.
Analysts at WSTC Securities Limited believe that weak revenue growth was reflective of the weak macros as well as depressed consumers’ purchasing power.
Elsewhere, while revenue grew by 1%, production cost increased by 7% from ₦115.04 billion to ₦122.71 billion in 9M-2020.
“We attribute the relative higher increase in production cost to foreign exchange adjustment, an increase in energy cost as well as adverse weather conditions which disrupted local food production”, analysts said.
As a result, gross profit decreased by 7% from ₦96.31 billion to ₦90.03 billion in 9M-2020 compressing gross profit margin to 42% (9M-2019: 46%).
The company’s unaudited result showed that mounting administrative cost further dampens operating profit.
The group’s operating expenses for the period increased by 1% from ₦39.26 billion to ₦39.84 billion in 9M-2020.
While marketing and distribution cost declined by 4% to ₦30.86 billion in 9M-2020, administrative expenses grew by 26% to ₦8.98billion in 9M-2020.
The increase in administrative expense was driven by personnel cost, which rose by 12% to ₦20.42billion in 9M-2020.
Also, general licence fees grew 8% from ₦7.75 billion to ₦8.35 billion in 9M-2020.
Due to the weak gross profit, operating profit decreased by 12% from ₦57.05 billion to ₦50.19billion in 9M-2020.
“We note with concerns the group’s increased production cost amid muted revenue growth.
“While we believe that the challenge is systemic, given the persistent general prices increases, we remain concerned about the group’s ability to pass these cost increases to consumers.
“We also note the continued illiquidity that has characterised the FX market”, WSTC Securities stated.
Analysts explained that while the group had over the years relied on local inputs, adverse weather conditions, and the incidence of flooding across states will inadvertently continue to pressure food prices and by extension, depress margins.
Again, it has been noted that the CBN inclusion of maize in FX restrictive list portents a downside risk to the group.
WSTC Securities revised forward EPS of ₦53.69k and a fair value of ₦1333.70k on the stock.
At the current market price of ₦1421.70k, WSTC said downgrade the stock offers a total one-year return of -6% to HOLD.
The company largely controlled its operating expenses adjusted for depreciation which grew by a marginal 1.1% year on year to ₦38.4 billion in 9M 2020 from ₦38 billion in 9M 2019.
Analysts said the year on year increase in operating expenses was driven largely by a surge in administrative expenses adjusted for depreciation.
Adjusted administrative expenses jerked up 29.8% year on year to ₦8.7 billion while marketing and distribution expenses adjusted for depreciation declined moderately by 5.0% to ₦29.7bn in 9M 2020.
“We had noted H1-2020 that the surge in administrative expenses was due to one-off welfare and end of service payments to qualifying staff.
“Consequently, administrative expenses adjusted for depreciation declined 32.3% quarter on quarter in Q3 -2020”, analysts said.
Nevertheless, weak revenue growth, cost pressures and marginal uptick in operating expenses combined to pressure EBITDA lower by 10.1% year on year to print at ₦56.0 billion in 9M 2020 from ₦62.3bn in 9M 2019.
In addition, EBITDA margin dipped 3.1ppts y/y to 26.3% in 9M 2020.
The company’s net finance cost surged, up 86.1% year on year to ₦0.9bn in 9M 2020 from ₦0.5 billion in 9M 2019.
The growth in net finance cost was driven by a 34.8% year on year dip in finance income to ₦0.7 billion in 9M 2020.
Declined finance income reflects the pressured yield environment which dampened the company’s strong cash generation.
Finance cost edged higher by 3.3% year on year due to the company’s increased debt balances.
Consequently, pretax profit dipped 12.9% year on year to ₦49.3 billion in 9M-2020 from ₦56.5 billion in 9M-2019.
“We have a HOLD recommendation on the stock with a target price of ₦1,235.53 per share at reference price ₦1,421.70 per share”, CSL Stockbrokers stated.
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Analysts’ Sentiments on Nestlé’s Nigeria Stock Drop over Disappointing Outing
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