Nestle Nigeria Q1 2021 Review: Decent Fundamentals But Tough Operating Conditions

Nestle Q1 ’21 earnings grew 11% y/y to NGN12.4bn, supported by 26% y/y and 24% y/y increases in food and beverage sales respectively.

Based on our market survey, an increase in average prices across Nestle’s portfolio drove the double-digit y/y expansion in topline in Q1 ’21 (+24.1% y/y).

We expect the impact of the price increment to taper off by the end of Q2 ’21. This implies that stronger growth in volumes may be necessary to deliver higher profitability in FY ’21.

In our view, another round of price increases (to pass on costs) may prove difficult, due to shrinking real income amidst rising food inflation and currency devaluation. Nonetheless, we have marginally revised our FY ’21f sales and earnings estimates by 5.7% and 3.0% respectively, to reflect the impressive trend in Q1 ’21. Changes to our estimates imply that turnover is now expected at N312.6bn in FY’21f (vs. prior forecast of NGN295.6bn). This follows an increase in sales for the company’s segments: food (by 9.1% y/y to NGN187.4bn) and beverage (by 8.6% y/y to NGN125.2bn).

Consequently, gross margin is higher by +50bps to 41.5%. Elsewhere, we have raised our opex estimate to NGN58.5bn (by 4.1% y/y), with operating profit climbing by 9.6% to NGN71.3bn (from previous estimate of NGN65.0bn). However, a surprise 243.4% y/y rise in interest expense in Q1 ’21 has forced a revised net interest cost of NGN4.6bn (vs. prior forecast of NGN298m).

The higher interest expense is traceable to a 27.0% ytd increase in long term loans to NGN43.0bn. We make a marginal +3.0% change to our tax forecast to NGN21.3bn (from NGN20.7bn previously), culminating in a PAT forecast of NGN45.3bn in ’21f (vs. prior estimate of NGN44.3bn).

For our valuation estimates, we have raised the risk-free rate in our DCF model to 12.5% (from 11%), and our adjusted beta estimate is increased to 0.8 (from 0.7 previously). Our new price target of NGN1,494.2 is lower by 4.9%. At current levels, our price target implies a potential upside of 6.7%. Consequently, we retain our Neutral rating. Year-to-date, Nestle shares have shed -3.4% vs. the ASI’s decline of -4.3%.

Gross margin weakened in Q1 ’21; interest expense surprised negatively

On average, Nestle’s Q1 ’21 results were better than expected. Sales grew by 24.1% y/y (and by 17.4% q/q) to NGN87.3bn while earnings expanded by 10.8% y/y, reflecting solid demand for products amidst higher prices across its portfolio. However, gross margin fell -520bps y/y to 39.8% (from 45.0% in Q1’20). We link this to the impact of disruptions in supply chain, local inflation and fx devaluation on cost base

Also, the company recorded a y/y increase in net interest expense by +1486.5% y/y to NGN1.3bn in Q1 ’21 on the back of increased loans (+27.0% ytd to NGN43.0bn).