Nestle Nigeria Plc FY 2018 Results: Higher Opex/Sales Drags Down PBT Perform

March 7, 2019/InvestmentOne Report 

·         Mixed topline growth: down 6.93% q/q, up 7.18% y/y.

·         Mixed gross profit margin: down 108bps q/q, up 156bps y/y.

·         Higher opex to sales ratio: up 641bps q/q;  510bps y/y.

·         Lower PBT margin: down 543bps q/q; 249bps y/y. 

Earlier in the week, Nestle Nigeria Plc published its Q4 2018 financial scorecard, which printed lower than expected.

This said, PBT margin declined by 249bps y/y to 18.47%, as the 165bps y/y improvement in gross profit margin and the net finance income of N327million in Q4 2018 against a net finance cost of N263million in Q4 2017 was offset by the 510bps y/y spike in opex/sales ratio to 26.12%, the highest ever in recent times. 

Topline Props Up On Volume Growth 

Similar to what we have observed in recent time, Nestle’s topline remains volume driven. Topline grew by 7.18% y/y to N63.14billion. The y/y growth in topline recorded in Q4 2018 is the second lowest in the year and a little higher than the y/y growth in Q3 2018 (7.13% y/y). On a segmental basis, the company recorded growth in both its food and beverage segments. The food segment grew by 5.79% y/y to N39.10billion while the beverage segment was up 9.43% y/y to N24.03billion. However, compared to Q4 2017, the growth rate in both segments slowed especially in its beverage business, which may be attributed to heightened competition in the consumer space as well as fragile consumer spending. Notwithstanding, Nestle’s gross profit rose by 11.12% y/y as it continued to see support from its improved cost and productive efficiency.

Although revenue generated from the beverage segment was flat q/q, the 11.02% q/q contraction in revenue from its food business drove down Q4 2018 topline growth by 6.93% q/q.  

Opex/Sales Ratio Remains High 

Nestle’s opex/sales ratio has been on the rise since the start of the year. The increase in the company’s opex/sales has been largely driven by higher expenses on its marketing and distribution, which may be an indication of its drive to improve market penetration amidst increased competition. Consequently, Q4 2018 opex/sales ratio advanced by 641bps q/q and 510bps y/y to 26.12%. We highlight that this is the highest ever in recent times and may have contributed to the 750bps q/q and 354bps y/y decline in operating margin to 17.87%. Again, we spotlight that Q4 2018 operating margin is the lowest ever since Q2 2016.

Lower Finance Charge Supports PBT

Compared to Q4 2017, where Nestle recorded a net finance cost of N263 million, the net finance income recorded in Q4 2018 was supported by the massive decline in its net foreign exchange loss position as well as lower interest expense on financial liabilities. We suspect the reduction in net foreign exchange loss may have been due to management’s restatement of the translation rate of its foreign outstanding debt in its balance sheet. Also, we highlight that the 66.07% y/y drop in total outstanding debt to N6.95billion at the close of 2018 further explains the lower interest expense incurred in 2018 relative to 2017.

Nestle continued to demonstrate strong cash generation given its ability to pay its debt, effect dividend payment and manage working capital demands, just as we have observed in recent times. Net cash from operating activities has continued to see support from improved profitability as well as higher trade payables.

Going forward, we expect topline to see support from the modest improvement in the economy as well as the implementation of the potential minimum wage increases, which may support volume growth. This, combined with continued cost efficiency and relative stability in the FX market may continue to support margin.  

Management has proposed a dividend payout of N38.50 per share which translates to a dividend yield of 2.55%.

Our pricing model is under review. 

Source: Company financials, Investment One Research