Event

Nestle Nigeria PLC recently released its earnings results for the year ended December 2022, where the Group reported a 27% YoY revenue growth to N446.82bn (FY 2021: N351.82).

Revenue from the Food segment was the biggest contributor of total revenue growth, accounting for 67% of total revenue growth. On a year-on-year basis, Food revenue grew by 31% to N271.99bn while Beverages revenue grew by 22% year-on-year.

In line with the industry trend in FY 2022, the Group raised the prices of its products, amid rising input cost pressures. We believe that increased efforts were made to drive volume growth during the period. For example, a new product – 3-in-1 Nescafe Malt was launched in early 2022. The product is a blend of coffee, creamer, sugar and malt. However, our overall assessment is that the Group’s topline growth was price-driven.

Pressured Working Capital Need Drives Higher Finance Cost

The Group’s operating cash flow turned negative for the first time in 12 years, owing to significant working capital pressures. Inventory rose by 50% year-on-year, receivables grew by 90% year-on-year, and prepayments increased by 76% year-on-year. The combined impact of these increases led to the negative operating cash flow.

Net Profit Margin Declines to Second Lowest in a Decade

Profit before tax grew by 15% year-on-year to N71.11bn (FY 2021: N61.88bn). On the back of a lower effective tax rate (31% in FY 2022 vs 35% in FY 2021), net profit grew by 22% year-on-year to N48.97bn (FY 2021: N40.04bn).

Meanwhile, inspite of the bottomline growth, net margin stood at 11% – its second lowest level since 2011. The lowest net margin achieved by the Group was 4% in FY 2016 during the height of FX crunch and economic recession during that period. The Group’s ten-year average net margin is 16%.

Strong Dividend Payment for the Year

Interestingly, the Group declared a N36.50 final dividend (43% higher than N25.50 final dividend in FY 2021) in addition to an earlier paid N25.00 interim dividend. The qualification date for dividend is on the 21st of April 2023, while the payment date is on the 17th of May 2023.

Outlook

We acknowledge the harsh operating environment, and we expect the pressures to remain in the near term. We expect illiquidity in the foreign exchange market and global supply chain disruptions to keep the Group’s cost elevated. We also see high inflation to keep margins under pressure. However, our projection is that the level of pressures expected in FY 2023 would be lower than what was experienced in FY 2022.

Our revenue growth projection for FY 2023 is 12% to N499.83bn, while EBITDA margin is expected to remain flat at 22% (N111.56bn). Meanwhile, we expect net margin to increase by 100 basis points to 12% (N58.74bn or earnings per share of N74.11). 

At current share price, we think that the Group’s stock is significantly undervalued. The forward price-to-earnings multiple stands at 14.58x – significantly lower than the historical average of 26.65x. Our fair value estimate for the Group’s stock is N1,633.87, which implies a 22.05x justified P/E. The total return expectation (including dividend yield) is 58%. Thus, we recommend a BUY.

Please follow the link “Nestle Nigeria FY 2022 – Earnings Potential Remains Solid Despite a Relatively Difficult Year” to view the whole report.

Thank you.