Cost pressures subdued Nestle Nigeria Plc’s (‘the Company) Q2 2022 financial performance. Although revenue grew significantly by 33% YoY to N112.23bn, the sharper increase in operating costs moderated the revenue gains. For context, cost margin expanded by 500 basis points to 67% (Q2 2021: 62%), on the back higher raw materials costs and FX illiquidity. Therefore, gross margin declined to 33% in Q2 2022 from 38% in Q1 2021, despite a 17% YoY absolute growth.
To the management’s credit, operating expenses were optimised to protect margins. Operating expense grew by 10% YoY, behind inflation rate. Accordingly, operating expense margin declined 400 basis points to 15% (Q2 2021: 19%).
The company’s Q2 2022 performance came slightly below our expectations due to a higher-than-projected production cost. In our view, we opine that the Company is careful about immediately passing on the cost burden to consumers due to the challenging macroeconomic environment in the form of declining purchasing power and increased competition. However, we believe that a persistent increase in cost would inevitably result in a broad-based increase in prices across the industry.
We retain our BUY rating for Nestle. We note that the stock has declined by 19% on a year-to-date basis. However, at the current price, the stock trades at 18.98x to our revised forward earnings per share of N66.49. Based on a blend of the discounted cash flow (DCF), discounted dividend (DDM), enterprise valuation (EV/EBITDA), and residual income (RIM) methodologies, our estimated justified P/E is 24.49x. This implies a fair value of N1,628.24.
Please follow the link “Nestle Nigeria Plc Q2 2022 – Cost Pressures Bite into Margins” to view the whole report.
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