NIGERIA | FMCG | NESTLE

Quick take: FX losses erode Nestle's profitability

In Q1 2024, Nestle reported its Revenue went up 43.4% y/y and 21.9% q/q to N183.48bn from N127.97bn in Q1 2023 and N150.53bn in Q4 2023. Cost of Sales (adjusted for depreciation) rose significantly to N132.49bn (+78.0% y/y) in Q1 2024 from N74.41bn in Q1 2023. This led to a drop in its Gross Profit to N51.00bn (-4.8% y/y) in Q1 2024 from N53.56bn in Q1 2023 allowing for a Gross Profit Margin of 27.8% (-14.1ppts) from 41.9% in Q1 2023.

The company's total Operating Expense (OPEX adjusted for depreciation) increased by 22.8% y/y to N27.20bn in Q1 2024 from N22.15bn in Q1 2023. This rise was largely driven by growth in Administrative Expenses (adjusted for depreciation) which soared to N7.74bn (+151.0% y/y) in Q1 2024 compared with N3.08bn in Q1 2023 while the Marketing and Distribution Expenses (adjusted for depreciation) grew marginally to N19.46bn in Q1 2024 (+2.1% y/y) from N19.07bn. Consequently, the company's OPEX margin was down by 2.5ppts to 14.8% in Q1 2024 from 17.3% in Q1 2023.

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The company's Impairment Loss on its Financial Assets was N122m in Q1 2024 from N39m in Q1 2023. Nestle's EBITDA was down by 24.5% y/y to N23.68bn in Q1 2024 from N31.37bn in Q1 2023 and its EBITDA margin was lower at 12.9% in Q1 2024 from 24.5% in Q1 2023. Its Depreciation and Amortisation was N2.76bn in Q1 2024, which was 1.4% y/y higher than N2.72bn in Q1 2023. Operating Profit came to N20.92bn (-27.0% y/y) in Q1 2024 from N28.65bn in Q1 2023.

In Q1 2024, Nestle's Finance Income rose by 10.4% y/y to N1.76bn from N1.60bn in Q1 2023 which was driven by interest income on some of its fixed income assets. Meanwhile, its Finance Expense surged to N218.77bn in Q1 2024 as some of its intercompany loans are pegged in foreign currencies and were revalued following the further devaluation in Q1. Consequently, its Net Finance Cost was up to N217.09bn in Q1 2024 from N3.75bn in the prior year.

Overall, Nestle reported a Loss Before Tax of N196.09bn compared with a profit of N24.90bn in Q1 2023. An income tax credit of N53.40bn in Q1 2024 led to a Net Loss of N142.68bn in Q1 2024 from a gain of N16.21bn in Q1 2023.

The current upward revaluation of its class of assets under its Property, Plant and Equipment created a revaluation surplus of N150.04bn in Q1 2024, thereby significantly reducing its losses brought on by its retained earnings to its total equity from N221.32bn to N70.81bn in the period and putting the company back on a swifter path of a recovery. Therefore, we have a BUY recommendation on Nestle, with a price target of N1,203.00 as it currently trades at N796.00/s.

"‹"‹"‹Nestle-Nigeria-Q1-2024-Quick-Take.pdf"‹"‹"‹

"‹"‹"‹"‹"‹"‹"‹"‹"‹Kind Regards.

Analyst: Sunmisola Ikoli-Oluwo"‹"‹

Email: CSLResearch@fcmb.com"‹

Address: 44 MARINA, LAGOS ISLAND, "‹

Website: www.cslstockbrokers.com