Nestlé Nigeria: Inflation Tempers Margin, Sales Grow for 23 Years

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Nestle-NigeriaNestle Nigeria Plc.’s revenue growth will be sustained in the financial year 2022, analysts at CardinalStone Partners projected.  In an equity report on the consumer goods producer, an analysts’ team led by Philip Anegbe also upgraded the company’s price target by 2.7% to N1,602.86, a 14.37% higher than the reference stock market price of N1,401.40.

According to a CardinalStone report, Nestlé Nigeria Plc. has consistently grown its revenue in the last 23 years, with related cumulative annual growth rate printing at 19.2%. In the financial year 2021, the revenue momentum was taken up by several notches, according to analysts.

Again, sales inched higher by 26.3% year on year in the first quarter of 2022. The recent traction in topline growth mostly reflects Nestle Nigeria’s brand visibility and efficient distribution strategy, analysts said in the equity report.

They noted that Nestlé’s unique products are at the “Top of mind” to many Nigerians. Asides from being one of Nigeria’s oldest FMCG institutions, the company has also positively increased the awareness of its products via initiatives such as the free product distributions in academic institutions.

To buttress Nestlé’s success on the brand visibility front, CardinalStone analysts highlighted a scene from the movie “Captain America: Civil War”, wherein the makers used pictures of Maggi cube and Milo to depict a typical Nigerian environment.

“Thus, it would appear that the Nestlé’s brand is now largely synonymous with the Nigerian market”. The loud clear voice of equity analysts was made open on Nestle Nigeria product innovation.

CardinalStone analysts said to improve the quality of its product design, packaging, and composition, Nestlé embarked on the “reiMAGGIne” journey for its Maggi cubes in 2020.

This initiative led to the launch of its new Maggi product (Maggi Signature Chicken powder), with more familiar and common ingredients and minimal processing. Similarly, Golden Morn experienced a reformation, with some of its pillow packs replaced with stand-up pouches for better merchandising.

In 2021, Nestlé Pure Life Sparkling water was launched, while in 2022, Nescafe Malty, a blend of Nescafe 3-in-1 and malt, was introduced to the market.

“In our view, the company’s ongoing product innovations are likely to remain supportive to topline in the financial year 2022 and across our forecast horizon”, analysts projected.

But there is/are downside risk(s). Rising headline inflation in Nigeria may affect the fast-moving consumer goods company’s margin in the year.

Given its diverse product portfolio, the equity report noted that the food company uses several ingredients for its production processes like soybean, maize, cocoa, palm olein, and sorghum.

These raw materials are mostly locally sourced; with about 80% of the consumer company’s raw material input coming from the domestic economy in a move to drive backward integration.

“To support this initiative, the company commenced its Nestlé Livestock Development Program (NLDP) in 2020 to increase productivity in the local dairy value chain (The project ends in 2024).

“Nestlé has also sustained its technical support to improve grains and cassava yield and quality by strengthening services offered to farmers to upgrade the cassava and cereal supply chain, according to the equity report”, CardinalStone detailed.

Despite its internal sourcing, Nestlé continues to experience margin contraction as a result of the hot inflation rate in the country. The consumer price index has been facing pressures due to an imbalance in the Nigerian economy – worsened by insecurity.

In the financial year 2021, the company’s margin dipped 4.1 percentage points year on year and it slowed down by 0.6ppts at the end of the first quarter of 2022

“We expect these pressures to subsist in 2022”, CardinalStone analysts stated, saying the view is consistent with FEWS Net’s recent publication, which highlighted that food supplies remain constrained due to conflict in producing areas and rising diesel & transportation costs.

More so, the report noted that breakdowns indicate material foreign exchange (FX) exposure to the company’s debt capital position. As of 2021, dollar-denominated borrowings accounted for almost all of Nestlé’s debt, analysts explained.

Analysts explained that this high foreign debt composition may have also been responsible for the N4.7 billion FX loss, a 37.8% of total finance cost, which trailed naira weaknesses across the different FX markets. At the Investors and Exporters’ foreign exchange window, Naira declined 7.5% in the period while FX fell by 15.4%.

With the sustained naira depreciation and possible increases in net borrowings, analysts said they see latitude for further foreign exchange losses by year-end. The market dynamic in this regard led to a projected 11.5% increase in interest expense for the financial year 2022, according to the equity report.

“We see scope for over 14.0% capital appreciation Nestlé Nigeria Plc is trading at material discounts to its historical price-earnings and enterprise value as a proportion of earnings before interest tax depreciation and amortization (EV/EBITDA) multiples.

“This relative undervaluation is despite the notable improvements in the company’s profitable ratios such as return on equity estimated at 206.8% in 2022 versus a 5-year mean of 107.5%”.

 


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