FOCUS OF THE WEEK: NESTLE NIGERIA PLC 9M’23 EARNINGS RELEASE

Nestle Nigeria Plc – Q3 performance insufficient to stem 9M loss.

Despite sustained inflation of over 20%, Nestle Nigeria posted impressive Q3 top-line gains. In Q3’23, revenue grew by 21% y/y to come in at ₦134.8 billion. This higher topline performance is attributed to higher product prices in both its food and beverage segments. On the back of this solid topline growth and slower growth in cost of sales (up 11% y/y to ₦82 billion), gross margin rose 6ppts to 39% in Q3’23. This pushed gross profit to ₦52.8 billion, reflecting a strong increase of 42.5% y/y. These positive gains supported Nestle’s 9M’23 revenue and gross profit to come in higher at 19% and 37% y/y respectively, bringing them to ₦396.6 billion and ₦160.2 billion apiece.

Higher gross margin propels operating profit in Q3

Despite cost pressures, operating profit came in higher in Q3’23. This was due to slower growth in OPEX and improved gross margin. To put this in numbers, relative to 21% y/y expansion in revenue, operating expense only grew by 20% y/y to ₦32 billion in Q3’23. This slower growth in OPEX alongside improved gross margin drove EBIT 65% higher y/y to ₦30.8 billion for the Q3 period. Ultimately, the strong performance in Q3 drove EBIT for the 9M period 41% higher y/y to ₦91.6 billion.

FX losses drag bottom line

However, similar to Q2 performance, it was a sad tale for bottom-line, as FX losses drove finance costs 9x higher in Q3 to ₦18.8 billion, ultimately dragging PAT. We, however, like to note that the pace of growth for these cost items were slower in Q3 than in Q2; thus, PAT for Q3 came in at ₦6.9 billion (down 44.4% y/y). However, this did little to abate losses in 9M’23 (9M’23 loss of ₦43.1 billion vs 9M’22 profit of ₦40.2 billion), given the magnitude of finance costs experienced in Q2 (₦121.7 billion).

Outlook: TP estimated at ₦1,145.89

Our full year expectation for revenue comes in at ₦504.5 billion (up 13% y/y), driven by higher product prices. Also, we expect sustained higher gross margins y/y to keep EBIT elevated; thus, we project EBIT to come in at ₦104.4 billion (up 20% y/y). Further down the income statement, we expect FX losses to drop its growth pace in Q4’23 to bring FY’23 finance costs to ₦170 billion. Despite the fall in pace in Q4’23, we still expect FY’23 bottom-line to stay in the negative territory due to the magnitude of finance costs. That said, bottom-line is expected to print at a loss of ₦36.1 billion (FY’22: ₦49 billion profit). Given this subdued performance, we do not project any dividends for FY’23.

What shaped the past week?

Equities: The NGX extended its bullish run advancing by 0.37% w/w. Notably, the Oil & Gas index extended its rally by posting the highest weekly losses (-0.04%) driven by OANDO (+21.88%). Meanwhile, the Banking index saw its rally end as it posted weekly gains (+0.91% w/w) led by some profit-taking in FIDLELITY (-3.83%). Lastly, Industrial Goods also closed negative (-1.18% w/w) as JAPAULGOLD (-14.14%) topped the losers’ chart for the week.

Fixed Income: The secondary market witnessed significant trading activities this week. On Monday, the DMO offered ₦360 billion worth of notes and sold ₦434.50 billion across the 6-years, 10-years, 15-years and 30-years tenors. Rates on all tenors rose significantly from October’s auction. The 14.55% FGN APR 2029 tenor rose 110 bps to 16.00% (previous: 14.90%), the 14.70% FGN JUN 2033 tenor rose 125bps to 15.75% (previous: 15.75%), also, the 15.45% FGN JUN 2038 tenor rose 170bps to 17.50% (previous: 15.80%), and finally the 15.70% FGN JUN 2053 tenor rose 140bps bps to 18.00% (previous: 16.60%). This led to a slightly bearish session in the bonds market. Of note, the yield of the 20-year note advanced by 25bps to settle at 16.67%. Meanwhile bullish sentiments dominated the NTBs market as unfulfilled demand from last week’s NTBs PMAs chased available papers in the market. Of note, the yields on the 91-day and 182-day bills fell by 76bps and 430bps respectively to 8.56% and 11.17%.

Currency: The Naira depreciated by ₦11.61 at the NAFEM Window to close at ₦791.75.

Domestic Economy: In October, headline inflation rose by 0.61% to 27.33% y/y. This outcome was driven by sustained increase in farm produce prices, elevated energy prices, and weaker currency. Food inflation went a notch higher above the 30% psychological mark, a level last seen in September 2005. Accordingly, food inflation surged to 31.52% y/y. Core inflation, on the other hand, rose to 22.69% y/y. We expect this trend to persist in the near term. We expect further uptick in inflation (Oct’23f: 22.72% y/y) and a stronger Q3’22 GDP outcome (Q3’23f: 3.5% – 4.3% y/y) to provide impetus for further tightening in the Monetary Policy Rate (Nov’23: +25bps to 19.0%).

Global: Global investors maintained a mixed outlook on capital markets this week, influenced by significant events such as the APEC Summit, U.S. inflation data, and corporate earnings reports. In the Asia-Pacific region, markets closed positively, driven by optimism surrounding the APEC Summit, where U.S. President Joe Biden and Chinese Premier Xi Jinping are slated to engage in economic discussions. However, underwhelming earnings releases from companies like Lenovo, Toshiba, and Alibaba dampened investor sentiment in these counters. Shifting focus to the U.S., this week was marked by the release of the CPI number for October, a pivotal factor in shaping the Federal Reserve Bank’s perspective on monetary policy amid persistent inflation. Inflation slowed to 3.2% y/y and remains well above the FED’s 2% target. The week also witnessed earnings reports from Walmart, Target, and Cisco Systems. Additionally, statements from officials at the Bank of Japan and the U.S. Federal Reserve were notable. Governor Ueda of the Bank of Japan emphasized that inflation is likely to reach their 2% target, providing insights into the bank’s monetary policy. Meanwhile, Governor Lisa Cook from the Federal Reserve, expressed the belief that with ongoing disinflation and a robust labor market, a “soft landing” is conceivable but not guaranteed for the U.S. economy.

What will shape markets in the coming week?

Equity market: We still expect similar tepid trading sessions next week, as investors look to other asset class, given significant returns most of the counters have posted this year. 

Fixed Income: For next week’s trading session, we expect tepid trading sessions until the NTBs PMA scheduled for Wednesday. Afterwards, we expect rates at the auction to direct investors’ sentiments.