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Nestle Q4 20 - A feeling of deja vu

A feeling of deja vu

• If Nestle’s topline performance in Q420 had you feeling like you had seen this story before, it’s probably because you have! Revenue grew on a YoY basis for the second consecutive quarter, this time by 2.3% to N74.35 billion. But, just like Q320, costs grew faster than revenue at a rate of 10.6%YoY which led gross profit down by 8.3%YoY to N29.19 billion. Also similar to Q320 was a fall in OPEX (-9.8%YoY) which was not enough to stop EBIT from declining (-6.7%YoY to N14.23 billion). The difference this time round, however, was net finance expense which rose significantly after a decline in Q320. PBT fell 22%YoY to N11.38 billion, making it 4 consecutive quarters of PBT declines, while PAT was lower by 18%YoY at N7.27 billion. Our new FVE of N1502.97 reflects the improved revenue performances but also takes into consideration the struggles with cost.
• Food drives revenue while raw materials drives cost: Food grew by 9.17%YoY to drive Nestle’s revenue growth in Q420, this marks an improvement (29%QoQ) from Q320 where it declined 14.24%. Beverages, meanwhile, declined by 8.44%YoY after a strong performance in Q320 (+33%YoY). Overall, revenue was up by 2.3%YoY to N74.35 billion. In our last report, we highlighted the negative effect of FX depreciation on Nestle’s costs and that, coupled with higher inflation, continued to weigh on Nestle’s cost of sales. Cost of raw materials was up 13% over FY20 while general license fees was up 4% over the same period. Total cost of sales rose 10.6%YoY in Q420 to N45.16 billion and the cost of sales margin rose to 60.7% (Q419: 56%) highlighting the increased costs burden faced by Nestle. On the back of the faster rise in costs gross profit fell 8.3%YoY to N29.19 billion which translates to a gross profit margin of 39.3% (Q419: 43.8%).
• OPEX came in lower by 9.8%YoY to N14.95 billion following strong declines in admin costs (-35%YoY) and sales & distribution costs (-5.7%YoY). However, this was not enough to stop EBIT from falling 9.8%YoY to N14.23 billion which gives an EBIT margin of 19.1% (Q419: 21.0%). Net finance expense rose by over 500%YoY to N2.86 billion as finance income fell (-122%YoY) and finance expense rose (303%YoY). The decline in finance income is understandable given the lower interest rate environment in 2020 while finance expense rose on the back of a higher net FX loss. Nestle’s PBT declined 21.9%YoY in Q420 to N11.38 billion while PAT was 17.7%YoY lower at N7.27 billion.
• Over FY20, Nestle’s revenue came in at N287.08 billon, a 1.1% growth from FY19. This revenue growth was driven by beverages which rose 6.9% over the year while food fell 2.5% over the same period. As expected, cost of sales rose by a quicker pace (7.7%) over FY20 to N167.87 billion which led to a 7% decline in gross profit to N119.21 billion as well a contraction in gross margins to 41.5% (from 45.1%). Opex declined by 2.3% YoY to N54.79 billion, led by sales & distribution costs which fell 4.85% while admin costs were up 9.4% for the year. EBIT, however, declined 10.6% to N64.42 billion translating to an EBIT margin of 22.4% (FY19: 25.4%). PBT for the year came in 14.7% lower at N60.64 billion as net finance cost rose 302%. After an income tax expense of N21.43 billion, PAT printed 14.2% lower at N39.21 billion.
• Looking ahead to FY21, we have a revenue projection N297.4 billion based on the premise of a return to growth in the food segment and continued (but slower) growth of beverages as economic growth picks up steam and consumer wallets improve. Costs will continue to weigh on Nestle’s numbers, however, with cost of sales margin projected to come in at circa 58% and OPEX margin at just under 19%. We project that profit will return to growth over the year with PBT coming in at about N67.44 billion. Based on these estimates we have a FVE of N1502.97 which based on today’s close is a recommendation of an OVERWEIGHT on the stock