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NESTLE NIGERIA PLC H1'20 - Declines in food revenue dwarf H1 Revenue growth

Nestle Nigeria recently released its half year results, reporting a flat topline performance in Q2’20 versus Q2’19, albeit 0.6% higher than our estimate. Revenue came in at ₦70.3 billion in the quarter, taking H1’20 Revenue to ₦141.0 billion, also flat compared to the previous year. While food revenue continued to underperform this year (-2.5% y/y to ₦86.0 billion in H1’20), the revenue growth in beverages (+2.5% y/y to ₦55.0 billion) acted as a buffer, likely boosted by Ramadan demand in Q2. We believe that the negative growth in Food revenue is borne from a strengthening in sales volume for its strongest competitor in the seasoning cube market, especially as Unilever embarks on smaller packaging strategies and restructures its sales challenges.

Given the company’s strong food and beverage portfolio as well as the resilience shown in its H1 revenue flow, we estimate that full year revenue will decline marginally (-0.7% y/y) to ₦282.1 billion sustained by the beverage segment. Revising our previous assumptions regarding costs and operating expenses, we expect gross Profit to decline by 5.3% to ₦121.3 billion and Operating profit to drop 2.9% y/y to ₦69.9. billion. Adjusting our interest expense expectation in line with the H1 run rate, we estimate a 19.1% decrease in finance costs to ₦0.8 billion. Overall, we expect Nestle’s PBT to weaken by 2.7% y/y to ₦69.2 billion and revise our PAT expectation upward to ₦44.6 billion (2.3% y/y). We value Nestle at ₦1,078.08 but maintain a SELL recommendation.