Nestle Nigeria reported a significant 24% y/y growth in topline to ₦87.3 billion in its Q1’21 results (Vetiva estimate: ₦74.1 billion), driving an equally significant 11% y/y growth in PAT to ₦12.4 billion (Vetiva estimate: ₦12.1 billion).

Food Revenue growth rebounds in Q1
Nestle’s Revenue growth came from a combined 37% y/y upsurge in revenue from beverages (to ₦34.9 billion) and a 15% y/y growth in Food Revenue (to ₦52.4 billion). Although impressive, we are unsurprised by the growth in the Beverage segment, as it had showed a consistent growth trend in the past year even while the company’s total Revenue was declining. What stands out for us, however, is the growth in Revenue from Food as, we had observed consistent declines in Revenue from this segment in the past year. We believe the turnaround in Food Revenue growth has come from an increase in prices as well as an improvement in demand for seasoning cubes as restaurants and food service companies are now seeing a remarkable rebound in traffic. Nestle remains a market leader, especially in the food segment of the FMCG sector. Despite the competition from Unilever’s Knorr, Promasidor’s Onga and other smaller brands, we expect that Food Revenue will maintain this growth trajectory, given the paced increase in economic activities, and its position as a moderately-priced seasoning cube. Furthermore, although Revenue from exports remained flat y/y, we remain optimistic on an improvement in Revenue from exports based on the prospects that the AfCFTA provides. Based on this and the impressive outperformance of our initial forecast, we revise our full year revenue estimate to ₦322.1 billion (previous: ₦296.3 billion).

Costs remain elevated, dampening margins
Although gross profit increased 10% y/y to ₦34.7 billion, Gross margin declined 5ppts y/y to 40%, largely in line with our expectation, (2020 quarterly average: 42%), dragged by the 36% y/y increase in Cost of Sales to ₦52.5 billion, as the company continues to face inflationary pressures on raw material costs. On a milder note, although Nestle’s admin expenses increased 8% y/y to ₦3.3 billion, selling and distribution was flat at ₦11.1 billion, dampening the jump in Opex to 2% y/y to ₦14.4 billion. Thus, EBIT came in at ₦20.3 billion, 16% higher y/y majorly influenced by the impressive Revenue performance, although EBIT margin declined 2ppts y/y to 23%. Although we had expected a moderation in full year Opex at the beginning of this quarter, the mild upswing in Q1 Opex causes us to revise our Opex forecast and estimate a 9% increase in the line item to ₦59.6 billion.