FRI 30 JULY, 2021-theGBJournal- NESTLE released its Q2-21 unaudited financials after market close Wednesday. The result showed that the company’s EPS declined by 12.2% y/y to NGN11.77 in Q2-21 (Q2-20: NGN13.41), mainly due to a spike in finance cost.
Revenue grew by 19.1% y/y in Q2-21 (H1-21: 21.6% y/y), primarily driven by a 35.2% y/y growth in the Beverage segment.
Our channel checks revealed that the growth in this segment was influenced by an estimated average price increase of c.13.5% implemented in Q1-21. We also highlight that the pandemic induced low base in Q2-20 supported the double-digit growth in the segment.
Meanwhile, the Food segment grew by 9.6% y/y. Growth in this segment was also price-driven, given that average prices rose by about 15.8% during the period.
Gross margin contracted by 36bps to 37.6% in Q2-21 (Q2-20: 41.3%) – the lowest since Q2-16 – as growth in the cost of sales outpaced revenue.
Cost of sales grew by 26.4% y/y, which in our view, is indicative of the weaker currency and much higher local sourcing costs (NESTLE sources c.80% of its raw materials in Nigeria) amid intensifying inflationary pressures within the country (food inflation in Nigeria averaged 22.02% in Q2-21).
EBIT and EBITDA fell by 4.6% y/y and 3.4% y/y, respectively, as a sharp increase in operating expense (+26.5% y/y) offset the revenue growth. Accordingly, EBIT and EBITDA margins declined by 47bps and 50bps to 19.0% and 21.5% (Q2-20: 23.7% and 26.5%), respectively.
NESTLE’s earnings were further dampened by the 328.1% y/y surge in net finance costs as finance costs (+303.2% y/y) ballooned in Q2-21. The surge in finance cost was underpinned by a 256.4% increase in interest expense following an increased borrowings during the period. Thus, the company’s total debt increased by 30.5% to NGN52.48 billion as of H1-21 (2020FY: NGN40.21 billion).
Overall, the weak operating profit and finance cost pressure drove profit before tax down by 12.4% y/y to NGN14.38 billion in Q2-21 (Q2-20: NGN16.41 billion). Following a tax expense of NGN5.05 billion, profit after tax printed NGN9.33 billion (Q2-20: NGN10.60 billion).
Remarkably, NESTLE has maintained topline growth despite the heightened competition in its operating environment.
However, we are concerned about the persistent surge in finance costs arising from the increase in foreign currency debt amid the lingering naira weakness.
Nevertheless, notwithstanding the weakness in margins, we expect the company to maintain positive earnings over the rest of the year.
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