TUES 02 MARCH, 2021-theGBJournal- NESTLE published its Q4-20 and 2020FY audited results after market close on Friday (February 26), with a reported EPS of NGN9.18 (-17.7% y/y), bringing the 2020FY EPS to NGN49.47 (-14.2% y/y).
KEY HIGHLIGHTS:
-Grew revenue by 1% to N287.084 billion in 2020 from N284.035 billion
-Profit for the year down by 14% to N39.212 billion from N 45.683
– Profit before income tax down 15% to N 60.638 billion from N71.123
– Declared dividend rose 10% to N55.485 billion from N50.333 billion
The achieved EPS is a miss per consensus 2020E EPS estimate of NGN55.71 (-11.2% variance) and Cordros estimate of NGN51.95 (-4.8% variance); the miss is attributable to a negative surprise in the finance cost line. A final dividend of NGN35.50/s was proposed, which equates to a yield of 2.4% on the last closing price (NGN1,450.00 on February 26).
Revenue grew by 2.3% y/y in Q4-20, driven by the 9.2% y/y growth in Food sales. According to our channels checks, average prices in the segment were relatively flat during the period, and as such, we feel the growth was primarily volume-driven.
In contrast, Beverage sales fell to a five-quarter low, declining by 8.4% y/y. The sharp decline was surprising, considering average prices in the segment rose by about 28.8% on average and implies a significant drop in Milo and Nescafe volumes in Q4.
For the third successive quarter, gross margin compressed, by 454bps, to 39.3%, the lowest since Q1-18, as the growth in cost of sales outpaced revenue. Cost of sales grew by 10.6% 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) amidst intensifying inflationary pressure within the country (food inflation in Nigeria averaged 15.0% in Q4-20).
Operating profit fell by 5.2% y/y as the operating expense (-11.1% y/y) decline was not enough to offset the gross profit. EBITDA declined by 6.1% y/y, equating to an EBITDA margin of 21.8% (23.7% in Q4-19), the lowest since Q2-16, and implies a 166bps contraction.
Net finance costs surged 546.3% as finance costs (+303.2% y/y) ballooned Q4. This is attributable to the NGN1.73 billion net FX loss recorded in the period.
Consequently, the operating profit weakness and finance cost pressure drove EPS down by 17.7% y/y/ to NGN9.18 in Q4-20 – the smallest quarterly EPS print since Q3-17.
Compared to Q3-20, EPS was down 28.1% q/q, weighed down by the weaker gross margin (-145bps), higher OPEX (+12.2%) and higher net finance costs (+523.2%). In the quarter, the effective tax rate was 36.1%, compared to 34.3% and 39.3% in Q3-20 and Q4-19, respectively.
2020FY: EPS fell 14.2% on a full-year basis, following muted revenue growth (+1.1%), a 359bps gross margin contraction and the surge in net finance costs (+302.9%).
Notably, total debt (excl. leases) increased by 198.3% y/y to NGN39.42 billion (3x total debt at the end of 2019FY). We recall that the company paid off its outstanding FX debt of NGN5.52 billion (USD15.25 million) due to its parent company Q1-20. However, in April and September of 2020, two new 7-year USD100 million parent company loans were approved, of which the company had drawn down USD72.50 million and USD7.0 million as of end-December. Total debt is now at the highest level since Q2-17 and translates to a debt/equity ratio of 1.4x, up from 0.3x and 0.2x in 2019FY and 2018FY, respectively.
FCF generation was significantly stronger at NGN84.42 billion in 2020FY (2019FY: NGN36.58 billion), reflecting favourable working capital movements as the company focused attention on receivables management (trade receivables days improved to 50 days from 85 days as of 2019FY). The company was also able to significantly increased its payables days to 254 days from 184 days in 2019FY.
NESTLE’s Q4 and 202FY operating performance was in line with Cordros Research expectation. However, concerns remain around the ballooning finance costs amidst the much larger foreign currency debt profile and the lingering naira weakness.
Despite the overall weakness during the period, Cordros expects the focus to be on the still positive FY earnings and higher-than-expected dividend.
‘’Hence, we do not foresee an adverse reaction. Per our numbers, the stock is trading at a forward (2021E) P/E of 22.7x, a significant premium to its Global Emerging Market peer average of 15.1x. Our estimates are under review.’’
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