Focus for the week: NESTLE NIGERIA PLC H1’24 Earnings Release – Revenue soars amid persistent macro challenges

Nestlé Nigeria PLC recorded a significant improvement in revenue for Q2’24, up 67% y/y to ₦223.5 billion. This growth was primarily driven by higher pricing across its product catalogue, a strategy it has sustained in the face of continued headwinds. However, the company’s gross profit recorded a slower growth, of 41% y/y to ₦78.2 billion, underscoring higher cost factors. Costs pressures were also witnessed further down, as OPEX jumped 54% y/y to ₦36.2 billion. Consequently, EBIT’s growth slowed to 31% y/y to print at ₦42.2 billion. Meanwhile, Net finance expense fell by 22% y/y to ₦98.6 billion. All in, the company recorded a loss after tax of ₦34.2 billion, lower than the ₦66.2 billion recorded in Q2’23.

Finance costs continue to pressure bottom-line

In H1, the company reported a revenue of ₦407 billion, marking a 55% y/y growth, while gross profit printed at ₦127.3 billion, (+19% y/y). Further down, EBIT inched up marginally by 4% y/y to ₦63.1 billion, following cost pressures witnessed across the two quarters. Additionally, the company’s financial performance was further exacerbated by increased net finance expenses, which skyrocketed by 143% y/y to ₦315.6 billion, primarily due to significant foreign exchange losses. This resulted in a pre-tax loss of ₦252.5 billion (H1’23: ₦69.1 billion loss), while net loss printed at ₦176.9 billion (H1’23: ₦50.0 billion).

Balance sheet wobbles as cash balance declines

Despite a ₦150 billion gain from PPE revaluation, the company’s balance sheet deteriorated in H1’24. A sharp increase in loans from ₦402.3 billion to ₦653.9 billion, coupled with negative retained earnings of ₦255.5 billion, resulted in liabilities exceeding assets by ₦104.9 billion. Cash balances plummeted to ₦37.7 billion from ₦167.7 billion in FY’23, primarily due to ₦231.8 billion in realized FX losses.

Outlook: losses to abate on lower FX volatility

Looking ahead to H2’24, we expect Nestlé Nigeria to continue navigating a challenging economic landscape albeit with lower volatility. We project a revenue of ₦873.7 billion, up 60% y/y, driven by sustained price increases, while gross profit is anticipated to grow to ₦340.8 billion (+57% y/y). We also expect OPEX to stay elevated, printing at ₦144.4 billion, up 54% y/y. Net finance expenses are expected to climb slowly in H2 bringing FY’24 print to ₦360.4 billion, as we anticipate lower volatility in the FX market. As a result, we project FY’24 loss to moderate to ₦106.6 billion (FY’23 ₦79.5 billion loss).

What shaped the past week?                     

Equities: This week, the local market closed in the green, driven by broad-based gains across sectors. The ASI grew by 0.63% w/w to close at 96,580.01 points. All sectors closed in the green, with the Oil & Gas sector posting the highest gains. OANDO (+60.71% w/w) drove the rally in the Oil & Gas space (+8.50% w/w), as investors continued to react to its acquisition deal. The Insurance sector added 5.76% w/w driven by gains in SOVRENINS (+21.43% w/w), CORNERST (+16.38% w/w), UNIVINSURE (+12.90% w/w), and GUINEAINS (+12.20% w/w). Also, buy-side activities in INTBREW (+13.95% w/w) saw the Consumer Goods sector add 3.48% during the week. Additionally, the Banking space (+1.96% w/w) was mostly lifted by FBNH (+10.57% w/w). Finally, the Industrial Goods (+0.08% w/w) index witnessed a marginal gain driven by increases in JBERGER (+31.15% w/w) and JAPAULGOLD (+13.72% w/w).

Fixed Income:

During the week, the CBN released a circular which operationalized the new SDF rate at 25.75% but capped at ₦3 billion while additional sums will earn a rate of 19.00%. This signaled a plateauing of rates in the fixed income market and strengthened bullish sentiments. Also, given robust system liquidity during the most part of the week, interbank rates declined. The OPR fell by 767bps w/w to 18.11%. At the end of the week, yield movements were seen on the 91-Day bill (-568bps), 364-Day bill (-3bps), 2-year note (-4bps), 3-year note (-3bps), and 7-year note (-3bps).

Currency: At the close of market trading on Friday, the Naira depreciated by ₦18.67 w/w to close at ₦1,598.56 per dollar.

Fixed Income: In next week’s trading session, we expect muted activities in the NTBs space as investors await the auction scheduled for next week. We also expect that the results from the auction would determine the attractiveness in the Bonds market.