Despite boasting of strong topline growth, Nestle’s rising cost of sales due to high production costs as a result of global inflation and local FX pressures are pilling pressure on the firm’s profitability, BusinessDay analysis shows.
The firm’s revenue growth was 27 percent year on year while the cost of sales grew faster than revenue amounting to a 32.3 percent year-on-year increase.
Nestle Nigeria’s profit after tax grew 22.4 percent to N48.97 billion in the full year of 2022 from N40 billion in the full year of 2021 while the firm’s profit after tax margin stood at 11 percent, 40 basis points decline from N11.4 percent in the comparable period.
“Notwithstanding the strong topline growth, we note margin pressures as a 32.3 percent increase in production costs forced gross margin to contract by 2.6ppts to 34.9 percent. The passthrough from the higher production costs also drove the operating profit margin lower by 1.1ppts, despite improved operating efficiency,” analysts at CardinalStone said in a note.
Nestle’s revenue grew to N446.82 billion in the full year of 2022, a 27 percent increase from N351.82 billion in the full year of 2021.
“Nestle Nigeria plc’s full year 2022 numbers showed a strong growth in Revenue, up 27.0 percent year on year to N446.82 billion in the full year of 2022 from N351.82 billion in the full year of 2021. This was supported by growth in both the food products and beverages segments,” CSL Research said in a note.
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According to CSL Research, maggi seasoning, cerelac, nan and other household names in the company’s foods category retained a dominant position, contributing 60.9 percent to total revenue and up 30.6 percent year on year to N271.99 billion in the full year of 2022 from N208.28 billion in full year of 2021.
“Also, the household delight, milo, nescafe, pure life, and their recent variants in the beverages segment contributed 39.1 percent to total revenue while growing 21.8 percent year on year to N174 billion in the full year of 2022 from N143.53 billion in the full year of 2021. We believe the increase in Revenue was driven by both price and volume growth,” analysts at CSL Research added.
Cost of sales grew faster than revenue during the reviewed period to reach N291.05 billion in 2022, up 32.3 percent from N219.99 billion in 2021.
“Despite the company’s ability to source 80 percent of its raw materials locally, the Cost of Sales (adjusted for depreciation) yielded to global inflation and local FX pressures as it grew faster than Revenue, up 32.8 percent year on year to N284.23 billion in FY 2022 from N214.10 billion in FY 2021,” CSL Research said.
The firm’s gross profit climbed 18.2 percent to N155.76 billion in December 2022 from N131.84 billion in December 2021, while its gross profit margin declined by 260 basis points to 34.9 percent in the full year of 2022 from 37.5 percent in full year 2021.
Nestle Nigeria’s finance income stood at N4.78 billion, 140 percent increase from N1.99 billion while finance cost amounted to N20.53 billion in December 2022, up 70 percent from N12.08 billion in December 2021.
The firm’s net finance cost jumped 56 percent to N15.76 billion in 2022, this is coming from N10.1 billion in 2021.
“Elsewhere, we see additional finance cost pressures (+70.0% YoY), which masked the 2.4x jump in investment income. In our view, the increase in net finance cost reflected higher foreign exchange losses and interest expenses on intercompany loans,” CardinalStone analysts said.
Nestle Nigeria declared a total dividend of N36.50 in the full year of 2022 from N25.50 in the full year of 2021
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