Nestle Plc released its FY 2019 audited numbers where the company recorded a 6.7% y/y increase in Revenue to N284.0 billion from N266.3 billion in FY 2018. On a q/q basis, Revenue grew 4.7% q/q to N72.7 billion in Q4 2019 from N69.4 billion in Q3 2019. The growth in Revenue was driven by improved sales growth across Food (up 4.7% y/y to N176.1 billion) and Beverage (up 10.0% to N107.9 billion) business segments.
We note reported Revenue of N284.0 billion beat our 2019e of N278.2 billion by 2.1%. In addition, we note the company recorded a rebound in q/q Revenue growth following two consecutive quarters of disappointing performances.
Cost of Sales (ex-depreciation) grew by 2.1 y/y to N150.3 billion in FY 2019 from N147.2 billion in FY 2018, which was slower than the growth in Revenue. We believe the moderate growth in Cost of Sales was driven by flattish growth in Factory Overheads and steep decline in Other expenses line item as Raw material costs for the year was higher by 6.3% y/y.
We note key raw materials saw minimal price pressures in the first half of 2019 although pressures ramped up towards the end of the year. Nevertheless, minimal average price growth helped keep Raw material cost growth moderate. Against the backdrop of lower y/y growth in Cost of Sales, Gross Profit increased by 12.3% to N133.7 billion in FY 2019 from N119.1 billion in FY 2018 while Gross margin climbed 2.4ppts in FY 2019 to 47.1%.
Nestle recorded a 5.2% y/y increase in Operating Expenses (adjusted for depreciation) to N54.2 billion in FY 2019 from N51.6 billion in FY 2018. The increase in Operating Expenses was driven largely by growth in Marketing & Distribution expenses adjusted for depreciation (up 5.9% y/y) and Administrative Expenses adjusted for depreciation (up 2.0% y/y).
We attribute the growth in Opex to increased spending on distribution and sales promotion activities. Slower growth in Operating Expenses compared to Gross Profit drove EBITDA higher by 17.7% y/y to N79.5 billion in FY 2019 from N67.5bn in FY 2018. However, EBITDA was lower within in Q4 compared to Q3, down 6.1% q/q.
Depreciation & Amortisation rose 7.9% y/y to N7.5bn in FY 2019 from N6.9 billion in FY 2018. Nevertheless, EBIT climbed 18.8% y/y to N72.1 billion in FY 2019 from N60.6 billion in FY 2018. Net Finance Cost climbed 5.4% y/y to N938.2 million despite lower Finance cost (down 13.0% y/y) as Finance income dipped 22.6% y/y on lower Cash and yield environment.
Nevertheless, Pre-Tax Profits grew 19.0% y/y to N71.1bn in FY 2019 from N59.8 billion in FY 2018 which was ahead of our 2019e of N69.8bn. However, higher than expected Effective Tax Rate caused a 51.9% y/y jump in Tax expense to N25.4 billion. Consequently, Net Income printed below our 2019e of N50.3 billion to settle at N45.7bn which represents a 6.2% y/y growth from N43.0 billion in FY 2018. Earnings per Share printed at N57.63/s in FY 2019 (CSL Estimate – N60.23/s)
The company announced final dividend of N45.0/s (bringing total dividend for the year to N70.0/s) which implies a dividend yield of 4.0% based on Friday’s closing price of N1,130/s. We have a HOLD recommendation on the stock with a target price of N1,356.97/s.
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