Cost Containment Boosts Nestle’s Fortunes

06 Mar 2013

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Chairman of Nestle Nigeria Plc, Chief Olusegun Oshunkeye

Goddy Egene
“We are confident that our company will continue to deliver the strong performance that we have become known for in spite of the daunting challenges and uncertainties ahead. We will continue to invest in the future, strengthen our capabilities and demonstrate resilience to drive sustainable performance improvement in 2012 and beyond,” these were the words of assurance by the Chairman of Nestle Nigeria Plc, Chief Olusegun Oshunkeye, to shareholders at during the company’s annual general meeting held last year in Lagos.

On February 20, the company announced its audited results for the 2012, showing a growth of 19 per cent in turnover, 28 per cent in profit after tax while the company declared a dividend of N18.50 per share.
Corporate Profile
Nestle Nigeria listed in the consumer goods sector of the NSE, was listed on the exchange in 1971. The company is owned 37.24 per cent by Nigerian investors while the remaining 62.76 per cent is held by Nestle S.A, which is the parent firm.

The company has the mission which it describes as "Good Food, Good Life," to provide consumers with the best tasting, most nutritious choices in a wide range of food and beverage categories and eating occasions, from morning to night.

Nestle has Mr. Martin Woolnough as its chief executive officer, while Osunkeye is the chairman. Other directors include: Martin Kruegel, David Ifezulike, Fiama Mshelia, Etienne Benet, Frederic Duranton, and Iquo Ukoh.
Staying Ahead of Competition

The highly competitive consumer goods industry where Nestle operates has made the firm to adopt various strategies to remain a leader in the market. The strategies include huge investments in warehouse, expansion, products enhancement and marketing.
In line with the company’s nutrition, health and wellness mindset, Nestle continue to offer tastier and healthier food and beverage choices in all its categories to consumers for all stages of life.

Besides, to further enhance its competitive edge, the company has been implementing relevant innovation especially targeting the needs of lower-income consumers most likely to suffer from micronutrient deficiencies.
Nestle has been fortifying foods with vitamins and minerals so as to prevent micronutrient deficiencies. In March 2012, the firm re-launched MAGGI cube fortified with iron.

“Already fortified with iodine, Nestlé’s development of the iron-fortified MAGGI Cube is a reflection of our ongoing commitment and leadership to play an important role in the daily life of Nigerians,” Osunkeye said.
In the area of investments, Nestle has made constant investments over the years to enhance its performance. The company has just invested N12 billion in a new state of the art facility in Ogun State.

Chief Executive Officer, Nestlé S.A., the parent company, Paul Bulcke, said: “Nestlé has been operationally present in Nigeria for 50 years, bringing meaningful value to society at large by sourcing locally, creating new local employment, offering nutritious products and helping in the further development of the region. By opening our new facility in Ogun State, we will be closer to our consumers and can better adapt our products to their needs and preferences.”

Also commenting, Woolnough said: It is a major milestone in the history of Nestlé in Nigeria and we are proud to see that our operations in Nigeria are not only measurable in length of time, but more importantly, also by our positive impact on our stakeholders and our positive visible impact on the Nigerian industrial landscape.”

Analysts’ Preference
Before Nestle announced the audited 2012 results, analysts at Renaissance Capital had expressed their preference for the firm over other operators in the same industry.
According to the RenCap analysts, they met the management of Nestle and the company appeared to be executing better than its competitors in the market, declaring “we remain very comfortable with our preference for Nestlé.”
Nestlé’s  Growth Continues
They explained that the company’s penetration of smaller towns and strong Milo growth has enabled Nestlé to continue reporting revenue growth of 20 per cent in 2012 despite the challenges in the year including petrol subsidy strikes and political unrest in the north.

“We believe a key differentiator for Nestle is that it provides 20-day credit to its distributors. Nestle dispatches to the warehouses of its distributors, but has a system of keeping track of stock levels, and replenishes when the stock falls below a certain level. Although Nestlé doesn’t own the warehouses, it treats them as its secondary warehouses. This ensures continuity of supply and enables more accurate sales forecasting,” they said.

RenCap also recognised the active role being played by Nestle S.A in the strategy of its Nigerian subsidiary.
“Capital allocation in Nestlé is done on a global and regional level. There is a purchasing company for all fixed assets at Group level. Product decisions are also made globally,” they said.

The 2012 Financial Performance
On February 20, Nestle became the first company to declare its audited results for the year ended December 31, 2012. Revenue stood at N116.7 billion in 2012, up by 19 per cent from N97.9 billion in 2011. Profit before tax was N25 billion, showing a growth of 37 per cent above the N18.2 billion in 2011.

Profit after tax was N21.1 billion in 2012, compared with N16.5 billion in 2011.
A further analysis of the company’s performance revealed that the reduction in financial cost in 2012 was the saving grace. While the cost of sales rose by 16 per cent, operating expenses by 27 per cent, finance cost was significant reduced by 72 per cent. Specifically, Nestle expended N3.32 billion on finance cost in 2011, which was reduced to N939 million in 2012.

In terms of margin, 2012 saw Nestle end with better margins compared with the previous year. Gross profit margin stood a 43 per cent as against 42 per cent the previous year. Net profit margin was 18 per cent compared with 16 per cent in 2011.
Return on average equity is 74 per cent, while return on average asset is about 25 per cent. The company ended the year with earnings per share of N26.67 up from N20.81 the previous year.
Based on the performance, the directors recommended a dividend of N18.50 per share, showing payment ratio of about 69 per cent.

Soaring Share Price
The shares of Nestle Nigeria have been the highest priced on the NSE. Although, it’s impressive performance and regular dividend payment policy has contributed to the steep rise in the price of the equity, its low share float is another factor driving up the price.
Nestle has only 792,656,252 million shares in issue and only about 295,181 million are in the hands of investors that is available for trading as the remaining are held by the parent firm that are not traded at all.

In line with economy law of demand and supply, since Nestle is a reliable blue chip that many institutional investors and fund managers want on their portfolio, any high demand always result in spike in the share price.
This has consistently pushed the price to new highs. For instance, the equity which stood at N430 per share this time last year closed at N886 last Friday, indicating a year-on-year capital gain of 106 per cent.

Although the stock is expected to moderate after adjusting the price for dividend, market operators said Nestle shares would remain the highest priced stock in the market.

Tags: Nigeria, Featured, Business, Nestle Nigeria Plc, Olusegun Oshunkeye

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