Nestle Shows Resilience


Despite the challenging operating environment, Nestle Nigeria’s adoption of internal cost saving initiatives paid off with the better-than-expected results for the first quarter ended March 2016, writes Goddy Egene

The challenging operating environment has dampened the enthusiasm of many investors for high returns. In 2015 some companies managed to pay dividends, while others could not pay dividends due to their poor results.

The difficult operating business environment has continued in 2016 engendered by the rising inflation, fuel scarcity, foreign exchange challenges. This has led to apprehensions among investors that companies may performance poorly at the end of the year.  The results released by many of the companies  for the first quarter ended March 31, 2016 have  reflected the state of the economy with many of them reporting  decline in their bottom-lines.  However, Nestle Nigeria Plc surprised many stakeholders with better-than-expected   results in Q1. The company grew its profit before tax (PBT) by 150 per cent.

Corporate profile
The first sale of Nestle products in Nigeria date back to the beginning of the 20th century. This was through local importers who placed their orders directly with British trading companies active in the country. The importation of  Nestle products  became regular from the 1920s when Nestlé decided to formally organise the importation and distribution of products.
However, in 1961, one year after Nigerian independence, Nestlé Products (Nigeria) Limited was officially created. This signaled the start of the Nestlé operations in Nigeria as a locally based subsidiary of Nestlé.

Nestle S.A, Switzerland owns 63.5 per cent of the company’s shares, while the remaining 36.5 per cent shares are held by Nigerian shareholders.
The company has two major two business units including food products and beverages. This strategic business units offer different products and are managed separately because they require different technology and marketing strategies. The food products segment contributed 59.75 per cent to the company’s revenue in FY 2015, compared with the contribution of 40.25 per cent by the beverages range.

First quarter results
Nestle reported a revenue of N36.131 billion for Q1 of 2016, up by 31 per cent from N27.556 billion in the corresponding period of 2015.  Gross profit grew by 46 per cent from N12.187 billion to N17.781 billion. Net finance  cost dropped by 86 per cent from N2.159 billion to N300 million. PBT soared   by 150 per cent from N3.487 billion to N8.725 billion, while PAT grew by 126 per cent from N2.954 billion to N6.681 billion.

Commenting on the performance, the company said   it is a testimony to the strength of its brands and its ability to provide value for consumers who are negatively affected by macroeconomic challenges.
“The reduction in the cost of sales, net finance cost and internal cost saving initiatives contributed a positive evolution of net profit during the period. The board and the management are committed to delivering on its set objectives despite the current turbulence and economic challenges,” the company pledged.

Analysts’ review
Analysts at FSDH Merchant Bank Limited said Nestle Nigeria reported an impressive performance in Q1 2016 despite the difficult economic environment.  They attributed the performance to   diversified product mix of the company and aggressive customer-focused advertising the company adopted improved the top-line performance.

“We also observed that the company was able to increase the prices of some of its products to compensate for the increase in inputs costs. The unaudited Q1 2016 result shows that turnover  increased by 31.12 per cent  to N36.13 billion  compared with N27.56 billion in 2015. The company’s cost of sales increased by 19.40 per cent   to N18.35 billion from N15.37bn in Q1 2015. The cost of sales as a percentage of  turnover  improved to 50.79 per cent  in Q1 2016 from 55.77 per cent  as at Q1 2015. The gross profit  increased by 45.90  to N17.78 billion in Q1 2016 from N12.19 billion in Q1 2015. Nestlé’s administrative, selling and distribution expenses increased by 33.86 per cent  to N8.75 billion,” they said.

 These expenses as a percentage of turnover increased to 24.23 per cent  in Q1 2016 from 23.73 per cent in Q1 2015. The cost saving measures of the company led to a growth in the operating profit or Earnings Before Interest and Tax (EBIT) by 59.84 per cent  to N9.03 billion  from N5.65 billion.  PBT grew to N8.73 billion in Q1 2016, an increase of 150.23 per cent from N3.49 billion in Q1 2015.

“The growth was as a result of the drop in the interest expenses. The low interest rate in the market during the period helped to lower the interest expenses. The tax provision also increased by 283.71 per cent to N2.04 billion from the N532.69 million. The PAT was N6.68 billion in Q1 2016, from N2.95 billion in 2015, representing an increase of 126.16 per cent. There was a significant increase in the company’s profit margins in Q1 2016, compared with Q1 2015,” they said.

Balance sheet
A cursory look at the balance sheet position as at Q1 2016 compared with full year (FY) December 2015 shows a marginal decrease in the company’s fixed assets. The total fixed assets decreased by 1.90 per cent to N69.16 billion in Q1 2016 from N70.50 billion in FY 2015. The inventory increased by 13.37 per cent to N12.26 billion in Q1 2016, from N10.81 billion in FY 2015. The cash and bank balances increased by 115.40 per cent from N12.93 billion in FY 2015 to N27.85 billion in Q1 2016.

Trade debtors decreased in Q1 2016 by 17.05 per cent to N12.11 billion, from N14.60bn in FY 2015. This may signify that there was at least a net cash inflow of about N2.49bn from payments previously owed by customers for goods sold on credit. The company’s trade payables also decreased by 4.09 per cent in Q1 2016 to N8.86bn from N9.24bn as at FY 2015. The working capital stood at a negative N2.15bn in Q1 2016 from a negative N11.02bn in FY 2015, while net assets
for the period increased by 17.88 per cent to stand at N44.80 billion in Q1 2016, from N38.01 billion  as at FY 2015.

The total assets of the company, which stood at N130.13 billion as at Q1 2016 was financed by a mix of equities and liabilities in the ratio of 34.43 per cent  and 65.57 per cent respectively. According to FSDH, “our analysis of the liabilities shows that the short-term liabilities stood at N63.12 billion, accounting for 73.97 per cent of the total liabilities. The short-term liabilities constituted mainly of trade and other payables and short-term loans and borrowings. Short-term loans and borrowings dropped by 1.54 per cent  to stand at N16.84 billion in Q1 2016. The company’s long-term liabilities stood at N22.21 billion accounting for 26.03 per cent of the total liabilities. Long-term liabilities constituted mainly of long term loans and borrowings and deferred tax liabilities, which stood at N12.58 billion and N7.22 billion respectively in Q1 2016.”

Looking forward
FSDH has made a five-year projection for Nestle after considering some factors.  The positive factors include: focus strategy on food segment of the Nigerian economy; cost management initiatives; growing demand for food and beverages in Nigeria; focus on investment in key brands; investment and innovation in plants, which should improve efficiency; technical partnership with the parent and related companies; large market size in Nigeria and stable growing population; strong demand for product at all levels; existing taste and preference for products by consumers.

On the other hand, the negative factors are: the prevailing stiff competition in the industry, the current weak consumer spending power, security challenges in some parts of Nigeria,  and expected further depreciation in the naira.

“Looking at the medium to long-term outlook of the company and the impact of the aforementioned factors, we are of the opinion that the impact of the positive factors would be higher on both the revenue and the profitability of the company than the negative factors. We therefore estimate a turnover of N176.64 billion, N208.90 billion, N253.33 billion,  N305.18 billion, and N358.49 billion  for the periods ending December 2016, 2017, 2018, 2019 and 2020. Our PBT forecasts for the periods are: N45.58 billion, N57.63 billion, N71.20bn, N86.43bn and N102.47bn. Adjusting for tax, our PAT forecasts are N31.90bn, N40.34bn, N49.84 billion, N60.50 billion, and N71.73 billion, PAT Margin for the period are 18.06 per cent, 19.31 per cent, 19.67 per cent, 19.82 per cent and 20.01 per cent. Our forecast final dividend for the FY 2016 is N36.36 per share,” they said.