Nestle Raises Investors’ Hopes

Having cut its dividend by 67 per cent last year, the half year results of Nestle Nigeria are a pointer that shareholders should expect higher returns at the end of the year, writes Goddy Egene

The year 2016 was a tough one for many companies due to the naira devaluation and high inflation. Many of the companies ended that year with lower profitability and lower dividend payment to shareholders.

Leading food and beverages firm, Nestle Nigeria Plc was one of the companies that posted reduced bottom-line and consequently reduced dividend payment. Specifically, Nestle Nigeria’s profit after tax (PAT) fell to N7.92 billion in 2016, from N23.7 billion in 2015. The reduction in profit made the directors to cut the dividend per share from N29.00 in 2015 to N10.00 in 2016.

Chairman of Nestle Nigeria, Mr. David Ifezulike, had explained to shareholders during the company’s annual general meeting (AGM) last May that 2016 was a challenging year due to scarcity of foreign exchange , devaluation of the naira and unfriendly economic policies, among others.

According to him, the scarcity of foreign exchange and devaluation of the nation’s currency led to increase in the company’s foreign loans portfolio.
“The fact that our sales increased by 20 per cent in 2016 is a confirmation that our brands continue to enjoy strong patronage from consumers in spite of inflationary pressures, weak purchasing power and the challenging operating environment. This is possible due to their nutritional benefits and contributions to the health and wellness of our consumers,” Ifezulike said.

However, things are already looking up as the company has reported improved performance for the half year (H1) ended June 30, 2017, thus raising the hopes of shareholders for high dividend at the end of year.

Half year financial performance
Nestle Nigeria recorded a revenue of N121.919 billion, up 51 per cent from N80.442 billion in 2016. Cost of sales rose from N47.712 billion to N73.576 billion, while gross profit grew by 47 per cent to N48.343 billion, compared with N32.731 billion.
Marketing and distribution expenses trended upwards, standing at N16.863 billion, from N12.731 billion in 2016. Administrative expenses declined marginally to N4.780 billion, from N4.9177 billion.

Nestle Nigeria recorded a finance income of N5.145 billion in 2016, showing an increase of 529 per cent from N817 million in 2016, while finance cost fell by 50 per cent from N14.891 billion to N7.385billion in 2017.

As a result, net finance cost dipped by 84 per cent from N14.074 billion in 2016 to N2.239 billion in 2017. A further analysis of the net finance cost show that net foreign exchange loss improved from N13.1 billion to N5.175 billion, while finance cost expenses improved from N14.891 billion to N7.385 billion. Hence, net finance cost stood at N2.239 billion in 2017, as against N14.074 billion in 2016.

Consequently, Nestle Nigeria ended the H1 of 2017 with a profit before tax of N24.459 billion, up by 2,629 per cent from N896 million in 2016, while Pat grew faster by 2,987 per cent to N16.547 billion, from N535 million in 2016.

Speaking on the results, Managing Director/Chief Executive Officer of Nestle Nigeria, Mr. Mauricio Alarcon said: “We are particularly pleased with the growth which is an affirmation of the loyalty and trust of our consumers in our brands. The result is also due to the hard work of our people, and our distribution network.”

“The board and the management remain confident that our strategic roadmap will continue to leverage on the potential of the business and the Company will further increase investments behind brand and route-to-market activities while proactively managing input cost pressures.”

Analysts’ comments
According to analysts at WSTC Financial Services, Nestle Nigeria’s wide economic moat and strategic position in the food and beverage industry continued to support top-line growth in H1 2017 as top-line surged by 52 per cent to N121.9 billion during the period.

The analysts explained that the impressive revenue growth was contributed by double digits increases in both price and volume sold.
“Notably, the growth in revenue was broad based across business lines as the Food business grew remarkably by 63 per cent to N78.2 billion ( N48.5 billion in 2016, while the beverage business also grew by 39 per cent to N43.8 billion ( N31.9 billion in 2016).

However, cost of sales grew faster by 54 per cent to N73.6 billion in H1 of 201717 (N47.7 billion in 2016) as a result of higher inputs costs as international raw milk and commodity prices soared relative to the corresponding period in 2016. Accordingly, gross profit margin declined by 100bps to 40 per cent compared with 41 per cent in 2016.

“Nevertheless, despite the elevated general price level in the period, Nestle was able to achieve significant efficiency gains which more than compensated for the reduction in gross profit margin as operating margin increased to 22 per cent (19 per cent in 2016). Finance income climbed significantly higher by 530 to N5.1 billion (N817.0 million in 2016) while finance cost declined by 50 per cent to N7.4 billion (N14.9 billion in 2016) as FX loss declined to N5.2 billion from N13.1 billion in H1 of 2016. As a result, profit before tax spiked to N24.4 billion in 2017 from N896 million in 2016,” they said.

In their assessment, analyst at FBN Quest looked at the second quarter (Q2) and said sales were up 37 per cent y/y to N60.8 billion.
PBT and PAT for the Q2 came in at N10.2 billion and N8.2 billion , compared with losses before and after tax of N7.8 billion and N6.2 billion respectively in the corresponding of the previous year.

“Top-line y/y growth was boosted by double-digit price increases which mainly occurred in Q4 2016. We estimate prices across board were raised by around 35-40 per cent on average over the last year. Q2 profitability was boosted by a gross margin expansion of 717bps y/y to 40.9 per cent, which we primarily attribute to relatively cheaper access to fx for imports. Surprisingly, Nestle reported an fx loss of N4.1 billion in Q2 which compares with an fx-related loss of N13.1 billion in Q2 2016. Sales for both Nestle’s food and beverage categories were up by around 40 per cent to N37.9 billion and N22.9 billion respectively. Sequentially, while sales were flattish q/q, PBT declined by 29 per cent q/q. The FX-related loss of N4.1 billion was the primary driver behind the PBT decline on a q/q basis,” they said.
FBN Quest said compared with its forecasts, Q2 sales beat its N57.6 billion estimate by 5.5 per cent.

“However, PBT was broadly in line. A positive surprise on the gross margin line was offset by negatives on both opex and net finance expense lines. PAT beat by 30.5 per cent due to a lower effective tax rate of 19.5 per cent compared with 38.0 per cent that we had modelled. On an annualised basis, Nestle’s H1 2017 sales and PBT are tracking ahead of consensus sales and PBT estimates of N238.7bn and N43.2bn respectively,” they said.

According to the analysts, looking ahead, they expect Nestle, like its peers, to continue to contend with the macroeconomic headwinds in 2017.
“In our view, sector leaders like Nestle are likely to fare better compared with competition. Given recent FX interventions by the central bank, we believe imported competition will ultimately start to stage a comeback, possibly in H2,” they said.