Goddy Egene writes that Nestle Nigeria recorded a profit growth of 44 per cent and recommended an interim dividend of N20 per share for the nine months ended September 30, 2018, despite the challenging business environment

The performance of most local manufacturing companies has been affected by weak demand and influx of imported products. Given the fact some of the imported products are cheaper, consumers whose income have been affected by inflation and high cost of living prefer to patronise those products. Consequently, the local manufacturers who incur high costs to produce record low patronage in most cases, a development that affect their bottom-lines.

The challenging environment notwithstanding, Nestle Nigeria Plc recently posted improved nine months results and recommended an interim dividend of N20 per share. The dividend is 33.3 per cent higher than the N15 per share the shareholders received in the corresponding period of 2017.

Financial performance
Nestle Nigeria recorded a revenue of N203.135 billion, up from N183.242 billion in the corresponding period of 2017. Cost of sale increased to N116.984 billion, from N109.362 billion, bringing gross profit to N86.149 billion compared with N75.881 billion in 2017. Marketing and distributive expenses jumped from N25.26 billion to N29.739 billion, while administrative expenses fell from N7.535 billion to N7.050 billion in 2018. Net finance cost recorded a major decline of 85 per cent from N8.606 billion to N1.271 billion.

Hence, profit before tax stood at N48.088 billion, up from N34.479 billion, while profit after tax increased by 44 per cent from N22.979 billion to N33.118 billion in 2018.
The company explained that the growth is the result of its disciplined execution and investments in the expansion of its route to market.

The Managing Director/CEO, Mr. Mauricio Alarcon, said: “Our marketing initiatives focused on nutrition awareness, as our consumers continue to trust us to deliver high quality, affordable, nutritious food products every day. All of this is well supported by the dedication and professionalism of our people.”

He added that to sustain “our performance, we will continue to focus on creating an environment where our people can grow to their potential while delivering their best performance. Driven by our purpose of enhancing quality of life and contributing to a healthier future, we continue to create value for all stakeholders across our value chain as we source and deliver products adapted to local preferences.”

Analysts’ Assessment
Analysts at FSDH Research said Nestle Nigeria reported a strong performance in third quarter (Q3) 2018 despite the difficult operating environment, saying the company is benefiting from investments in expansion in the route to market and market leadership.
According to the FSDH, Nestle managed its cost of sales better in Q3 2018 than in the corresponding period of last year.

“However, the selling and distribution expenses as a proportion of revenue increased in 2018 over the level recorded in Q3 2017. The finance cost dropped significantly and compensated for the increase in the operating expenses. Consequently, the profit margins increased in Q3 2018 over Q3 2017. The unaudited Q3 2018 result for the period ended September 2018 shows that turnover (T/O) increased by 9.66 per cent to N203.13 billion compared with N185.24 billion in 2017. The company’s cost of sales increased by 6.97 per cent to N116.98 billion from N109.36 billion in Q3 2017. The increase in the prices of most raw materials and inputs is responsible for increase in cost of sales,” they said.

The analysts added that despite the increase in cost of sales, the company was more efficient in 2018 compared with 2017.
“The cost of sales as a percentage of T/O declined to 57.59 per cent in Q3 2018 from 59.04 per cent as at 2017. Thus, the gross profit (GP) increased by 13.53 per cent to N86.15 billion in Q3 2018 from N75.88 billion in Q3 2017. Nestle’ s administrative, selling and distribution expenses increased by 12.18 per cent to N36.79 billion. This was as a result of increased investments in marketing and distribution. These expenses as a percentage of turnover increased to 18.11 per cent in Q3 2018 from 17.70% in 2017. The Earnings Before Interest and Tax (EBIT) increased by 14.56 per cent to N49.36 billion from N43.09 billion,” they said.

The company recorded a net financial charge of N1.27 billion in Q3 2018, a decrease of 114.77 per cent from N8.61 billion in 2017. This was because of the significant drop in net foreign exchange loss from N11.15 billion in 2017 to N96.07 million in 2018. The profit before tax (PBT) grew to N48.09 billion in Q3 2018, an increase of 39.47 per cent from N34.48 billion in Q3 2017. The tax provision also increased by 30.19 per cent to N14.97 billion from N11.50 billion in 2017. The profit after tax (PAT) was N33.12 billion in Q3 2018, from N22.98 billion in 2017, representing an increase of 44.12 per cent.

A further analysis of the results showed that GP margin increased to 42.4 per cent in Q3 2018 from 40.9 per cent in Q3 2017 while the EBIT margin increased to 24.3 per cent from 23.3 per cent . Similarly, the PBT margin increased to 23.7 per cent in Q3 2018 from 18.6 per cent as at Q3 2017. The PAT margin currently stands at 16.3 per cent in Q3 2018, up from 12.4 per cent in the corresponding period of 2017.

Balance sheet
A look at the balance sheet position of Nestle as at Q3 2018 compared with full year ended December 31, 2017 showed that the cash position of the company improved greatly in Q3 2018. According to FSDH, although the company tied down more cash in inventory and trade and receivables, it also enjoyed free credits from trading partners. Consequently, its working capital improved. The total fixed assets decreased by 7.78 per cent to N66.75 billion in Q3 2018 from N72.38 billion in FY 2017. The inventory increased by 27.46 per cent to N30.48 billion in Q3 2018, from N23.91 billion in FY 2017.

The cash and bank balances increased by 119.13 per cent from N15.14 billion in FY 2017 to N33.17 billion in Q3 2018. Trade debtors increased in Q3 2018 by 74.78 per cent to N22.19 billion, from N12.70 billion in FY 2017. The company’s trade payables also increased by 81.5 per cent in Q3 2018 to N42.22 billion from N23.26 billion as at FY 2017. The working capital stood at N7.67 billion in Q3 2018 from a negative N7.18 billion in FY 2017, while net assets for the period increased by 25.37 per cent to stand at N56.26 billion in Q3 2018, from N44.88 billion as at FY 2017. The total assets of the company, which stood at N174.34 billion as at Q3 2018 was financed by a mix of equities and liabilities in the ratio of 32.27 per cent and 67.73 per cent respectively.

FSDH said:“Our analysis of the liabilities shows that the short-term liabilities stood at N98.02 billion, accounting for 83.01 per cent of the total liabilities. The short-term liabilities constituted mainly of trade and other payables and current tax liabilities. The company’s long- term liabilities stood at N20.06 billion accounting for 16.99 per cent of the total liabilities. Long- term liabilities constituted mainly of long-term loans and borrowings and deferred tax liabilities, which stood at N7.13 billion and N10.28 billion respectively in Q3 2018. Our analysis of the cash flow statement in Q3 2018 shows that Nestle generated a net increase in cash and cash equivalents of N33.17 billion. The major contributor to the net cash generated was from the net cash generated from operating activities of N66.67 billion. The cash profit from core activities generated during the period stood at N59.60 billion but was lower than the cash profit generated in FY 2017 at N62.8 billion. The ratio of the cash profit to turnover increased to 29.34 per cent in Q3 2018 from 25.72 per cent in FY 2017.”

Growth Prospect/Forecast
Nestle Nigeria plans to achieve its growth objectives by continuing to invest in innovation of new products to meet consumer needs and preferences as well as investment in new facilities. The company’s product innovation is based on the understanding of the nutritional needs, local tastes and habits of its customers. Nestle also focuses on food fortification to help micronutrient deficiency challenges. This is reinforced by its Popularly Positioned Products (PPP) strategy, which focuses on the specific needs of lower-income consumers. PPP offers these consumers high-quality food products that provide nutritional value at an affordable cost.

In considering their five-year forecast, FSDH said they considered some positive and negative factors. The positive factors include: strong revenue growth prospect with strong profit margins; market leadership and large market size in Nigeria; focus on investment in innovative products; improved operational efficiency; backward integration to lower imported inputs; technical partnership with the parent and related companies and customers’ brand loyalty.

The negative factors are: current weak consumers’ spending power; difficult operating environment and possible currency depreciation.
“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 N298.45 billion, N364.79 billion, N440.43 billion, N525.15 billion and N620.91 billion for the periods ending December 2018, 2019, 2020, 2021 and 2022,” they said.

FSDH estimated EBIT of N64.41 billion, N75.66 billion, N91.75 billion, N109.54 billion and N129.05 billion, respectively and EBITDA of N72.42 billion, N84.87 billion, N102.47 billion, N122.18 billion and N144.15 billion for the same period using EBIT margins of 21.58 per cent, 20.74 per cent, 20.83 per cent, 20.86 per cent and 20.78 per cent respectively.

“Our PBT forecasts for the periods are: N68.13 billion, N75.66 billion, N90.12 billion, N106.14 billion and N123.73 billion. Adjusting for tax, our PAT forecasts are N49.06 billion, N54.49 billion, N64.90 billion, N76.44 billion and N89.10 billion. PAT margin for the period are 16.44 per cent, 14.94 per cent, 14.74 per cent, 14.56 per cent and 14.35 per cent. Our forecast final dividend for the FY 2018 is N35.71 per share,” they said.