Nestle Nigeria plc: Resilience amid economic headwinds, shrinking consumer wallet

Nestle Nigeria plc: Resilience amid economic headwinds, shrinking consumer wallet

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The urban population in Nigeria grow is growing at 4.6% per annum and by implication, an increasing number of Nigerians participate in the cash economy and have become consumers. However, one would expect players in the nation’s FMCG to enjoy booming sales and profitability. Sadly, this is not the case. The last recession, the worst in 25years left consumers with shrinking wallet, while manufacturers are left to bear the growing cost of operation as they could not pass the cost to the already cash-strapped consumers.

Also, the economic headwinds left several FMCGs struggling to find their footing, while few have been able to triumph and shine in the midst of economic adversity, thus conferring the tag of Primus inter pares (first among equals) on them.

Nestle is the world’s largest food and beverage company with operations in over 190 countries with its Headquarters in Switzerland. The company commenced operations in Nigeria in 1961 and was listed on the nation’s bourse in 1979. From its first factory commissioned in 1982, Agbara, Ogun-State, it currently has 3 manufacturing sites with a recently commissioned water factory in Abaji, outskirt of the FCT.

Nestle’s Management Team

The Board of directors of Nestle Nigeria Plc is made up of individuals from diverse academic and professional backgrounds. They include David Ifezulike as the chairman, who joined the company in 1980 and served the company in various capacities spanning over 26 years. Maurico Alarcon, a Mexican who is the Managing Director/ Chief executive officer, other Nigerian on the board include Gbenga Oyebode, who is the chairman of several listed companies including a non-executive director of MTN Nigeria, Ndidi Nwuneli is an entrepreneur with over 25 years of experience and also serves on the board of several quoted companies. Others foreign directors include Jagdish SINGLA, Ricardo Chavez, Remy Ejel.

Financial performance

Nestle has consistently grown revenue and net income in the last three years.  In 2015, revenue and net income of the food product maker rose 6 percent and 7 percent respectively to N151.3 billion and N23.8 billion in 2015.

The food product maker felt the impact of the economic slowdown on its bottom-line. Despite revenue soared some 20 percent from N151.3 billion in 2015 to N181.9 billion in 2016, net income plunged 67 percent, on the heels of dampened disposable income.

Finance cost which skyrocketed from N4.9 billion in 2016 to N20.8 billion in 2017. However, about 80 percent of its finance expense came from foreign exchange loss. This is however not surprising considering the fact that there was intense pressure on foreign exchange in that period, as the naira traded as high as N525 a dollar.

The consumer goods giant picked up the pieces of a horrid year in 2016, to grow revenue by a whopping 34 percent to N244.1 billion in 2017, fuelled by 139 percent surge in domestic sales. Export sales, which contracted in 2016, grew more than double to settle at N3 billion in 2017.

The tangible appreciation in operating profit and finance income, coupled with lowered finance cost helped trigger net income from N7.9 billion in 2016 to N33.7 billion 2017. Revenue further trended northwards to N266.2 billion in 2018, and a sharp drop in finance cost helped after-tax earnings soared some 26 percent to N43 billion last year.

Nestle maintained stellar performance in the first quarter of 2019.  Sales revenue grew 5 percent year-on-year buoyed by 6 percent growth in domestic sales.  The company recorded its first net finance income in the first quarter, which consequently helped trigger net income by 49 percent.

The food product giant continued to wax stronger in profitability. Profit margin, which measures the profit percentage retained by a firm after settling production cost, operational expenses, interest, and tax, hits a 5-year in 2018 at 16.15 percent, more than industry average of about 10 percent.

This implies that the food product maker retained N162 as profit last year from every thousand naira realized as revenue. This compares with N156 in 2014, N157 in 2015, N43 in 2016 and N138 in 2018. The company showed resilience profitability as margin upped N181 in three months to March 2019.

The company’s return on assets and equity are at their 5-year high in 2018, indicating that Nestle is more efficient in utilizing assets and shareholders’ funds to generate earnings.

For every thousand naira the consumer goods giant invested assets, it realized N265 in 2018, higher than N210 in 2014, N199 in 2015, N47 in 2016 and N228 in 2017.

Furthermore, Nestle has been exciting shareholders with a high return on their investment. Return on equity (ROE) has trended northwards after the 2016 economic recession. For every thousand naira invested in the company’s stock, the food product maker returned N856 in 2018, compared with N257 and N757 respectively.

Analysis of its balance sheet revealed that Nestle’s high ROE on its back of high debt financing in its capital structure. 69 percent of its capital structure as at 2018 comes from debt, while the other 31 percent are sourced through equity.

Nestle betters peers in cost efficiency, going by cost-of-sales ratio. Last year, production cost accounts for less than 60 percent of gross profit, compared to Cadbury and Unilever with more than 70 percent. Cost-of-sales ratio hits a 3-year low in 2018 at 57.22 percent.

Gbolahan Ologunro, Research Analyst at Lagos-based CSL Stockbrokers, stated that Nestle’s cost efficient on the back of economies of scale, it enjoys from its brands and local input sourcing.

“In terms of cost efficiency, they enjoy economies of scale from their wide range of products that get to the market, underpinned by their route to market strategy. The company also source most of its raw materials like sorghum, maize, soya beans, sugar, cocoa, and cassava locally”

Market Performance

Nestle’s performance at the domestic bourse in underpinned by weak investors’ sentiment. Investors are snubbing the attractive earnings figures churned out by corporates and looking up to the Buhari-led administration to formulate market-moving reforms that would revive the bourse.

Its shares declined N20 or 1.38 percent to close at N1, 430 after Friday’s trading session, down 3.7 percent since the beginning of the year. The food product giant outperformed the broader market index and consumer goods sector that has returned 4.4 percent and 37.2 percent losses respectively.

Nestle is trading at price multiple of 24, compared with Unilever (17.3x) and Nascon (9.6x), making the stock the most expensive among peers in the food product segment.

Backward Integration

Some of the company’s products include MAGGI, milo, Golden morn, Nescafe, Nestle Pure Life waterAccording to the company, it has spent N52billion in the last six years on productive investment across its manufacturing operations and substantial amount in creating value.

Currently, 80 percent of the company’s input is sourced locally while 100 percent of the grains and legumes used in the production of GoldenMorn is sourced locally. This has tremendously helped over 30,000 local farmers to improve on their farm inputs to meet Nestle’s high quality standard and also provides a steady source of income for the farmers.

 Takeaway from Nestle’s AGM

At the 50th Annual General Meeting (AGM) of the company held on 28th of May 2019 at The Shell Hall, Muson Center, Onikan, shareholders commended Nestle’s management team for an impressive performance in 2018, the company’s turnover growth of 9percent from 2017 to 2018, while profit after-tax increase 94percent over the last five years despite the harsh operating environment.

However, a cross section of the shareholders also advised the management to establish a manufacturing plant in the southeastern part of the country to further aid the penetration of its products to the south-south and southeastern part of the country. They also advised the company to add more products (such as ice cream brand) to its known brands in the market and further boost its bottom line.    



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