Nestlé Nigeria: Q1 results show company defying the odds

Recently, the directors of Nestlé Nigeria plc released the results of the Company’s operations for the first-quarter (Q1) period ended March 31, 2016.

Nestle Nigeria plc, listed on the consumer goods sector (food products—diversified subsector) at the Nigerian bourse is highly capitalised at N531.872billion. The company’s shares outstanding stood at 792,656,252 units, while its share price was N671 as at Tuesday this week having reached a 52-week high of N965.98 and 52-week low N615.26.

The first-quarter (Q1) results

The unaudited results released to shareholders and investors show Q1 revenue growth to N36.130billion from N27.556billion in Q1’15. Gross profit rose to N17.780billion from N12.186billion in the corresponding quarter of 2015.  Result from operating activities increased to N9.025billion from N5.646billion in Q1’15. The company’s Net Finance Cost declined to N300.170million from N2.159billion in Q1’15.Profit Before Income Tax rose to N8.725billion from N3.487billion in Q1’2015, while the company’s profit for the period rose to N6.681billion from N2.954billion in Q1’15.

Management comments

“Nestlé Nigeria plc posted a solid 31percent growth in revenue notwithstanding the challenging operating environment in the first quarter of 2016. The performance is 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 stated in a statement signed and released at the NSE by Bode Ayeku, Company Secretary/Legal Adviser, Nestlé Nigeria Plc.

Analysts view

According to research analysts at United Capital plc, “Although benefitting from a (Q1-15) relatively low base, Q1-16 performance was strong especially in the context of on-going domestic macro struggles and impact on consumer wallets. Following a period of relative calm, we think sales numbers were aided by higher contribution from the northern region which has historically contributed c.22.0% to revenue, going by our estimates. We note that in recent times, Nestle has been innovative and aggressive in its marketing strategy especially up-north where it has created informal channels to get its products to local distributors. Markets in the second and third tier cities also continue to support volumes, mostly through the ‘small portion size’ strategy.”

The analysts further added: “Q1-16 numbers reiterates our view on Nestlé’s leadership position in the FMCG sector.  In our opinion, it is no coincidence that it is the two names within our FMCG basket (Nestle & Nigerian Breweries) with exposure to the mass market segment and the capacity to achieve the largest scale advantage on both cost and revenue sides that have navigated successfully so far, the challenges presented by a difficult macro terrain and much lower level of consumer spending”.

“Furthermore, with the boko haram insurgence gradually abating, we expect contributions from the northern region as well as new markets in the south-south and south western areas to boost volumes over 2016, with its small portion strategy providing a firm support. It is against this background that we now expect 8.5% y/y growth in revenue to N164.1bn while retaining our COGS and borrowing assumptions,” said analysts at United Capital plc.

In their view, FBNQuest analysts said: “Nestle’s topline recovery which began in Q2 2015 has been sustained for four consecutive quarters. According to management statements, sales were driven by y/y growth in both the Food and Beverage segments. We believe unit volume growth was the primary driver for topline improvement given flattish pricing. We also believe that Nestle is benefiting from relatively softer competition as importers continue to struggle to meet FX requirements.

“Given that Nestle sources around 65percent of its raw material locally, we expected that the firm’s operations were likely to be better off compared with competition. Also, Nestle’s parent, Nestle SA, has in the past provided FX credit lines for its local subsidiary, a situation we believe could re-occur if required. In addition to topline growth, a gross margin expansion of 499bps y/y to 49.2% and an -86% y/y decline in net finance charges boosted PBT growth which was up 150% y/y. We note that Nestle’s low reliance on imported raw materials continues to keep gross margin at healthy levels. We await management’s comments on all of these lines,” FBNQuest analysts added.

They added: “We expect upward revisions to consensus 2016E forecasts. Looking forward, although we believe consumer goods firms will struggle given the continued macroeconomic headwinds, we expect sector leaders to benefit from shrinking competition. Additionally, firms with local manufacturing presence, a strong distribution network and access to FX are likely to turn in a good performance in 2016.”

Iheanyi Nwachukwu