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Nestle Nigeria Plc: Thriving amid macro headwinds

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Nestle Nigeria is part of the Nestle Group, the respected and trustworthy nutrition health and  wellness company renowned worldwide for its high quality products. Nestle Nigerian began trading operations in Nigeria in 1961 and has today grown into a leading food manufacturing and marketing company.

Growth in sales despite pressure on consumer wallets   

The 2014 audited financial statement of the company showed revenue increase by 8 percent to N143.32 billion from N133.08 billion the same period of the corresponding year (FY) 2013.

This is a stellar performance at the top line for any Nestle given the slowdown in demand for consumer goods arising from significant macro headwinds.

Firms operating in the Fast Moving Consumable Goods sector  (FMCG) have been grappling with sluggish growth due to declining consumer spending stoked by hike in fuel price of 2012.

This headwind, which has affected the purchasing power of consumer, is affecting the sales volume of Consumer Goods Company.

Additionally, the menacing security challenges in the north part of the country are preventing firms like Nestle from pushing their products to the crisis region.

Also, consumers in those areas have been unable to go about their normal business as a lot are displaced thus shrinking disposable income and crimping consumption.

The degree of competition within the industry poses some risk especially for the company especially  from  its main rival Cadbury Nigeria Plc and from   firms that  produce similar .

Currency volatility swells borrowing costs slows pretax profit

Profit before tax reduced by 6 percent to N24.44 billion in December 2014 from in December N26.04 billion. The decline in profit was as result of a 147.66 percent increase in finance costs to N5.30 billion as against N2.14 billion the preceding year.

The surging borrowing costs was due to the devaluation of the naira which spiraled the dollar denominated debt and thus exposes the company to currency risks.

Total borrowing in the balance sheet jumped by 13.50 percent to N31.11 billion in December 2014 compared with N27.41 billion the preceding year.

Operating income increased slightly by 4.91 percent to N29.20 billion in December 2014 compared with N27.83 billion the same period of the corresponding year 2013. The 5 percent growth in operating profit is by far the highest of the Nigerian consumer companies under our coverage in FY14.

Profit after tax decline by 0.1 percent to N22.23 billion in December 2014 as against N22.51 billion in the corresponding period of (FY) 2013 stoked by a 42 percent reduction in tax liabilities to N2.21 billion in December 2014 from N3.78 billion the preceding year.

Pending management comment on the reasons for the tax cuts, we attribute the reduction in the tax liabilities to tax holidays in form of capital allowance on newly acquired assets.

Macroeconomic challenges spikes production costs

Cost of sales increased by 7.57 percent to N82.09 billion in December 2014 from N76.30 billion the corresponding period of (FY) 2013. Operating expenses also moved by 10.78 percent to N32.02 billion as against N28.93 billion last year.

However, direct costs attributable to projects were manage efficiently as gross profit increased by 9.66 percent to N61.30 billion as against N56.78 billion as at December 2013.

It is expected that production costs will spike as unstable power supply leaves firms with no choice than to switch to the use of diesel oil which is a more expensive source of energy. Though the company may not rely heavily on imported raw material to meet most of its production, the devaluation of the naira may have impacted on material costs.

Rising debtor position a drain on sales

Trade and other receivable increased by 24.88 percent to N22.33 billion in December 2014 from N17.88 billion the preceding year while long term debtors in the balance sheet spiked by 100.60 percent to N1.15 billion as against N573.10 million the corresponding period of last year.

This means a lot of customers owe the company. The company should tighten collection policy to collect more money from customers as this strategy will help bolster sales and also boost liquidity and total assets.

Total inventories increased by 11.16 percent to N10.95 billion in December 2014 from N9.85 billion the preceding year, which means there are more inventories in the warehouse. A proper inventory policy will help reduce inventory level. Total assets were down slightly by 1.97 percent to N106.06 billion compared with N108.20 billion as at December 2013.

Nestlé’s level of liquidity was impacted upon by surging short term borrowings as shown by its current and quick assets indicators. The current ratio for Nestle stands at 0.68 times, meaning the current assets of the company cover its short-term obligations by 68 per cent (though falls below the benchmark of 200%). Current ratio as at the recent year ended December 31, 2014 is lower than the 1.28 times recorded last year.

High payout ratio means more returns on share holders’ investment

The company has been consistently rewarding shareholders with high return on their investment in form of dividends. It is proposing a payment of a final dividend of N17.50 (2013:N24) per share amounting to a total final dividend of N13.87 billion from the pioneer profits of the company.

Further analysis show that the N13.87 billion final dividend for 2014 full year is 27 percent lower than the N19.02 billion figure of December 2013. Total dividend payout is 98 percent in the review period, which is higher than the 90 percent payout in 2013.

Nestle is paying out higher dividends relative to share price as the  minimum require rate on return on share holder (dividend yield) was 3.35 percent, which means investors expect more returns for taking risk in the company.

BALA AUGIE