The earnings of Nestle Nigeria have been rising steadily even as it operates in an industry beset by a myriad of challenges, a phenomenon spooking investors.
But investors are not only interested in a firm’s earnings growth, attractive valuation or future expansion plans. They also want to gauge corporate performance with competitors, so as to enable them make inform investment decisions.
A first glimpse of Nestle Nigeria’s book revealed that it generated N26.24 billion in net income in the first six months of 2019, making it the country’s most profitable company so far.
It handily beat Dangote Sugar (N10.97 billion), Nigerian Breweries,(N13.29 billion); Flour Mills Nigeria, (N4.23 billion); Unilever Nigeria, (N5.13 billion); Nascon Allied Industries, (N1.15 billion); Cadbury Nigeria (N669.83 million), and Guinness Nigeria (N4.25 billion).
Nestle Nigeria’s huge profit can be largely attributed to its diversified product bases that are increasingly making an inroad into the market.
For instance, its Maggi product is in the kitchen of every household, and housewives across the country are increasingly addicted to the seasoning. A pot of soup needs the seasoning to make it deliciously palatable while it simmers on the cooker.
Not only does the company have a robust product base, its ability to put in place an excellent distribution network that ensures these products reach rural areas is case study for MBA students at Harvard Business School.
Nestle Nigeria’s earnings have also been largely driven by growth in the Beverage business as the Milo Ready To Drink (MTD) pack continues to gain widespread acceptance in the market place.
It continues to deliver cost efficiency that has been underpinning margins, while a reduction in debt shows the consumer goods giant isn’t exposed to financial risk. In short, a low gearing position gives it the leeway to borrow more money to finance future expansion plans.
Nestle Nigeria has been turning each Naira invested into higher profit compared to peers as it is the only corporate entity to record margin expansion in the entire industry. It also uses shareholders’ assets in generating higher profit than peer rival, making its valuation attractive to investors that wish to magnify their earnings.
Nestles’ net margin stood at 18.15 percent as at June 2019, that compares with Dangote Sugar,(13.45 percent); Nascon Allied, (9 percent); Unilever, (8.24 percent); Nigerian Breweries’ (7.81 percent); Guinness Nigeria (4.19 percent); Flour Mills (3.41 percent), Cadbury, (3.44 percent), and Dangote Flour Mills, (-12.11 percent).
Financial Highlights for H1 2019
For the first six months through June 2019, Nestle Nigeria’s revenue increased by 4.89 percent to N141.91 billion from N135.29 billion the previous year.
The company has been able to manage direct costs attributable to profit as gross profit increased to 18.87 percent to N66.08 billion in the period under review from N55.58 billion as at June 2018; the gross margin expansion in the second largest among 10 consumer goods firms tracked by BusinessDay.
Cost of sales increased by 5.13 percent to N79.71 billion in June 2019 as against N75.82 billion the previous year; the growth in input cost is, however, lower than the 11.22 percent July figure.
Cost of sales ratio moved slightly to 56.17 percent in the period under review from 56.04 percent the previous year. This means the company spent N0.56 on input cost to produce each unit of product.
Total operating expenses were up 9.48 percent ( lower than inflation figure) to N25.64 billion in the period under review from N23.42 billion the previous year; operating expense ratio increased to 18.07 percent in the period under review from 17.31 percent the previous year.
Nestle Nigeria’s profit, which includes operating performance, has been growing at a double digit, a feat that has not been surpassed by peer rivals.
Operating profit increased by 25.75 percent to N40.43 billion in June 2019 from N32.15 billion the previous year.
Profit after tax was up 22.34 percent to N26.24 billion in the period under review as against N21.45 billion the previous year.
Margins have also followed the same growth trajectory, thanks to cost efficiencies and lower input cost, as the company plans to intensify its cost control strategies.
Gross profit margins increased to 46.57 percent in June 2019 from 41.11 percent the previous year while operating profit margin increased to 28.50 percent in the period under review as against 23.77 percent the previous year.
Pretax profit margin followed the same growth trajectory as it moved by 28.50 percent in June 2019 as against 23.55 percent the previous year while net margin, another measure of efficiency, increased to 28.50 percent in the period under review from 23.55 percent the previous year.
Nestle Nigeria deleveraging strategy has yielded fruit as the proportion of debt in its capital has reduced. This also means it has minimized the weighted average cost of capital, while contemporaneously maximizing the value of its owners.
With a market capitalization of N1 trillion as at the time of reporting, the company is Nigeria’s third largest company by market cap after newly listed firm, MTN Nigeria, and Dangote Cement.
Nesltes’ finance costs were down 20.57 percent to N888.67 million in the period under review from N1.18 billion the previous year. Its operating profit can cover interest expenses, and still deliver profit to be transferred to reserves, as times interest coverage of 2.10 times is above the 1.50 times global bench mark.
Total debt (Both long and short term) has fallen to N6.45 billion in the period under review from N6.85 billion the previous year.
Nestle Nigeria is awash with cash, that is to say it has the financial strength to pay dividend, settle debt, and fund future expansion plans.
Total net cash from operating activities has hit N33.03 billion as at June 2019, while it spent N2.55 billion on the acquisition of property plant and equipment.
The company has been spending money on the construction of new factories, as it continues to spread its tentacles across the country.
In 2018, Nestlé inaugurated its N4.10 billion Milo Ready-To-Drink (RTD) beverage production plant- in Agabra Ogun State-to meet the growing consumer demand. The plant has created additional 100 jobs.
While Nestle’ has been able to deliver higher higher returns to shareholders, it operates in a harsh and unpredictable macroeconomic environment.
Consumer goods firms in Africa’s largest economy can no longer pass on high input cost to the already beleaguered consumers that have refused to open their purse strings.
An increase in fuel prices and high inflationary environment dealt a blow on consumer wallets, leaving Nigerians impoverished.
Post-recession, growth in real household consumption peaked at 3 percent in the final quarter of 2017, before falling to 1 percent in the second quarter of (Q2) 2018.
Nigerians are getting poorer as over 50 percent of a population of 200 million live on less than $1.98 dollars a day, as the country overtook India to become the world’s poverty capital.
The road to higher margins and profitability for the firms appear to be increasingly uphill as economic recovery has been sluggish since the country existed a recession in the third quarter of 2017.
The country’s GDP expanded by 2.01 percent in the three months through March 2019, from a year earlier; that compares with 2.4 percent expansion in the fourth quarter.
While inflation figure for the month of June fell to a 12 months low of 11.22 percent, the figure, however, falls below the central bank’s target range of 6 percent and 9 percent.
Further exacerbating the already anemic position of consumer goods firms is the menacing Apapa gridlock, as goods remain trapped at the ports, resulting in disruption in production process, a situation that undermines profit margins.
BALA AUGIE
