Nestle Plc: When Consumer Loyalty, Economic Recovery, Management Mix Drive Profit

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Post Views: 248 The management of Nigerian Stock Exchange’s highest priced equity and leading player in the fast moving consumer goods segment of the ...

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The management of Nigerian Stock Exchange’s highest priced equity and leading player in the fast moving consumer goods segment of the economy, recently released its half-year earnings report in keeping to corporate governance best practice.
The company’s strong numbers and improved profitability ratios in the preceding quarter were sustained in the earnings report under consideration, a situation that has been linked to improved consumer purchasing power, following the decline in inflation rate, helped by the sustained intervention by the Central Bank of Nigeria (CBN) in the foreign exchange market which continues to impact positively on the economic fundamentals that has boosted production capacity in many manufacturing companies, which now has better access to imported raw materials.
The commitment of Nestle’s management to deliver value to consumers, customers and other stakeholders, while expanding its market within and outside Nigeria with products innovation, added to effective cost management, all of which have supported performance, as numbers posted were impressive and above market expectation. This however, had influenced the company’s shares price positively due to its shareholding structure and foreign investors’ interest in the stock.
The company’s multiple lines of nutritional products that target a wide range of the market segments from infancy to old age have boosted performance as revealed by the half-year numbers, as well as its risk management strategy in recent years. The company’s Q2 earnings report is the basis for valuation in the market, compared to the 2016 numbers which revealed that the market price had moved to N955.50 from N850 in the same period.
Nestle Nigeria recorded a 2988.41% growth in earnings to N16.55bn from N535.82m in the corresponding second quarter of 2016, as it reclaimed the market along the country’s northern axis, helped by the gradual return of peace to the troubled region and neighbouring countries across the borders. These have also impacted sales revenue, lifting it to N121.92bn from N80.44bn in 2016. Profit for the period was seriously influenced by finance income from fixed deposit and decline in foreign exchange loss from N13.13bn in 2016 to N5.17bn. This reduced finance cost from N14.13bn in 2016 to N2.24bn. On the other hand, Net Assets improved by 9.44% to N39.5bn, from N35.18bn in 2016.

Recommendations
The company’s shareholding structure and relatively small number of shares outstanding, as well as the leadership role it plays in its industry and consistent reward to investors on improving performance have remained very strong factors in the sustenance of its share price. Nestle Nigeria’s strong performance came at a time its sector’s performance had attracted market attention due to impressive numbers posted by many companies in the industry and general market. The recovery of the nation’s economy has impacted the manufacturing sector and indeed others positively as investment in the sector had hit its three year high with over N34 trillion.
Meanwhile, as projected in Q1, the company’s Q2 2017 scorecard beat market expectation with better than envisaged performance as profit improved exceptionally, regardless of the prevailing higher operating cost, but the recovery in the macro-economic environment supported the impressive numbers that might equally support interim dividend at the end of Q3.

Summary and valuation
Nestle Nigeria’s 2017 full year earnings projection is revised to N25.12 billion from the early estimate of N18.56 billion, representing a 217.17% increase from the 2016 N7.92billion.
Its Q2 trailing Price/Earnings Ratio at 11.44, down from 314.36x in 2016 as a result of growth in earnings, is expected to decline to 8.69x at the end of 2017 financial year despite the galloping of its share price to five year high of N1216 on Q2 strong numbers. The half year profit margin still weak at 13.57%, compared to 0.67% in 2016, since is still below the minimum global standard of 15%.
We recommend HOLD for long term investment horizon, and the only buying now is to hedge against risk as foreign and institutional investors are accumulate the company shares. Not too long, one of the major shareholders increased its stake by 2.58% when the recession in 2016 push its share price to as low as N560.

Nestle price action breakout of it four years falling channel after various attempts to rebound within the channel that fail before broke down the major strong support level of N615 to a lower low of N570 and retrace up on a positive sentiment for its financials that beat market expectation and rally up to breakout of the channel in early May 2017 still on positive sentiment on the recent numbers. The stock is currently trading above its 100 and 200-Day moving average at N1208. Currently, MACD is bullish for the last 19 trading sessions. RSI is reading 82.86 lofty overbought region and at the same signaling sell for traders that enter lower, while other technical indicators like OS and MACD are signaling buy, while RSI and CCI are saying sell.
The trending momentum and direction is strong as ADX is above 20 at 33.34 and money flow index is looking up, indicating that funds are entering the stock. Watch trend.

Management
The impact of strategic plans of the board and management are yielding results already as internal cost management is reducing the impact of the operational cost and FX market-afflicted cost pressure. This is despite the cost of expansion and production drive of the management to deliver value to all stakeholders.
Five-Year Financial Analysis
The company’s consistent release of its financials over the years has helped the market and analysts to predict and forecast its performance and release dates. This has added to its valuation status as it is sure in portfolio management effectiveness. The market price as at release date on the other hand is experiencing decline after two years of trending up in the five years under consideration. The price moved from N981.00 in 2012 to an all-time high of N1,071.00 in 2013, closing at N570 per share when the 2016 audited result hit the market recently from N820 in 2014 to N680 in 2015.
Looking at the company’s performance critically for the last five years, it is evident that there has been a stable up-trend performance with positive numbers that reveal the competence of the successive management, regardless of challenging business environment but was hard hit in 2016.
The company’s topline for the period was up by 55.86% to N181.91bn from N116.71bn in 2012; while profit level for the same period was down 62.54% to N7.92bn, from N21.14bn recorded in 2012. This was after recording a high of N23.74bn in 2015 where the highest reward was given to shareholders in the form of the N29 dividend per share. This is just as earnings remained almost flat in three of those years under consideration before the decline in 2016 that reduced it to N10 each. Within the same period, the economy has experienced mixed movement of progress and retrogression to the current situation.
Meanwhile, shareholders’ fund stands at N30.88bn from the N34.19bn posted in 2012 after recording a high of N40.59bn in 2013. Dividend grew through the period from N20 per share in 2012 to N29 per share in 2015 before it dropped to N10 in 2016. Note that dividend reward grew more than the revenue and earnings for that same period which is not too good. Such high payout ratio does not support future payments and expansion.

Five-Year Estimated Ratios
Earnings power of Nestle within (2012 to 2016) seems to be strong enough to have supported its share price for that same period with the help of its shareholding structure and relatively small number of shares in issue. The drop in earnings from N26.67 in 2012 and N29.95 in 2015 to N10.00 in 2016 has increased investors waiting periods over the years as PE ratio stood at 57.01x from low of 22.71x in 2015 and previous years from 2012.
As observed, this is because of the sharp drop in earnings while market price relatively remained high. The Book Value of the equity over the years revealed a very high premium on the stock as a result of consistent dividend and strong numbers with that of 2016 at N38.95 as against the market price of N570 when the report was released. Long term investors have over the years recouped their investment, and they continue to enjoy relative capital protection in this stock.

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