Nestle Plc: Overcoming Finance Cost Challenges To Value

The multiple products line and the nature of Nestle Nigeria Plc’s products have so far supported its top line, despite the low purchasing power of consumers across the country arising from the present economic situation.

Its recently submitted third quarter scorecard however reveals sustained consumer loyalty to the company’s array of brands that have together boosted sales revenue in the current financial year. This has led to increases on a quarterly basis, regardless of the inflationary pressure and harsh operating business environment, which is testimony to the fact that its infant products, in particular, have over the years been a necessity to most young families.

The company’s mixed  performance ratios in the earnings report under review arose from the  high cost of servicing foreign loans and importing of raw materials due to the Naira  devaluation. This unhealthy combination helped to push up its financing and operating costs  to  dilute  the bottom line.

This is a company that has posted strong numbers on quarterly and yearly basis before the nation’s flexible foreign exchange rate was adopted by the Central Bank of Nigeria (CBN).

All things considered, Nestle Nigeria appears to have been lucky to have still posted positive numbers, considering that the same scenario had thrown the numbers of many manufacturing companies into deep red.

Worthy of mention is the fact that the internal cost saving initiatives of Nestle’s management that boosted the first quarter profit level have paled into insignificance by the CBN’s forex policy.

However, these have not significantly affected the company’s shares price, owing to its shareholding structure and long-term position of many investors in the stock.

The company’s array of nutritional products continue to target a wide range of the market from infancy to old age. This product lines have over the years ensured that the company posted positive figures. This year however, it posted mixed results with an impressive first quarter performance as top and bottom lines were up, while the second and third quarter were unimpressive as a result of significant increase in cost and the unfriendly business environment.

The company’s Q3 earnings report is the basis for valuation in the market, compared to the 2015 numbers which revealed that the market price  decline to N791  from N830 in the same period of  2015. The market price is at the released date of the results.

Nestle Nigeria recorded a 20% growth in sales revenue to N129.48 billion from N107.99 billion in the corresponding third quarter of 2015. Its reclaiming of the northern Nigerian market with peace gradually returning to the region and neighbouring countries, thereby also impacting its sales revenue. Profit was however not commensurate for the period as it was hampered by financing  cost of its foreign loans that grew by 418% to N21.98 billion, from just N4.24 billion in 2015. This was in addition to company income tax for the period that jumped by 40% to N5.02 billion from N3.58 billion in 2015.

All of these left bottom line at N484.69 million from N17.24 billion recorded in 2015, representing a 97% decline.

Similarly, Net Assets declined by 21.55% to N31.56 billion, from N40.23 billion in 2015

Source: Company Financial & Investdata Research

Recommendations

Lack of economic direction and the Naira devaluation as a result of the flexible exchange rate adopted and the shortage of FX which posed multiple challenges to manufacturers and indeed other sectors of the economy.

This was obvious in the weak and even negative numbers posted by companies in the real sector such as Nestle Nigeria, at a time the economy is facing macro-economic challenges.

Early in the second quarter of this year, the company commissioned its water factory in the Abuja axis to service the northern region, an investment expected in no distant time to start contributing to its bottom line, while helping to reverse this trend.

Also, early last month the company appointed a new managing director described by those who know as a strategist, marketer and profit driver, who has demonstrated capacity and strength in more challenging business environments than what the company is facing now, to drive the management team and help the company overcoming this challenging times.

The CBN’s fx intervention in the manufacturing sector is expected to help relief some pressure in the industry come next year, if the policy will not summersault tomorrow.

With the weak performance ratios, traders should not expect much rally in the company’s stock for now.

For investors, the company’s retained earnings is strong but dividend possibility at the end of the year is 50-50, but what is sure is that with less payout. The possibility of pull back is nonetheless high on the strength of the quarterly numbers.

Every investor at various levels must have to consider whether to hold or exit and re-enter later. It is worth noting that Nestle’s holding structure and relative small shares in issue may help retain its defensive nature to support your portfolio.

It should however be noted that history, dating back to 1999, confirms that this equity has experienced various heavy price drops from which it has always recovered, due to the consistent growth in earnings and expansion of its facilities and bouquet of products. Therefore, even if the price suffers short, medium or long-term pull back, changing your investment strategies to long term remains the best investment decision when this stock is concerned, especially for income investors.

Price Action

Nestle is currently trading above its 20 and 50-Day moving average at N814.97. Currently MACD is bearish since it is trading below its signal line in the last six trading sessions.  RSI is reading 54.02 and at the same signaling buy, while other technical indicators like CCI and SO are signaling buy. MFI is flat, indicating that funds are neither entering nor leaving the stock.

Summary and valuation  

Nestle Nigeria is one of the multinationals in the country that has the best management teams in the beverage industry. The company’s unimpressive numbers in the recent times is the result of decline in the value of the Naira and the harsh business environment which Ishmael  a pointer to where it is headed in this current financial year.

Analysts argue that the market’s instability will hit Nestlé’s momentum and its recent result that came supports such analysts’ position. This is because unstable and unclear policy direction of the government has kept the economy in this direction.

Nestle’s Q3 Price/Earnings Ratio currently stands at 431.08x of earnings and then it is expected to decline to 20.12x in 2017 as earnings rebound soon. Its Q3 profit margin was poor at 0.37 compared to 15.96% which is below the 15% international standard.

Source: Company Financial & Investdata Research

Management

The strategic plans of the board and management, led by David C. Ifezulike and Mauricio Alarcon have started yielding results with cost management driving expansion and production, among others. This has however not reflected in its Q3 performance due to the challenging business environment facing the economy at large.

Five-Year Financial Analysis

The company has been noted for consistency in the release of its financials during the period under review, not withstanding this year’s slight delay. One must not fail to acknowledge that it was still within the approved time frame. This adds up to its valuation status as it stands sure in portfolio management effectiveness. The market price as at released dates on the other hand experienced an outstanding growth from the N441.00 in 2011 to an all-high of N1,071.00 in 2013, closing at N680 per share when the 2015 audited result hit the market last week.

Looking at the company’s performance critically between 2011 and 2015, it is evident that there has been a stable up-trend performance with positive numbers that reveal the competence of the successive management.
Its sales revenue for the period rose by 54.42% from N97.96 billion in 2011 to N151.27 billion in 2015; while profit level for the same period was up by 41.23% to N23.74 billion, from N16.81 billion recorded in 2011, even when earnings remained almost flat in three of those years under consideration. Within the same period, the economy moved from its gloomy to recovery stage due to the positive reforms before pulling back to another depressed economic situation that has now befallen the nation.

Meanwhile, Net Assets stands at N38.01 billion up from the N23.49 billion posted in 2011 after recording a high of N40.59 billion in 2013. Dividend grew through the period from N12.55 per share in 2011 to the latest dividend of N29 per share, representing a 131.08% increase. Please 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.

Source: Company Financial & Investdata Research

Five-Year Estimated Ratios

The earnings per share of Nestle stands at N29.95 as against the N21.20 in 2011. In other words, the growth in earnings power has reduced the investment periods over the years as PE ratio stood at 22.71x from high of 38.17x in 2013.

As observed, this is because  the rate of growth in market price has not been same with the growth in earnings, even while shares outstanding remain relatively the same over time. The Book Value of the equity at the end of 2015 stood at N47.95 as against the market price of N680, this simply shows that Nestle’s share price is grossly overpriced, but supported by its consistent dividend payment.

Long term investors have over the years recouped their investment, and they continue to enjoy relative capital protection in this stock.

Source: Company Financial & Investdata Research