Nestle Nigeria Plc names Gbenga Oyebode as Board Chairman

…as FMCGs firms intensify brand/price war to regain market share


In what analysts say is clearly indicative of the dire economic straits that many businesses are enmeshed in at the moment, blue chips in Nigeria are currently strategizing for a bumpy 2021 operating year.

And chief of the challenges confronted with are issues of poor overall national social and economic management. Added to this are concerns over fluctuating oil prices, the lingering COVID-19 pandemic and now the latest social dislocations engendered by the ripples generated in the wake of the tardy handling of the #EndSARS protests. It is indeed a quite difficult time to run a business in Nigeria.

Under the circumstances, not many analysts are upbeat about the prospects for business, and notably the operations of blue chips in the country in the immediate short term. But they also note that some reprieve of sorts could still come if the respective policy actors make the right adjustments that could then translate into middle and long-term wins.

Sketching the broad framework, a recent report from the World Bank outlines:

‘While metal and agricultural commodities have recouped their losses from the COVID-19 pandemic and are expected to make modest gains in 2021, energy prices, despite some recovery, are expected to stabilize below pre-pandemic levels next year,’ the World Bank recently said.

But it is not an altogether dismal projection and here is where there is a further glimmer of hope going forward:

‘Almost all commodity prices recovered in the third quarter of 2020 following steep declines earlier in the year due to the COVID-19 pandemic. Crude oil prices have doubled since their April low, supported by sharp oil supply cuts by OPEC+, but prices remain one-third lower than their pre-pandemic levels. Metal prices recovered rapidly in response to a faster-than-expected pick up in China’s industrial activity. Some food prices have also risen due to production shortfalls in edible oils. Looking ahead, oil prices are expected to increase very gradually from current levels and average $44/bbl in 2021, up from an estimated $41/bbl in 2020, as a slow recovery in demand is matched by an easing in supply restrictions. Metal and agricultural prices are projected to

see modest gains of 2 percent and 1 percent, respectively, in 2021.’

Still on the specific difficulties that could come from the COVID-19 pandemic, the World Bank says the challenge would be dependent on the length of time involved:

‘The main risk to the price forecasts is the duration of the pandemic, including the risk of an intensifying second wave in the Northern Hemisphere and the speed at which a vaccine is developed and distributed. The COVID-19 pandemic is a shock to global commodity markets that presents a challenge to policy makers in commodity exporters: to the extent that it is short-lived, policy stimulus can buffer its impact; to the extent that it is lasting, policy makers need to allow their economies to adjust smoothly to a new normal. Identifying the duration of commodity price shocks is a challenge that frequently confronts policy makers in commodity exporters…’

Additional challenges

The descent into chaos that followed the poor handling of anti-police brutality protests by the authorities has expanded the challenge faced by businesses and notably blue chips at the moment.

Lagos, for example, which accounts for some 40 percent of Nigeria’s GDP has taken a further beating on account of the EndSARS protests.

While the jury is still out as to exactly what has played out in the process, the reality is that both residents and governments in the megacity and state have presently been saddled with huge reconstruction bills. Of immediate determination would be how much of those assets were insured and whether the concerned insurers would presently be able to pay given also the overly constrained state of that sector at the moment, some analysts like Sam Okeke say that overall, the blue chips still have a lot going for them that they can yet hold on to keep their heads afloat:

‘A lot will depend on which of several COVID-19 and international oil price scenarios play out in 2020/2021. A short COVID-19 pandemic with a modest US$40 per barrel average price would likely lead to a V-shaped recovery with a mild swoosh going forward. However, a dip in oil prices and a rise in COVID-19 incidences would ram businesses into a recession wall.

The mild recession we could witness in 2020 may worsen in 2021. Q2 saw a decline of -6.10% and Q3 may settle at around -4.40% while full year should stumble at just over -3.00%.

Next year 2021 may witness mild positive growth as large financial liquidity positions drag interest rates down and finance costs slide lower. Corporations may see some modest  recovery in gross earnings in Q1 2021 but this will depend heavily on the reestablishment of supply chains, and an increase in fiscal government spending and higher consumer incomes. The incoming year may, however, see weak early growth as drivers of expansion still look limp and uninspired. Companies may have to tarry to Q2 2021 before they experience joy.’

The example of Airtel

One firm that recently posted its results is Airtel Africa.

In its Q2 2020 results, net profit was down 8.3% year on year with indications that it was being weighed down by mounting finance costs.

Notwithstanding this, it was able to record basic growth of 20.2 percent in its Nigerian operations, a point which analysts say may be attributable to higher telecommunications patronage overall on account of the lockdown.

As also gleaned from its report, in the July-September period, Airtel was also able to witness a surge in its subscriber base across the 14 African countries where it operates, as its users in the region expanded by 4.4% on-quarter, bringing actual number in the continent to 116.4 million.

Overall, Airtel’s Africa operations recorded a net profit showing of $88 million in the second quarter of the year.

Profit after tax after exceptional items, however, grew 54.3% from the preceding quarter’s $57 million.

Consolidated revenue is now put at $965 million, having increased 14.3% from corresponding quarter last year. At the same time, earnings before interest, tax, depreciation and amortization (EBITDA) also mounted 17.4% to now register at $437 million.

According to its CEO, despite the threat of a potential second wave of COVID spread in Africa, there is in-house optimism for growth and enhanced profitability going forward:

“We are in a strong financial position to capture the opportunities in a fast-growing region that is vastly underpenetrated in terms of mobile and banking services,” he enthused.

Nestle Plc

Nestle Nigeria has been grappling with a rising costs scenario that has been eating away at the blue chip’s profitability.

In its 2020 second quarter results for example, though revenue beat estimate, it however underperformed on the critical profit turf even as it also reported a dip in earnings per share on the back of a spike in costs.

At the close, revenues dropped to N70.6 billion, which registered at -0.3% year on year, gross profit margins was 43% compared to 48.8% in the corresponding period in 2019 and pre-tax profit for the second quarter in particular was N16.4 billion compared with N17.4 billion recorded in the previous quarter.

The net outcome then was that its earnings per share dipped to N13.41 compared to the earlier recorded figure of N16.9.

Part of the pressure point for Nestle, analysts say resides in the fact that the blue chip took on a new N5.8 billion loan during the quarter under reference. Another sore spot is an increase in cost of sales, which may not be unconnected with factors like the devaluation and higher cost of locally sourced inputs.

It is perhaps part of plans to help the Nigerian subsidiary ride over the current stormy waters that Nestle’s parent company moved to increase its stakes in Nestle Nigeria in August through a purchase consideration for the 748,047 additional shares at an average price of N1,174.74, and which was to effectively translate into an injection of N878.8 million into the firm.

This was disclosed by the company in a notification sent to the Nigerian Stock Exchange

According to the document, which was signed by the Company’s Secretary, Bode Ayeku, the purchase was made on the bourse over two transactions on 20th and 26th of August.

With this purchase, the ownership percentage of Nestle S.A now comes to 66.27% of Nestle Nigeria Plc.

One of the largest food and beverage companies in Africa, Nestlé Nigeria Plc engages in the manufacturing, marketing and distribution of food products including purified water. It also exports some of its products to other countries within Africa.

It has three product segments: Food, Beverages and seasoning. The Food segment engages in the production and sale of Cerelac, Nutrend, Nan, Lactogen and Golden Morn. The Beverages segment engages in the production and sale of Milo, Chocomilo, Nido, Nescafe and Nestlé Pure Life. While the seasoning segment engages in the sale of Maggi cubes.

Dangote: AfCFTA to the rescue?

Dangote Cement’s move to extend clinker export to countries across West Africa and commence shipment to Central Africa in H2 2020 could not have come in more handy.

With the growing levels of competitiveness being experienced in its home market and against the backdrop of the first phase of the African Continental Free Trade Agreement, AfCFTA, set to take off from January 1, Africa’s largest cement producer, Dangote Cement Plc (DCP) is clearly positioning for the future.

According to sources, part of the motivation behind the clinker export push is the outcome of field research that the absence of limestone in much of West Africa, and especially for the coastal states, has over the years encouraged them to import bulk cement and clinker from Asia and Europe at prohibitive costs.

Currently then, Dangote Cement is pushing an ‘export–to–import’ strategy, that would establish Nigeria as the main export hub of the continent, in a bid to serve West and Central Africa countries from Nigerian factories and help make the region cement and clinker independent.

An additional impetus is the projected lower clinker cost for pan-African operations, due to the proximity of Nigeria to these countries, as clinker landing cost will be cheaper.

Meanwhile, Dangote Cement had noted that its Pan African operations performed well in the first half of 2020, with its African operations contributing positively to its Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA). EBITDA for the Pan African operations was N12 billion though it ended up posting a loss of after-tax of N17 billion.

“In total, Dangote Cement’s Pan-African business is not dragging the Group down. Pan Africa is contributing net positive Earnings before interest, tax depreciation, and amortisation as shown in note 4 to our interim financial statements. As also shown in that same note, Pan Africa is contributing positively to Profit from operating activities. When you go below the operations profit line and consider the funding the Nigerian business records income for the funding it provided to Pan Africa while Pan Africa picks finance costs for the funding it got from Nigeria and this is intergroup and will eliminate on consolidation.”

And as part of the gains of a diversified continental portfolio, rather than post losses, the current devaluation of the naira actually did not translate into any additional pressure on the Nigerian business.

“The Nigerian business has dollar investments in Pan-Africa. Owing to the naira devaluation in H1:2020, the Nigerian business gained more naira for its dollar investment. As such, there is an FX gain in the Nigerian business and an FX loss in the Pan-Africa business. Furthermore, our finance cost shall not be materially affected by the devaluation as we have limited dollar debt exposure, with only 14% of our debt in dollars.”

It was a similar situation with the projected impact of the COVID-19 pandemic:

“Our Pan-Africa operations performed well in the first half of 2020, with an increase in volumes and revenues, despite the impact of COVID-19. We have reduced our cash cost in 6 of our 9 Pan-African operations this year and recorded a record high EBITDA and EBITDA margin of ₦31.5B and 22% respectively. We had strong volume growth in 5 countries, with Ethiopia and Senegal performing particularly well. In fact, the output at our plant in Senegal continues to exceed its rated capacity.

“We have a vast opportunity to make West and Central Africa cement independent, and this is why we are deploying our ‘export to import’ strategy. Nigeria has an abundance of quality limestone, while much of West Africa is lacking it. As successfully delivered for Nigeria by Dangote Cement leadership, we are aiming at making Ecowas and CEMAC regions clinker and cement independent and eventually next exporters with Nigeria as the main supplier.”

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