By JULIUS ALAGBE
Amidst bumps and bruises in the economy, Nestlé Foods Nigeria Plc is leading competition to finding value for its shareholders. Analysts have raised its revenue estimate for 2020 on the expectation that the most profitable company in the consumers goods segment will leverage on rising demand for foods in its key segment.
As an investment vehicle, analysts are of the opinion that Nestlé’ food Plc is leading in terms of creating wealth for its shareholders. The blue chip consumer goods company remains the highest price stock in the consumers’ goods sector on the local bourse.
On 792,656,252 outstanding shares, investors think Nestlé Foods is worth ₦934.541 billion, having lost more than 25% of its opening value to bearish run in 2020. In the Nigerian Stock Exchange, Nestlé stock price had peaked at ₦1,469.90 and hits bottom at ₦764.90.
For 2020, equity analysts at Meristem Securities set price target of ₦1, 200, while the stock traded at ₦1,179 on Tuesday. Emphasising its earnings leadership, Meristem Securities said the company remains the most profitable in consumers’ good industry.
Recall that in the first quarter of 2020, Nestlé reported a muted performance with revenue declining by 0.90%. Equity research analysts note by Meristem Securities revealed that this is the first top line drop since first quarter of 2015.
Looking ahead, however, analysts maintain positive outlook for sales in 2020, projected a 7.28% growth in top line to ₦304.71 billion.
“This is buoyed by our expectation of increased demand channels, stockpiling and a shift in consumption pattern to essential goods as most households grapple with the effects of COVID-19”, Meristem said.
Nestlé Nigeria, a subsidiary of Nestlé S.A, is one of the largest foods & beverage manufacturing companies in Africa. The consumer giant currently operates three manufacturing sites in Nigeria, and exports some of its products to other neighboring African countries – Niger, Togo, Ghana, Burkina Faso, and so on.
The company is primarily involved in the manufacturing, marketing and distribution of food products, including purified water. Recently, the company’s management has taken to expansionary projects – launch second beverage production plant in Ogun State in 2018, as it seeks to grow its revenue by enhancing sales volume.
Despite the prevailing macroeconomic headwinds and mounting pressure on consumer spending, Nestlé’s 2019 revenue climbed 6.67% to ₦284.04 billion from ₦266.27 billion in 2018. Analysts explained that over a 5-year period, top line growth has been impressive, registering a double-digit at cumulative annual growth rate (CAGR) of 13.43% between 2015 and 2019.
This growth was largely supported by the essential nature of the company’s products and expansion in sales volume; as the company benefited from Management’s decision to rotate into more favorable price-volume mix products.
“Other sources of competitive advantage are the company’s effective route-to-market network that ensures availability of its products across the length. Also, breadth of the country and brand loyalty from customers especially in the beverage segment, where the Milo brand is dominant”, Meristem stated.
In 2019, the company generated 98.25% of its revenue from sales in Nigeria, while the remaining 1.75% was from export sales to other neighboring countries. The improvement in top line has also been followed by increased production costs, coming at 13.18% average annual growth rate in the last five years.
Although, Nestlé has increasingly focused on sourcing its production inputs locally – achieving remarkable success with maize and sorghum which it employs in the production of its Golden Morn and Cerelac brand – it still spends heavily on raw material imports. As a result, cost of sales has hovered around 54.88% and 58.69% between 2015 and 2019, with a 5-year average of 56.97%.
Meristem stated that Nestlé’s operating expenses have also trended upwards, from ₦33.60 billion in 2015 to ₦56.08 billion in 2019. Operating expenses ballooned due to increased spending on marketing and promotion, coming at 12.21% average annual growth over 5 year as well as administrative expenses at 5.40% over the same period.
On the branding side, Nestlé seeks to maintain top-of-the-mind awareness among its customers and weather the keen competition for market share in the consumer goods space. Analysts said the Nestlé Foods has also benefited from its grip on finance costs which has continued to trend downwards.
In the last five years, its finance cost has spiraled downward by 14.18% on the average per annum. In 2015, the company spent ₦4.87 billion on finance costs. This rose to ₦20.86 billion the following year, before falling to ₦15.11 billion in 2017. However, in 2018 and 2019, the finance costs settled at ₦2.61 billion and ₦2.27 billion respectively.
Nestlé Continues to Return Significant Value to Shareholders
Equity research analysts at Meristem observed strong profitability trend over the years with the company’s performance. Analysts stated that both PBT and PAT have expanded steadily since 2015, from ₦29.32 billion and ₦23.74 billion to ₦71.12 billion and ₦45.68 billion in 2019.
This implies a 5-year CAGR of 19.39% and 13.99% respectively, Meristem stated.
The firm recalled that in 2019, Nestlé’s profit after tax was up by 6.22% from the corresponding period in 2018. The growth was due to the pass through effect of enhanced sales which lifted by +6.67% and slower growth in production costs which dropped by +2.32% during the period.
Meanwhile, Nestlé continues to generate significant value for its shareholders, as the company’s return on equity (ROE) has maintained an upward trend from 62.45% in 2015 to 100.28% in 2019. The expansion in ROE has been fueled by steady climb in both net margin and asset turnover. Both came strong from 15.69% and 1.27x in 2015 to 16.08% and 1.47x in 2019.
Analysts at Meristem explained that the company’s financial leverage followed the same trend, after falling from its highpoint of 5.49x in 2016, to 3.27x in 2017. As at 2019, financial leverage stood at 4.24x, up from 3.23x in the corresponding period, bringing the 5-year average financial leverage ratio to 3.88x.
Increase Short-term Debts Pressure Liquidity Ratios
Based on its financial performance, analysts spotted that follows the financial leverage, there was increased short term debts pressure on liquidity ratio. Meristem stated that total interest-bearing debts for 2019 pegged at ₦13.21 billion, up from ₦8.34 billion in 2018.
Meanwhile, debt to equity ratio pegged higher at 0.29x, compared to 0.17x from the preceding period compare to 5-Year average of 0.68x. Both current and quick ratios declined slightly from 0.90x and 0.63x in 2018 to 0.85x and 0.58x in 2019.
Analysts explained that the decline in liquidity ratio was driven by an increase in trade payables and short-term borrowings. The company’s cash position also slumped by 55.73% to ₦6.98 billion compare to ₦15.76 billion in the corresponding period.
As with the previous period, the company’s net working capital has remained negative, worsening by 97.14% to – ₦18.50 billion as at 2019. This was driven largely by a 36.28% increase in current liabilities to ₦125.54 billion as against a 29.37% climb in current assets to ₦107.04 billion.
In addition, the access to foreign exchange in the official window for the importation of milk and allied products is expected to provide succor to costs in the coming period.
“We identified risks to production and finance costs – stemming from unfavorable movement in foreign exchange and rise in operating expenses, mainly distribution and promotion costs, as downside risks to our outlook”, Meristem stated.
Nestlé Foods Nigeria Plc remained the most profitable consumer goods company in Nigeria over time, leveraging its market leadership position in the country’s teeming market – one whose population is projected to reach 300 million by the year 2030.
The company’s industry leadership and brand popularity constitute a formidable source of competitive advantage in the tightly contested race to capture market share.