Nestle Nigeria; Broadstreet cash cow suffers declining profitability.

By OKEY ONYENWEAKU     |    

This time last year 2019,  Nestle Nigeria Plc would have boasted of its getting set to post very strong and solid performance with huge dividends to its shareholders. Investors in Nestle Nigeria’s stock have always been looked at with subtle respect and envy because of its high price and the high dividends they receive year on year. But the times appear to be changing fast.

The company’ s profit before tax  dropped 15 per cent from N71.123billion in 2019 to N60.638billion in 2020.  At this point also, the Food and beverage giant also said its profit for the year ended December 31, 2020 declined -14.17 percent to N39.21 billion from N45.68 billion recorded a year ago.

Despite all the discomfort, the company proposed a final dividend of N35.00, 22.2 per cent lower than the N45.00 final dividend it paid last year but its total dividend pay-out will stand at N70.00 per share when you add the  interim dividend of N25.00 as against the N63.00 per share it paid last year as total dividend.

In spite of the drop in returns, shareholders are still impressed with the firm’s performance given the hard times occasioned by the ravaging effect of Covid-19 which has impeded growth in businesses generally.

While the blue-chip company’s  revenues inched up +1.07 percent to N287 billion from N284 billion declared in 2019 end,  inventories rose by 36 per cent from N33.278billion in 2019 to N52.222billion in 2020.

Of course, Covid-19 caused a lot disruptions in business activities all over the world from cutting supply chains to halting productive activities among others.

Further details revealed that while the firms net foreign exchange loss rose 4,599 per cent from N37.565million in 2019 to N1.728billion in 2020, net finance cost also jumped 302 percent from N938.222million in 2019 to N3.780billion in 2020.

To survive, the Company also ramped up its loans and borrowing by 531 per cent from N5.516billion in 2019 to N33.834billion in 2020.

These analysts say have constituted a huge burden for the giant beverage company and also dragged down its total equity by 36 per cent from N45.557billion in 2019 to N29.296billion in 2020; its basic earnings also plunged 14.1 per cent from N57.63 from 2019 to N49.47 in 2020.

Nestle Nigeria had also posted a decline in profit  before tax by 12.89 per cent in the third quarter ended September 2020; EPS and Net Assets also plunged by -13.32 per cent and -8.22 per cent respectively.

Over the years, the manufacturing sector has suffered huge set back emanating from factors such as the power crisis, misappropriation of Funds by government officials, excessive dependence of Nigerians on Imported Goods, lack of finance, classification of manufacturing Industry as a high risk area for bank lending, unbridled globalization, high cost of production and poor infrastructure among other impeding challenges.

But these have not deterred some of the stronger breed like Nestle Nigeria which appears to have proved and mastered the art that it can always run against the tide and still deliver fairly good margins for its investors.

However, the company has been consistent in ensuring strong performance and lubricating the pockets of its owners with good dividend.

While the performance is not too fantastic, Nestle Nigeria and other manufacturing firms have been plagued by macro-economic factors: a higher inflation rate at 16.4 percent as of December 2020, the insurgency in the North – which has denied it market access – and a higher borrowing cost, which climbed to N33.8billion, from N5.516bn from the previous year.

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This notwithstanding, its five year performance from 2016 to 2020 indicates that the company has been formidable even in the midst of strong head and tail winds. Looking critically at its performance from 2016 to 2020, Business Hallmark observed that its revenues grew 57.81 per cent from N181.910billion in 2016 to N287.084billion; Profit before tax also grew 181.4 per cent from N21.548billion in 2016 to N60.638billion in 2020; declared dividend grew 268.4 per cent from N15.060billion in 2016 to N55.485billion in 2020.

However, this sliding performance has prompted consistent strategy sections on how to over-come the stifling effect of the recent head and tail winds.

“Revenue grew by 2.3% y/y in Q4-20, driven by the 9.2% y/y growth in Food sales. According to our channels checks, average prices in the segment were relatively flat during the period, and as such, we feel the growth was primarily volume-driven.  In contrast, Beverage sales fell to a five-quarter low, declining by 8.4% y/y. The sharp decline was surprising, considering average prices in the segment rose by about 28.8% on average and implies a significant drop in Milo and Nescafe volumes in Q4.

“For the third successive quarter, gross margin compressed, by 454bps, to 39.3%, the lowest since Q1-18, as the growth in cost of sales outpaced revenue. Cost of sales grew by 10.6% y/y, which in our view, is indicative of the weaker currency and much higher local sourcing costs (NESTLE sources c.80% of its raw materials in Nigeria) amidst intensifying inflationary pressure within the country (food inflation in Nigeria averaged 15.0% in Q4-20).” Said analysts at Cordros.

Nevertheless, Nestle Nigeria is to be applauded for having diligently resisted the smothering effect of the persisting weak macro-economic headwinds and raising its head high despite all odds. Pushing back on the harsh macro-economic environment, the company beat analysts’ expectations in the final year performance for the period ended December 31, 2019 as reflected in the increased revenues that it was able to deliver.

Challenges

Market analysts have attributed the weak performance of manufacturing companies to the prevalent macro –economic challenges in Nigeria. While some of them fingered the lack of a sustainable economic direction by the President Buhari-led administration as one of the strong reasons for this, others have hinged it on tight regulation of both the fiscal and monetary authorities. Yet a third group has sadly pointed at the shrinking revenues of the nation, caused by the volatility in crude price, lack of productivity and increased funding for security, in addition to low disposable income in the hands of consumers. These, market observers believe have also been responsible for the near weak performance of other sectors of the economy. This is in addition to the disruptions of Covid-19 of businesses all over the world.

These have dealt a heavy blow on business operations as many firms seem to be struggling to survive.

On its part, the leadership of the Manufacturers Association of Nigeria, MAN has always fingered lack of disposable income in the economy  – as a major cause of mounting inventories of unsold stock in the ware houses of Manufacturers.

“Most of our members complained of their unsold stock inventories, because people are not buying their goods, which can be attributed to shrinking economy.

“A situation where you generate your own power for production does not make you competitive, because whatever is produced in this country is produced at a higher cost when compared to other parts of the world.

“The same goes for the transportation system as we still move our good via roads, even the heavy duty goods. Such good which should go by rail lack enough rail lines to carry them.

“There is a need to develop the transportation sector to the point where it can support the manufacturing sector and also support the economy,” a recent MAN statement expressed.

Market observers have also noted that manufacturing capacity utilization has continued to slide since it hovered between 70 and 75 % from 1975 to 1980’s. There is also stiff competition in the industry as Cadbury, Cowbell and many other small companies continue to push to gain higher market share in the Food and Beverages segment of the market.

Whereas the government has excluded importers of 43 items from accessing forex to boast their market, the recent closure of the border has also impeded exportation of manufactured goods.

In spite of these constraints however, Nestle Nigeria has very clearly performed well over the years.

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Before and even during the value erosion of stocks in the market in 2008, Nestle was formidable.  Its dividends history reveals that it paid N1.50 kobo per share in 2001 and N6.50 in 2002. In 2003, investors earned N7.00 per share as dividends. The company also paid dividends of N7.00 in 2004, N7.00 in 2005 and N10.00 in 2007. It also paid N11.95 kobo in 2008, N12.55 in 2009, N10.60 in 2010 and N12.55 in 2011, N18.50 in 2012, 18.50 in 2013, N17.50 in 2014, 17.50 in 2015, N19.00 in 2016 and N42.50 in 2017, 47.50 in 2018 and N70.00 in 2019 and a declared dividend of N70.00 in 2020.

At the stock price of N1,350.00 per share as at March 6, 2021, Nestle’s share holders have gained 13.2 per cent this year. In fact, the stock has gained 41.22 per cent year on year while Earnings per share stood at 49.47. But with its P/E Ratio at 27.29, it will take an investor some reasonable length of time to recoup his investment.

Nevertheless, the truth is that Nestle has remained consistent in terms of performance aside from having good fundamentals. These have sustained its high price over the years. But many have fingered the huge percentage stake of its core investors as the major reason the stock may be considered illiquid. Digging further, BH checks show that Nestle S. A. of Switzerland and Nestle CWA Limited, Ghana are the major shareholders of the company, controlling 3.17% and 59.13% of the company respectively. This has left investors with fewer shares of the company.

While we wait for the response of its corporate affairs department, Nestle still remains one of the stock is still enjoying the commanding height in the Food/Beverages and Tobacco sub-sector of the NSE. Nestle Nigeria Plc is a member of the respected and reliable nutrition; health and wellness company renowned world-wide for its high quality products.

The company commenced simple trading operations in Nigeria in 1961 and has today grown into a leading food manufacturing and marketing company. Nestle is notable countrywide for sundry household products that include Bouillon Cubes, Maggi Chicken, Cray fish and super onion spices, Nestle Nutrend, Cerelac, NAN Baby food, Nestle Golden Morn-Cereal, Nestle Nido, Carnation Milk, Nestle Milo (Chocolate drink) and Nescafe (Coffee) brand of beverages. It was listed on the Nigerian Stock Exchange on April 20,1979.

Sturdy player

To be sure Nestle Nigeria has demonstrated over the years that it is indeed a sturdy player in the Nigerian business arena. With strong household brand leaders like the Milo beverage and the Maggi seasoning, the company has through the years found and occupied regular spots in many a Nigerian household.

This acceptance has also been demonstrated at the Nigerian Stock Exchange where it was the first to hit the N1,000 per share mark.

Add to this the strength of its global parent brand which continues to provide the Nigerian operation with strong shoulders upon which to rest, then you have a business operation that would require more than the casual occurrence to flinch.

But then these are clearly unusual times in the Nigerian and global business firmament.