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Nestle: Rising Costs Slow Profit Growth

Posted: Aug 30, 2016 at 9:04 am   /   by   /   comments (0)


Kirk Leigh


Nestle, the company with the priciest stock on the Nigerian Stock Exchange (NSE) may not realise the optimistic full year forecasts as a combination of rising financing costs, naira devaluation and inflationary pressure takes a toll on bottom line as half-year results indicate.

The company, which operates in the food and beverages sub-sector of the manufacturing sector of the NSE, improved revenues 22 percent to N80.44 billion from N65.92 billion in a mostly inflation-led rise, a factor which also jerked up the cost of selling the company’s ubiquitous products including Milo and Nescafe by 28 percent to N47.71 billion from N37.25 billion.

The company was quick to state though that the rise in cost of sales was due to devaluation of the naira.

“The increase in the cost of sales was mainly due to higher material costs resulting from currency devaluation,” the company said in a statement accompanying the half-year results. This is as the company known for household confectionery like Chocó Milo and KitKat said it was pleased that revenue increased despite the tough economic environment. According to the company, it is a confirmation of “the great value that our brands provide consumers”.

The effect of rising cost of sales on revenues led to a marginal 14 percent rise in gross profit to N32.73 billion from N28.67 billion achieved in the equivalent half in 2015. This had a depressing effect on gross profit margin, falling to 41 percent from 43.5 percent. It is also an indication that cost of sales had a deleterious effect on top line profit.

Determinants of how operating and pre-tax profits might turn out-marketing, distribution and admin expenses- traced upward movements but had little effect on operating results, moving it up by 10 percent to N14.97 billion from N13.56 billion. Pre-tax profits may have held on to the same figures but for the spoiler role of net financing cost, which leapt a whopping 376 percent to N14.07 billion from N2.96 billion.

Financing cost (FC), also known as the cost of finances (COF), is the cost, interest and other charges involved in the borrowing of money to build or purchase assets. It is the total expenses associated with securing finance for a project or business arrangement.

Apart from a depleted liquidity position, the hefty financing cost resulted in a concomitant heavy toll on pre-tax profits, which dropped 92 percent to N896.5 million from N10.61 billion. Net profits had a slightly more forlorn look, backtracking 94 percent to N535.8 million from N8.89 billion enjoyed in the previous half year. On a marginal level, the company originally from Switzerland was able to translate every naira of sale into only one kobo of pre-tax returns compared to 16 kobo in the previous equivalent quarter. This is as it was able to translate less than one kobo into net profit where it did 13 kobo previously.

But analysts advise investors to hold their position in the company, which traded for N825 on August 12, saying the stock will outperform the market. According to the Financial Times, which tracks analysts’ opinion on the NSE, “as of August 12, 2016, the consensus forecast amongst 12 polled investment analysts covering Nestle Foods Nigeria Plc advised investors to hold their position in the company; this has been the consensus forecast since the sentiment of investment analysts improved on August 11, 2016. The previous consensus forecast advised that the company would underperform Nestle Foods Nigeria Plc.

The 11 analysts offering 12-month price targets for Nestle Foods Nigeria Plc have a median target of N803.70, with a high estimate of N1, 040.00 and a low estimate of N594.00. The median estimate represents a -2.58% decrease from the last price of N825.00”.

Indeed data from Bloomberg indicate that the stock is outperforming the NSE All Share Index (ASI) since the middle of June. While the stock price as of August 12 was N825, the ASI was 27280.95 or N769.15 in stock price equivalent relative to Nestle.

That the stock has a commanding presence on the NSE may also have to do with investors’ eyes fixed firmly on the company’s free cash flow to firm, which grew 101.35 percent in the last financial year to suggest a rising intrinsic stock value. They may have reasoned that it might be foolhardy to dump a stock such as Nestle which estimated EBITDA for 2016 is at a six-year high of N40.5 billion and ROE of 64.2 in 2015 despite a recession.