Nestle Nigeria: Defending profit against rising cost

Nestle Nigeria is again struggling with rising costs but appears to be definitely in a better position to rebuild and grow profit this year. The company is looking good to remedy the profit slump of last year and set a new profit high in 2017. That depends on its ability to sustain the earnings performance seen in the first quarter.

Three major cost lines had hurt the company’s profit capacity badly last year and these are cost of sales, finance costs – induced by foreign exchange losses and income tax expenses. The three cost elements are still hitting the bottom line in the current financial year but the ability to push up sales revenue is helping to moderate the cost increases and what looks more like a windfall from interest income has fixed completely the problem of rising finance cost.

The food and beverages company closed the first quarter trading with two key operating strengths – a strong revenue growth and a shift from a net finance cost to a big net finance income. Sales revenue is accelerating for the second year for Nestle with a top record growth of over 69% year-on-year to N61.15 billion at the end of the first quarter.

The company’s management is encouraged by that performance and attributed it to brand loyalty of consumers in defiance of inflationary pressures and weak purchasing power. Increase in product prices in the course of last year is also a significant factor in the sales revenue growth recorded in the first quarter.

Based on the first quarter performance, sales revenue is projected to stand in the region of N250 billion for Nestle Nigeria at the end of 2017. That will be a full year growth of 37%, accelerating from 20% in 2016 and further from 5.5% in 2015.

Sharp cost increases didn’t let the accelerated revenue growth get down to the bottom line last year and profit capacity dropped to the lowest level in many years. This year is seeing an upturn with sustaining revenue growth and moderating cost, which is stretching out profit margin.

Rising cost of sales remains a challenge to the company, as it is again growing well ahead of sales revenue. At N37.67 billion, cost of sales more than doubled at 105.3% compared to the 69% growth in sales revenue. It claimed close to 62% of turnover, rising from under 51% in the same period last year. That permitted a much lower growth rate of 32% in gross profit during the period, indicating persisting weakness in converting sales revenue into profit.

Two other major cost lines showed moderate growths and these are marketing/distribution expenses and administrative cost. This enabled the company to raise operating profit by 46.6% to N13.30 billion compared to the 32% growth in gross profit. These are the only two expense lines where the company saved costs in the first quarter.

A good part of the cost saved in the two areas could have been absorbed by finance expenses, which advanced by 96% to N1.53 billion at the end of the first quarter. With a massive growth in interest income however from N480 million to N2.6 billion, the company achieved a major change from a net finance cost of N300 million in the same period last year to a net finance income of N1.07 billion at the end of the first quarter. That enabled it to lift pre-tax profit by 64% to N14.30 billion over the review period.

An upsurge in income tax expense is the third major cost element of the company that stood in the way of converting revenue into profit. It came close to tripling at N5.94 billion at the end of the first quarter, maintaining the massive growth for the second year. Tax expense had grown by 144% to N13.62 billion at the end of 2016.

Nestle closed the first quarter with after tax profit of about N8.36 billion, an increase of 21.5% year-on-year. If the first quarter performance is maintained to full year, after tax is expected to be in the region of N35 billion for Nestle Nigeria in 2017. That will be multiplying last year’s closing profit of N7.92 billion four and half times.

This will be a new profit high for the company after losing two-thirds of its preceding year’s net profit in 2016. The first quarter profit figure for the current year is already ahead of the full year profit record in 2016.  Net profit margin is up from 4.3% at the end of last year to 13.7% at the end of the first quarter.

The company earned N10.50 per share at the end of the first quarter, improving from N8.67 in the same period last year. The full year outlook indicates earnings per share in the region of N44 for Nestle Nigeria in 2017. It had earned N10 per share at the end of 2016 and gave it all out to shareholders in cash dividend. The company register will close between 8th and 12th May while payment is scheduled for 24th May, 2017.