NESTLE: Expanding Through Innovation as Priorities Remain Unchanged

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Friday, June 19, 2015 01:44pm / FSDH Research

FY 2014 Performance Analysis
The audited Financial Year (FY) 2014 result for Nestlé Nigeria Plc (Nestlé) for the period ended December 31, 2014 shows that its Turnover (T/O) increased by 7.70% to N143.33bn, compared with N133.08bn recorded in the corresponding period of 2013.

The cost of sales also increased by 7.60% to N82.10bn from N76.30bn recorded in FY 2013. The cost of sales as a percentage of Turnover fell marginally to 57.28% from 57.33% as at FY 2013. The administrative, selling and distribution expenses increased by 10.63% to N32.03bn. These expenses as a percentage of turnover increased to 22.35% in FY 2014 from 21.76% in FY 2013.

The investment income stood at N551.59mn as at FY 2014, representing an increase of 52.67%, compared with N361.31mn recorded in the corresponding period. The company also recorded a significant increase of 147.16% in its finance cost of N5.31bn from N2.15bn in 2013. This increase in finance costs was largely due to a substantial rise in the net foreign exchange loss, which stood at N3.04bn in FY 2014 from N609.07mn in FY 2013.

The Profit Before Tax (PBT) fell to N24.45bn, a decrease of 6.15% from N26.05bn recorded in the corresponding period of 2013. This is a reflection of the challenges the company is facing with regards to stiff competition in the industry and increased finance costs.

The tax provision also decreased by 41.67% to N2.21bn from N3.79bn, the decrease in the tax provision was due to the recognition of previously unrecognized tax credits and the origination and reversal of temporary differences resulting in a deduction of N815.76mn from the current tax expense leading to a Profit After Tax (PAT) of N22.24bn in FY 2014 from N22.26bn in the corresponding period of 2013, representing a marginal decrease of 0.10%.



 

The company’s profit margins in FY 2014 were impacted by various factors thus showing mixed performance from the figures recorded in FY 2013. Gross Profit margin increased marginally to 42.72% in FY 2014 from 42.67% in FY 2013. The PBT Margin in FY 2014 decreased over the FY 2013 figure.

The PBT margin decreased to 17.06% in FY 2014 from 19.57% as at FY 2013. The PAT margin currently stands at 15.51%, down from 16.72% in the corresponding period of 2013. The Earnings Before Interest and Tax (EBIT) margin declined to 20.37% from 20.91% in 2013.

 





A cursory look at the balance sheet position as at FY 2014 compared with the position as at FY 2013 reveals an increase in the company’s fixed assets. Fixed assets increased by 2.48% to N67.51bn from N65.88bn in FY 2013. The company’s inventory increased to N10.96bn from N9.85bn in FY 2013. Trade debtors and other receivables also went up by 24.86% to N22.33bn in FY 2014 from N17.88bn in FY 2013.

Cash and bank balances decreased significantly by 72.99% from N13.72bn in FY 2013 to N3.70bn in FY 2014. This decrease was primarily due to a significant decrease in call deposits. The call deposits fell to N2.43bn in FY 2014 from N9.62bn in 2013. The trade creditors and other payables decreased by 8.29% to N26.66bn from N29.07bn as at FY2013.

Borrowings increased by 13.48% to N31.12bn from N27.42bn in FY 2013. The increase in loans and borrowings in FY 2014 was mostly due to an increase in foreign related party loans from Nestlé Treasury Centre-Middle East and Africa Limited. These foreign loans as at FY 2014 stood at N22.15bn.

The total assets of the company which stood at N106.06bn as at FY 2014 were financed by a mix of equities and liabilities in the ratio of 33.89% and 66.11% respectively. Our analysis of the liabilities shows that the short-term liabilities stood at N44.64bn, accounting for 63.66% of the total liabilities, while the long-term liabilities stood at N25.48bn accounting for 36.34% of the total liabilities.

The long-term liabilities constituted mainly of long term loans and borrowings, which stood at N18.39bn. The current liabilities constituted mainly of trade & other payables. Working capital stood at a negative N7.25bn from N8.52bn recorded in FY 2013. Net assets for the period decreased by 11.47% to stand at N35.94bn from N40.59bn as at FY 2013.

 




Q1 2015 Performance Analysis

As at Q1 2015, turnover (T/O) decreased by 17.56% to N27.56bn, compared with N33.43bn recorded in the corresponding period of 2014. The administrative, selling and distribution expenses increased by 25.61% to N1.88bn. The company also recorded a significant increase of 167.54% in its finance cost of N2.34bn from N873mn in 2014.

The Profit Before Tax (PBT) fell to N3.49bn, a decrease of 50.69% from N7.07bn recorded in the corresponding period of 2014. The tax provision also decreased by 50.08% to N533mn from N1.07bn, leading to a Profit After Tax (PAT) of N2.95bn in Q1 2015 from N6bn in the corresponding period of 2014, representing a decrease of 50.80%.

The PBT Margin decreased over the Q1 2014, and the Financial Year ended December (FY), 2014 figure. The PBT margin decreased to 12.65% in Q1 2015 from 21.16% as at Q1 2014, and from 17.06% as at the end of FY 2014. Also, the PAT margin currently stands at 10.72%, down from 17.96% in the corresponding period of 2014, and also down from 15.51% as at FY 2014.

The result also indicates that the percentage of T/O, PBT, and PAT in the Q1 2015 to the Audited T/O, PBT and PAT for the period ended December 2014 are: 19.23%, 14.26% and 13.29%, respectively. Given the run rate, the company would need to remain focused on marketing development to meet its previous year’s performance. We however note the low business activities in Q1 2015 as a result of the security challenges in the country and the general elections.

 




Drivers of Performance and Strategic Focus

Nestlé’s performance during the period was driven by the following factors:
·         Diversified product portfolio which are essential for healthy living.
·      Its backward integration strategy to secure raw materials locally by partnering with farmers to provide quality raw materials.
·         Investments in plants upgrade to produce products more efficiently.
·         The Naira devaluation.
·         The security challenges in the country and the general elections in 2015.


However, the company’s increased finance costs especially the exposure to foreign exchange adversely affected profit in FY 2014 and Q1 2015. In FY 2014, Nestlé’s foreign exchange exposure was estimated at N63.24bn with imported raw materials of N41.10bn dominating the foreign exposure. In Q1 2015, finance costs rose by 167.54% to N2.34bn from N872.90mn in Q1 2014.

Strategic Focus
Nestlé’s priorities remain unchanged from its standard corporate business principles. In respect to its brand and product, the company’s focus is to ensure its brands and products undergo continuous innovation. Also, Nestlé seeks to ensure that its products are available wherever, whenever and however the customer wants them.

A key part of Nestlé’s business principles is its commitment to environmentally sound business practices that will benefit the communities it operates in. Consequently, to further reduce its environmental footprint and ensure efficient use of energy for manufacturing operation, Nestlé has built a Tri-Generation power plant at its Agbara factory.

The plant generates power, while chilled and hot water are generated using heat from the power plant exhaust gases. This enables the company to increase overall energy efficiency from 42% to 74% and to reduce carbon dioxide emissions by 5,000 tonnes per year. Also, in 2014 Nestlé laid the foundation for its ultra-modern N4.8bn

Nestlé Waters factory in Abaji near Abuja. This facility is key to the growth of Nestlé’s water operation in Nigeria. The Company chose the rural location for the factory with the aim of contributing to the rural development by providing local employment and purchasing directly from small scale suppliers and intermediaries.

Valuation
We employed relative valuation method using Enterprise Value (EV) to Earnings Before Interest Tax Depreciation and Amortization (EBITDA) multiple. The assumptions and results of the valuation are:

Assumptions:
·         EV/EBITDA Multiple: 23.61x
·         Debt: N31.12bn
·         Cash: N3.70bn
·         Number of shares in issue: 792.66mn

 

Applying the EV/EBITDA multiple of 23.61x, we arrived at N937.29 per share as the fair value. The current market value of Nestle share is N850.10, the highest and the lowest closing prices in the last 52 weeks are N1,150 and N746.25 respectively.

The forward earnings yield and dividend yield of the company at our fair value are 2.50% and 2.20% respectively. The total return, a combination of the capital appreciation and the dividend, generates 12.68%.

The company has a track record of consistent dividend payment (both interim and final) which makes a good stock to hold for large fund managers. Going by historic trend the company shares would always trade at a premium to its fair value. We therefore place a BUY on the shares of Nestle at the current price of N850.10 as of June 18, 2015.

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