Nestle Nigeria Faces New Pressure From Rising Debts
are likely to be on the rise, as new borrowings in the second quarter had raised balance sheet
debts and virtually thinned out net finance income. This was clearly the major development
that happened in the company’s operations in the third quarter.
Finance expenses surged upward from about N889 million at the end of June to N1.6 billion at
the end of September 2019. That overturned the modest net finance income position of the
company at half-year to a net finance expenses status at the end of the third quarter. The
favourable effects of the sustained drop in finance expenses ended on the reverse direction at
the end of the period.
The company’s management was able to keep profit growing comfortably at 22 percent at the
end of half year despite its inability to achieve a reasonable growth in sales. Its strength lay in
the cost saving from dropping finance expenses. Expectedly, the pressure from finance charges
in the third quarter has undermined the profit growth functions of the company considerably.
The profit per quarter went down from over N13 billion in the second quarter to N10.6 billion in
the third, which has lowered the full-year profit expectation for the company. The adverse
pressure on the bottom line in the third quarter is expected to be sustained to full year.
On year-on-year basis, however, finance expenses continued to drop at the end of the third
quarter, but the pressure in the third quarter was further reinforced by a drop in finance
income at the end of the period.
The food and beverages company continued to face a big challenge in the selling front, as sales
decelerated further in the third quarter from 5 per cent increase at half year to 4 percent
improvement at the end of the third quarter. Sales revenue was slowing down for the second
year at the end of the period, which has moderated the full-year outlook.
With the shift back to net finance expenses position and the lingering slow sales, the company’s
strategy for profit enhancement for the year is undermined. Nestle Nigeria was able to keep
profit growing in a bad selling season initially because of a deleveraged balance sheet over the
preceding two years.
With rising borrowings once again, the bottom line is getting the pressure. From less than N7
billion at the end of the first quarter, interest-bearing debts rose to over N15 billion at half
year before going down to over N11 billion at the end of the third quarter.
From just a 5 percent improvement in sales revenue at half-year, management was able to extract
more than 22 percent leap in profit. The developments in the third quarter have caused that
pattern of earnings to falter.
Nestle Nigeria posted sales revenue of N211 billion at the end of the third quarter operations in
September 2019. This is an increase of 4 percent year-on-year and a slowdown from 5 percent
increase maintained up to half year. The company has faced a continued slowdown in sales
revenue from 34 percent in 2017 to 9 percent in 2018.
Sales revenue projection of N285 billion is revised slightly down to an estimate of N282 billion
for Nestle Nigeria for the 2019 operations. This indicates a full year turnover growth of 6
percent from the closing revenue figure of N266 billion in 2018.
The company faced new pressure also from input cost in the third quarter. Cost of sales shifted
radically from 5 percent decline maintained to the end of half year to a 5 percent increase at
the end of the third quarter. Input cost therefore changed from being a major cost saving
centre for the company to a revenue consuming channel.
The development undermined gross profit, which slowed down from 19 percent increase at the
end of June to 11.6 percent at the end of September 2019. This squeezed gross profit margin
from 47 percent at half year to 45.5 percent at the end of the third quarter.
Management was able to keep administrative expenses under control but
marketing/distribution expenses continued growing well ahead of sales revenue. Operating
profit slowed down from 26 percent growth at the end of June and improved by 15.6 percent to
N57 billion at the end of September 2019.
The developments in the third quarter tempered management’s ability to build wealth for
shareholders. Profit margin went down from 18.5 percent at half year to 17.4 percent at the
end of the third quarter. This means the company devoted increased resources to other
stakeholders during the review period.
Nestle Nigeria closed the third quarter operations with an after tax profit of over N36.8 billion,
which is a year-on-year increase of 11 percent, down from a 22 percent growth at half year. Full
year profit is estimated at N48 billion, a markdown from N53 billion earlier projection for Nestle
Nigeria in 2019. This would be an increase of 11.6 percent for the year compared to a growth of
over 27 percent in 2018. The company ended the 2018 operations with an after tax profit of
N43 billion.
The company earned N46.48 per share at the end of the third quarter, up from N41.78 per
share in the same period in 2018. The full-year earnings per share expectation is in the region of
N61 for Nestle Nigeria in 2019. An interim cash dividend of N25 per share was paid to
shareholders last December.
Comments are closed.