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Nestle Battles Rising Cost of Operations(AllAfrica Via Acquire Media NewsEdge) Last week Nestle Nigeria Plc announced a final dividend of N24 for the year ended December 31, 2013. Having paid an interim dividend of N1.50, the total dividend for the year amounted to N25.50 per share. However, while the dividend payout may appear huge in absolute terms, it translates into a yield that is below three per cent Corporate Profile Nestle Nigeria is a member of Nestlé S A Group. The company has Mr. David Ifezulike as chairman while Mr. Dharnesh Gordhon, a South Africa as the managing director/chief executive office. The company is a nutrition, health and wellness company renowned world-wide for its high quality products. Nestlé Nigeria Plc began simple trading operations in Nigeria in 1961 and has grown into a leading food manufacturing and marketing company in Nigeria. Nestlé Nigeria Plc was listed on the Nigerian Stock Exchange on April 20, 1979. Nestlé Central & West Africa (CWA) Limited is the major shareholder of the Company. Nestle CWA has shareholding of 59.59 per cent. The company manufactures and markets a range of brands including: infant cereals (Nestlé Nutrend, Nestlé Cerelac); family cereals (Nestlé Golden Morn); beverage drink ( Nestlé Milo); confectionery (Nestlé Chocomillo) and Maggi range of products. 2013 Audited Result The company reported a revenue of N133.1 billion, up 14 per cent from N116.7 billion recorded in 2012. Gross profit rose 13 per cent from N50.2 billion to N56.7 billion. However, a rise in operating expenses, financial charges among others reduced the growth of the company's bottom-line. Financial charges rose 16 per cent from N1.848 billion to N2.14 billion, while operating expenses grew by 19.7 per cent from N24.179 billion to N28.95 billion. This high costs affected the profit before tax, which rose marginally by 3.9 per cent from N25 billion to N26 billion. But a reduction in taxation from N3.9 billion to N3.7 billion led to a growth of 5.4 per cent in profit after tax, which stood at N22.3 billion as against N21.1 billion in 2012. Nestle recorded earnings per share of N28.08, from where the company paid a total dividend of N25.50, which indicates that the company is paying out 91 per cent of its earnings as dividend to shareholders. Double Digit Revenue Growth Although Nestle's revenue continued to grow in double digit, its earnings recorded the slowest pace in three years. According to analysts at Cordros Capital Limited (CCL) the slow growth in earnings resulted from higher inputs costs. "We note particularly the serious consequence of higher input costs growth in the fourth quarter and increased operating expenses (all year) on earnings. Though profitability and efficiency ratios remained within historical levels, they recorded contractions year-on-year," they said. Speaking on the dividend, the analysts said the N25.50 is 27 per cent higher than the level paid the previous year and considering the December 2013 closing price(N1,200) of the stock, the dividend translated into a yield of 2.13 per cent. Weakened Q4 Margins. According to the analysts, Nestle disappointed in the fourth quarter of 2013 with earnings contracting considerably, as management (may be temporarily) apparently lost control over input costs and operating expenses (opex). CCL analysts said on quarter/quarter (q/q) basis, Q4-13 PBT (N5.67billion) and PAT(N5.16billion) fell by 20.8 per cent and 13 per cent respectively and were also at discount to the N6.77billion and N5.75billion reported during the same period of 2012. "Depicting the flaws in efficiency, Q4-13 PBT and PAT margins both came in at 15.1 per cent and 13.7 per cent, discounting the 21.7 per cent and 18 per cent recorded in Q3-13 as well as the 21.4 per cent and 18.1 per cent in posted Q4-12. "2013 was undeniably a thorny year for Nestle as it had to contend with disproportionate growth between revenue and opex. With earnings up by 11.1 per cent y/y in Q3-13, the poor performance in Q4 had a knock-on effect on the company's full year earnings which grew by 5.3 per cent y/y, the slowest pace in three years. The 2013FY post-tax profit of N22.3billion missed our N23.6billion estimate. PBT and PAT margins both fell by 189bps and 139bps respectively, while return on average earnings (ROAE) dropped to a 10-year low of 57.3 per cent," they said. Rise in Cost of Sale Nestle's cost of sales (CoS) rose surprisingly by 24.2 per cent in three months ended December 31, 2013 to N22.56billion. Compared to Q4-2012, input costs rose by 32.4 per cent. "While we are yet to receive management guidance on the driver, we surmise that the sharp rise may be tied to an increase in raw materials costs in the period leading to the end of the year. This has defied the company's long tradition of maintaining moderate input costs, leaving a negative impact on earnings and margins as stated above. "Despite a double digit revenue growth, Q4-13 COS margin came in at 59.9 per cent 480bps higher q/q and 610bps up against Q4-12 figure," they said. The analysts explained that the implication of the sharp rise in Q4-12 COS was diluted by soft growth recorded in the first three quarters. Hence, input cost grew by 14.7 per cent for the full year and produced a margin of 57.3 per cent in line with the company's five year average. Notwithstanding the 13.2 per cent growth in gross profit, the gross margin actually fell by 32bps y/y. According to them, given the size of revenue growth recorded during the period, they reckoned that there must have been strong capital commitment to distribution, sales and marketing (DSM) which accounted for 83 per cent of sales value. For the full year, opex increased by 19.7 per cent (26.7 per cent in 2012) and accounted for 21.8 per cent of revenue, from 20.7 per cent in 2012. "Going into the year, management had given a guidance for highe,DSM spend in line with plans to continue to drive the visibility of its products and maintain market leadership. We noted particularly the advertisements and promotions that backed the Milo, Maggi and Golden Morn brands during the year," they said. For the full year finance charges rose by 16.1 per cent due to the higher concentration of expensive, short term debts in the first three quarters. Positive Outlook Analyst said they believe Nestle has a positive long term outlook supported by its rich product portfolio and moderate input costs tradition. "The growing economy, burgeoning middle class population, evolving retail market and mobile banking as well as rapidly changing taste and preference make the Nigerian consumer story attractive. However, we expect the drag on consumer spending witnessed in 2013 to persist in 2014. A combination of exchange rate weakness and likely inflation uptick will impact on cost of production and possibly prices of goods," they said. They added that while the spill-over from election spending is expected to drive demand for consumables, they said they foresee greater consequence on business operations coming from the security challenges in the vulnerable regions, mainly the North, whose population contribute a larger proportion of revenue of consumer companies. Maintain Sell The analysts said based on their revised estimates of Nestle's financials to align with current realities, "we arrived at a new target price of N823.33, 16.6 per cent lower than the previous estimate. At current market value of N1, 071.31, we continue to find valuation demanding, hence our sell recommendation." Copyright This Day. Distributed by AllAfrica Global Media (allAfrica.com). |