Categories: Company Analysis

Nestle Nigeria: Interest expenses cut lifts profit

A sharp cut down in interest expenses was the major favourable event in the Nestle Nigeria’s income statement at the end of half year operations, lifting profit margin higher than any time since 2014. The consumer goods company brought finance expenses down 85% year-on-year to N1.12 billion at the June 2018. With that, it slashed net finance cost by over 87% to N280 million. This enabled it to enhance profit capacity, raising profit three times as fast as sales revenue over the review period.

A drop in finance cost was equally a major factor in the strong turnaround the company registered last year. Strong growths in finance income and sales revenue were equally the strengths in the company’s 326% surge in after tax profit at the end of 2017.

This year, the strengths of finance income and revenue are missing so far. Finance income was down 84% at the end of half year and sales revenue slowed down from 34% in 2017 to about 11%.

Sales revenue amounted to N135.30 billion for Nestle Nigeria at the end of June, maintaining an even growth across quarters. The full year outlook indicates sales revenue growth stepping up to 13% to establish turnover in the region of N275 billion in 2018.

Cost of sales moderated at an increase of 8.3% year-on-year at the end of June, which permitted a small gain in gross profit margin from less than 40% in the same period last year to 41% at the end of the second quarter. This enabled the company to grow gross profit ahead of sales revenue at 15% to N55.58 billion compared to the 11% growth in turnover.

A marginal decline in administrative expenses countered a 13% increase in marketing/distribution expenses during the period and improved profit capacity further. Operating profit grew a clear 20% year-on-year to N32.15 billion at the end of June.

Interest income has lost its last year’s momentum that saw a growth of nearly one-half and dropped by 84% to N838 million at the end of half year trading. Finance cost dropped equally sharply by 85% to N1.12 billion over the same period, lowering net finance cost by 87% to a little over N280 million.

Finance expenses had dropped by close to 28% in 2017, leading to a 47% cut down in net finance expenses. There is a continuing reduction in balance sheet borrowings from over N50 billion at the end of 2016 to N24 billion in December 2017 and further to N17.5 billion at the end of June 2018.

Nestle Nigeria ended half year operations with an after tax profit of N21.46 billion, a year-on-year growth of 30%. This is close to three times the increase in sales revenue, indicating a strong gain in profit capacity from cost moderation.

Net profit margin improved from 13.6% in the same period last year and from 13.8% at the end of the year to 16% at the end of the second quarter – the highest profit margin since 2014. Maintaining profit growth after the 326% leap in 2017 is a key strength for Nestle Nigeria in 2018.

The company earned N27.07 per share at the end of June against N20.88 per share in the same period in 2017. It closed last year’s operations with earnings per share of N42.53 and paid a final cash dividend of N27.50 per share.