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Nestle Nigeria: The reward of debt reduction

Nestle Nigeria: The reward of debt reduction
January 11
12:46 2019
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Major cost saving from interest expenses and debt reduction is the strength of strong profit growth for Nestle Nigeria so far in 2018. It holds the promise for another strong profit growth that is expected to be the summary of the company’s earnings story for 2018.

The consumer goods company has engaged a continuing reduction in balance sheet borrowings from over N50 billion at the end of 2016 to N24 billion in December 2017. The debt figure has gone down further to N17.5 billion at the end of September 2018, freeing earnings into the bottom line.

The good news for the company is a slash of interest expenses that consumed 55% of operating profit in 2016, bringing the ratio down to 5% at the end of the third quarter in 2018. That has boosted the company’s profit capacity with profit margin climbing to the highest mark since 2014.

On year-on-year basis, finance expenses dropped by 82% to N2.66 billion at the end of September 2018. Despite a sharp drop in finance income as well, net finance cost dropped by over 85% to N1.27 billion. This enabled the company to grow profit more than four times as fast as sales revenue over the review period.

The company closed the third quarter with sales revenue of N203.13 billion, an increase of 9.6% year-on-year. This is a slowdown from 34% growth in 2017. Seasonal sales in the final quarter are expected to step up turnover growth to 13% at full year. The full year turnover projection of N275 billion for the company in 2018 is unchanged.

The strength of finance income last year is still missing so far in the 2018 financial year. Finance income dropped by 78% at the end of the third quarter to N1.39 billion. This is despite a strong improvement in cash flow during the period.

Cost of sales keeps moderating relative to sales at an increase of 7% year-on-year at the end of September. This improved gross profit margin further from 41% at the end of the second quarter to 42% at the end of the third.

A slight decline in administrative expenses helped to moderate a 17.7% increase in marketing/distribution expenses during the period. Despite that, operating profit slowed down from the 20% growth recorded at half year to 14.6% year-on-year, amounting to N49.36 billion at the end of September.

Nestle Nigeria closed the third quarter operations with an after tax profit of N33.12 billion, accelerating its year-on-year growth from 30% at the end of half year to 44% at the end of the third quarter. This is more than four and half times the increase in sales revenue, indicating a continuing gain in ability to convert revenue into profit. After tax profit is projected to be in the region of N45 billion for Nestle Nigeria at full year.

Net profit margin improved from 12.4% in the same period last year and from 13.8% at the end of 2017 to 16.3% at the end of the third quarter of 2018 – the highest profit margin since 2014. The company had rebuilt profit in 2017 with a 326% upsurge from a 67% fall in 2016.

It earned N41.78 per share at the end of September, rising from N28.99 per share in the same period in 2017. It is expected to close the year with earnings per share of over N56 against N42.53 in 2017. The company has paid an interim cash dividend of N20 per share and shareholders can hope for more at full year.

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