Nestle shares have been the priciest on the Nigerian Exchange (NGX) for as long as anyone can remember, resulting in capital gains for investors but selloffs and weak bottom lines have resulted in reversals that the parent company is moving quickly to stave.
An example of a bad day for the Nestle share was August 17, 2021 when the shares lost nearly 10 percent of its value in a sell off and the share price declined from N1, 500 to N1, 400. Consequent upon that capital depreciation was a significant drop in capitalization by a whopping N110 billion as its total cap took a swift southern journey to N1.11 trillion from N1.22 trillion.
Investors were also miffed at the erosion of the ability of their holdings to add value as Return on Equity (RoE) sank to 8.3percent from N13.5 percent. They had their eyes on the company’s financial performance.
Nestles value attrition can be pinned on the less than inspiring fundamentals as seen from its six months performance to June. Although it improved revenues by a robust margin, its bottom line succumbed to the vagaries of mounting costs, slipping by more than one percent.
Revenues were up 21.6 percent to N171.44 billion from N141 billion indicating a rise in consumption after the economy emerged from two quarters of negative growth. But the costs necessary to make the sales jumped by a hefty 31 percent to N105 billion from N80.2 billion thus restricting top line profit to 9.2 percent or N66.43 billion from N60.8 billion.
Receding topline relative to the equivalent period had a searing, if shocking effect on the gross profit margin, pulling it down to 38.7 percent from 43.1 percent. What this means is that despite the spike in revenues, it is not strong enough to sustain bottom line and that the company would need to work on its sales strategy to up the situation.
The languid upward trudge and rising operating costs had a drag on operating profit to the effect of managing only a 5.8 percent growth to N36.3 billion from N34.3 billion. This had a drag effect on operating margin, ebbing at 21.2 percent from 24.3 percent. This means that the FMCGs operating costs need to be checked going forward especially as we are in the third quarter when increased operating activities are expected of manufacturing companies.
Operating profit being so thin only led to a flip in pretax profit relative to the corresponding period in 2020, dropped by 1.4 percent to N33.4 billion from N34 billion. It also led to a concomitant drop in pretax profit margin to 19.5 percent from 24 percent. This could be indicative of the need to get hold of finance costs.
With pretax profit sliding, net profit joined in the southern move, albeit unwillingly dropping by 0.43 percent to N21.73 billion from N21.82 billion with a resultant drop in net profit margin to 12.7 percent from 15.5 percent.
Nestle’s parent company had had enough as they have moved swiftly to buy back shares, a move they started in July. Buybacks have a positive effect as a way of making the company shares look more attractive to investors. Buybacks are a more tax-effective means of rewarding shareholders; returns cash to the shareholders of the company; help the promoters to consolidate their stake in the company; theoretically buybacks tend to improve valuations of companies and a way of saying that the stock is undervalued.
Hopefully, these measures will help the FMCG known for Milo, Maggi and Nescafe get back to winning ways.
Given the heavy investments by the parent company and its huge vault of cash, we would recommend you hold your position in the shares and for new investors to enter the stock.
The Board of Nestle Nigeria Plc has approved a final dividend payment of N28.14 billion representing N35.50 per share for the 2020 financial year at the 52nd Annual General Meeting of the company, held at Ilupeju, Lagos on 22nd of June, 2021.