Introduction
We forecast that the 2017 financial year might be a slightly more profitable one for Nestle Nigeria Plc than the 2016 financial year was.
The company was able to weather Nigeria’s uncertainties in 2016 better than a lot of other companies did, but the recession did have a down turning effect on the company’s profit. While it recorded a profit, and such profit was significantly lower than that of 2015. This had a regressional impact on both profitability ratios and dividend payment to shareholders.
We however expect that the company should be able to have a good performance into 2017, and record an astounding year, result wise.
Core operations
For its 2016 financial year, Nestle did not record a growth in all of its parameters. While some experienced a growth, some didn’t. First, the company’s ability to earn income during the course of the year improved, and its gross earnings grew by 20.2 per cent to N181.9 billion from N151.3 billion in the prior year. This 20.2 per cent growth rate is as compared to a lower growth rate of 5.6 per cent in 2015.
After deducting operating expenses, administrative expenses and finance costs from the gross profit, Nestle was left with a pre-tax profit of N21.5 billion, and this was one of the levels in which the conglomerate recorded a decline. The N21.5 billion pre tax profit represents a decline of 26.6 per cent over the N29.3 billion pre-tax profit recorded in the erstwhile year, and is as compared to a pre-tax profit growth rate of 19.6 per cent in the preceding year.
After-tax profit also declined over the preceding year’s level by a whopping 66.7 per cent, closing at N7.9 billion, as compared with N23.7 billion in 2015.
Meanwhile, total assets grew over the preceding year’s while the levels of liabilities and equity declined over the prior year’s.
Earnings per share (EPS), at N10.00, was predictably lower than that of the prior year. This EPS was down by 66.6 per cent over the N29.95 recorded before. The company then declared a dividend of N10.00, down from N19.00 declared in 2015.
Profitability ratios
Because the company recorded a higher turnover and this intersected with a lower profit for the 2016 review year, its profitability ratios took a downward dip. It recorded a profit margin of 11.8 per cent during the course of the year, as compared to 19.40 per cent in the prior year. This means that every N100 worth of turnover made a profit of N11.80, as compared to N19.40 in the prior year.
As per return on assets (ROA), the company also did not perform in 2016 as well as it did in 2015, but the results recorded still surpassed industry standards. ROA for the year was 12.7 per cent, down from 24.6 per cent in the prior year. Meanwhile, return on equity (ROE) was 25.6 per cent in 2016, down from 62.4 per cent in 2015. Both ratios were higher than what most other companies recorded for 2016.
In terms of staff matters, the company performed better for the year ended December 31 2016 than it did in the prior year. On the average, each employee contributed N78.23 million to the company’s pre-tax profit, up from N64.22 million in the prior year.
Other ratios
Nestle recorded about the same level of capital adequacy in 2016 as it did in the prior year, and its result did not overshoot industry standards for the period under review. At 63.6 percent, about the same as the 63.9 per cent result recorded in the prior year, the company’s result is however high enough to suggest that its financial strength in the future is still unshakeable.
A common feature of the manufacturing industry for the 2016 financial year is that most companies had high current ratios, having the ability to meet short term liabilities with short term assets. Nestle was one of the exceptions to this rule with a current ratio of 0.81 times, slightly lower than 0.82 times in the erstwhile year.
Having a debt to equity ratio of 4.49 indicates that the company is using N4.49 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using a total capital of N5.49 for every N1.00 of equity capital, higher than the N3.14 used in 2015.
Sustainable growth
For the review year, the company recorded an after tax profit of N7.9 billion, and chose to retain none of it, dedicating all of its profit for dividend for 2016. Thus, there was no retention ratio, as compared to 0.36 times it was in 2015. With a profit margin of 11.8 per cent, a retention ratio of 0 times, an asset turnover of 1.07 times and an asset to equity ratio of 5.49, the company had a sustainable rate of zero per cent. This means that using only the resources it generated, the company had no inherent capacity for growth during the course of the year. It however grew much faster than that, recording an actual growth rate of 20.2 per cent. This was a departure from the prior year when the company had a higher sustainable growth rate as compared to the actual growth rate.
Stock value
Our analysis determines that it the Nestle stock is overvalued. At N1,410.08, it is one of the costliest stocks on the floor of the Nigerian Stock Exchange. First, nets assets per share is only N37.87, and this is much more less the size of the current market price. This is a clear indication of overvaluation. Secondly, the book value to market value ratio is much lower than one, another clear indication of overvaluation. While book value is N30.9 billion, the market value is a much higher N1.12 trillion.
Meanwhile, P.E ratio was a little high at 141 while earnings yield was low at 0.007, both indicators of overvaluation. It is obvious that the company is worth much less in reality than the price it is currently trading at.
While this stock is overvalued, it is however one that pays shareholders regular dividend. For an investor whose aim for investing is dividend, this may be the stock to buy.
Unique strategies
Nestle Nigeria Plc is a food manufacturing and marketing company. The Company is engaged in manufacturing, marketing and distribution of food products, including purified water throughout the country. It operates through two segments: Food and Beverages. The Food segment includes production and sale of Maggi, Cerelac, Nutrend, Nan, Lactogen and Golden Morn. The Beverages segment includes production and sale of Milo, Chocomilo, Nido, Nescafe and Nestle Pure Life.
The company is part of the Nestlé Group that continues to deliver good food, good life for 150 years and still counting. The company began trading operations in Nigeria in 1961 and has since grown into a leading Nutrition, Health and Wellness Company.
Nestlé Nigeria was listed on the Nigerian Stock Exchange on April 20, 1979 and currently has over 29,000 shareholders.
Conclusion
Our analysis shows that the Nestle stock in one that pays dividend, so it is an ideal stock for the investor who is interested in a regular dividend income.
*Source: Nestlé’s 2016 financial report
*The Nigerian Stock Exchange