Wednesday August 11, 2021 / 6:00 PM / by Iyioluwabomi Onakoya, Proshare research intern / Header Image Credit: Nigeria Premium Hours

Nestlé Nigeria saw its net profits for the first half of 2021 take a slight hit as the company faced a one-third of one hundred percent increase in its cost of goods sold. Rising input prices and greater supply chain disruptions due to insecurity in the agricultural belt put a damper on the company’s operating profits. The food drink maker saw its input costs increase by 31% between January and June 2021.

On the positive side, its net sales increased by a fifth or 21. But that was swallowed up by a 260% increase in finance charges and a 6% drop in finance income. Analysts are observing that there are signs the company has slipped into a widening debt hole, representing a more than 700% increase in the size of the company’s debt year-over-year. the other (YoY). The peak in corporate debt will continue to weigh on profitability if management cannot find ways to reduce short-term commercial borrowing.

The bittersweet debt and liquidity

As previously reported, the baby food maker is trapped in debt, which portends a tightening of corporate liquidity. The company’s current ratio (a measure of operating liquidity or cash availability) is approximately 1 compared to the preferred analytical ratio of 2. The preferred ratio would mean that for every Naira of current liabilities, the manufacturer had N2 short-term cash available to repay short-term loans and advances.

While the ratio of 1 is considered manageable by some business analysts, others believe it cuts the beverage maker’s debt service capacity to the bone. Investors in the company may demand that Nestlé management take a more critical look at the manufacturer’s liquidity shortage. The options open to the company would appear to be to raise equity capital to improve the company’s debt ratio or to propose the conversion of part of the current outstanding debt into new equity through a convertible debt issue. Analysts said the company is expected to do so at a potential interest rate that is lower than the company’s current average cost of debt. This move could reduce its weighted average cost of capital and improve equity valuation.

Analysts further note that the devaluation of the national currency during the year and the rise in the headline inflation rate also contributed to negatively affect Nestlé’s results in the first half of 2021.

Highlights

• Profit before tax (PBT) decreased slightly by -1.43% to 33.38 billion naira in the first half of 2021.
• Turnover increased by + 21.57% to N171.44 billion in H1 2021 against N141.03 billion in H1 2020.
• The cost of sales was + 30.95% higher than 105.01 billion naira in the first half of 2021 compared to the figures for the first half of 2020.
• The financial cost increased year-on-year by + 262.15% to 3.39 billion naira in the first half of 2021.
• Financial income fell by -5.81% tonne444.62mn in H1 2021.
• The company’s total assets increased by + 35.77% to N262.79 billion in the first half of 2021.
• Total debt increased by + 787.13% to 51.91 billion naira in the first half of 2021.
• Earnings per share down -0.40% at N27.42 in the first half of 2021.

Stock Price Movement – Looking Down Hopefully

The Nestlé Nigeria share price was 1,505 N in January 2021 before falling to 1,450 N in February, then declining slightly by -6.9% at N1350 in March. Between March and June, the share price remained below 1,420 naira. However, it increased by + 10% in July at N1.540. The year-to-date share price movement (YTD) has increased by + 2.33% at N1540 as of Aug 2, 2021. Share price volatility during the period was associated with corporate disclosures by the company and investor sentiment towards the stock (see the table 1 below).

Graph 1: Movement of Nestlé Nigeria YTD share price as of August 2, 2021

Source: NGX, Proshare Markets

Turnover – The ups and downs of the business

The company’s turnover was trending up between H1 2017 and H1 2020. It recorded a brief decline in H1 2020 but recovered in H1 2021 while turnover increased by + 21.57% between H1 2020 and H1 2021. The significant increase in turnover is driven by a + 22.58% increase in the value of goods sold in Nigeria compared to a decrease in –25.9% of export earnings in the first half of 2021 (see the table 2 below).

Graph 2: Nestlé Nigeria H1 2017 – H1 2021 YTD revenue (N’bn)

Source: Nestlé Nigeria Financial Statement, Proshare Research

Profit Before Tax – A Drop and a Fear

In the first half of 2021, Nestlé Nigeria’s PBT contracted slightly year-on-year by -1.43% to 33.38 billion naira despite the + 9.1% increase in gross margin; this was probably due to the + 262.15% soaring financial costs.

Nestlé Nigeria’s pre-tax profit increased by + 36.47% between H1 2017 and H1 2021. The company has gone from registering a + 30.31%surge in PBTs in the first half of 2018 and a + 26.87% increase in the first half of 2019. The past increase decreased by -16.26% in the first half of 2020 due to a recession induced by the Coronvirus (see the table 3 below).

Graph 3: Nestlé Nigeria Profit before tax YTD H1 2017 – H1 2021 (N’bn)

Source: Nestlé Nigeria Financial Statement, Proshare Research

Current Ratio-The Liquidity Chokehold

Nestlé Nigeria’s current ratio has steadily declined by +0.86 in H1 2019 at +0.79
in H1 2020. Nonetheless, the company’s ratio improved to +1.01 H1 2021, indicating that it was still swimming in shallow liquidity waters. The company’s low liquidity is becoming an increasingly important consideration. Indeed, market analysts note that it addresses the challenge of corporate sustainability in an environment of high inflation rates and rising input costs with declining disposable income for consumers.
(see the table 4 below).

Graph 4: Current ratio of Nestl̩ Nigeria H1 2017 РH1 2021

Source: Nestlé Nigeria Financial Statement, Proshare Research

QUick ratio

Analysts note that Nestlé’s more rigid liquidity or acid test ratio has fallen in two consecutive quarters in the first half of 2019 and in the first half of 2020 to +0.62 and +0.48, respectively. The relatively higher rapid ratio observed in the first half of 2021 showed that the company has improved its current assets, significantly its cash and cash equivalent balances, despite the increase in inventories (inventory of finished and intermediate goods in the warehouse). Nestlé inventories increased by + 47.92%
YoY, resulting in its quick ratio of 1.01, which was an improvement over the first half of 2020 figure but did not hit the preferred 2 that many analysts would have considered more comfortable (see the table 5 below).

Graph 5: Nestl̩ Nigeria Rapid Ratio H1 2017 РH1 2021

Source: Nestlé Nigeria Financial Statement, Proshare Research

Debt to Equity Ratio – Borrowing in Tough Times

The latest Nestlé debt figures are slightly numbing. Its debt ratio soared in H1 2021 to 227.26% against 18.48% in H1 2020. The increase in gearing was largely attributed to a + 787.13%
increase in its total debt while its total equity decreased by -27.88% YoY.

Available data shows that the fast moving consumer goods company (FMCG) suffered high leverage as early as the first half of 2017, when its debt ratio was 101.51%. The high debt a year earlier was followed by a sharp reduction in the first half of 2018 and in the first half of 2019 to respectively 39.27% ​​and 13.98% (see table 6 below).

Graph 6: Nestl̩ Nigeria Leverage Ratio H1 2017 РH1 2021

Source: Nestlé Nigeria Financial Statement, Proshare Research

The beverage giant’s share price on August 2, 2021 rose by + 2.33%
to N1540 against N1505 in January. the + 2.33% The rise in the share price sent a positive sentiment to the stock market despite the -0.40% decrease in earnings per share (eps). With heavy debt around their necks, Nestlé executives would have to do more than create positive sentiment in the market if they are to avoid a negative reaction from shareholders at the next Annual General Meeting (AGM).

Harsh times are obvious, but with the pains of COVID-19 disrupting the livelihoods of shareholders, the bloody stories of business difficulties are unlikely to be greeted with the usual calm understanding.

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