Nestle PLC: Product Lines Expansion Drives Recovery, Support Returns

       

                                    

Nestle Nigeria's third quarter sales revenue was largely driven by its array of nutrition products that target wide segment of the market from infancy to adulthood. This product lines had over the years ensured the company posted positive figures, especially with the inclusion of wyeth nutritional products.

As the market awaits the full year financial scorecard of Nestle, the most current basis for valuation in the market is the third quarter result for the period ended September 31, 2015. Comparing the result with similar period of 2014 reveals that the market price dropped by 17 percentto N830 per unit from the N999 in 2014.

Meanwhile, the company’s sales revenue rose marginally by 5.2 percent from N102.67 billion to N107.99 billion. Total earnings after considering all interest and tax equally inched north at N17.24 billion as against the previous N16.86 billion. On the other hand, Net Assets was up by 4 percent to stand at N40.22 billion from N38.50 billion.

NESTLE NIGERIA
NINE MONTHS ENDED SEPTEMBER 31, 2015
COY	2015	2014	% Chg
	(N)	(N)
Date Released	26-Oct-15	24-Oct-14
Price at Released Date	830.00	999.00	-16.92
Turnover	107,985,974,000	102,665,387,000	5.20
Profit After Tax	17,236,757,000	16,862,602,000	2.22
Shareholders' Fund	40,223,574,000	38,499,572,,000	4.48
Dividend
ESTIMATED RATIOS
Earnings Per Share	21.94	21.75	0.87
PE Ratio	38.17	46.96	-18.72
Earnings Yield	2.62	2.13	23.00
Book Value	50.75	48.57	4.48
ROE	0.43	0.44	-2.27
Profit Margin	15.96	16.42
Year End	Dec	Dec

Recommendations

Though Nestle's share price may be said to be on the high side by most valuation tools, investor sentiments, financial consistency, frequency of dividend payments in form of interim and full year had made the stock toast of income investors. The leading role played by the equity in its industry remains a very strong backbone to the sustenance of its price. Traders are not expected to venture into this stock, as it does not hold tradable characteristics for now. But any drop in the share price to below N700 would make it attractive for short term players. Investors at various levels may consider positioning in the equity for its sure dividend incentives and defensive nature of the stock. 

It should however be noted that history dating back to 1999 confirms that this equity has experienced various heavy price drops from which it has always recovered. Therefore, even if the price suffers short, medium or long-term pull back, changing your investment strategies to long term remains the best investment decision for Investors.

Nestle Weekly Price Action

Despite the marginal growth in the company's earnings and the N10 interim dividend declared recently, the share price is still trending down, looking for a support level. As mentioned above, anything below the bottom blue line is a good time for traders to position. 

Summary and valuation

Analysts recently argued that the market's instability will hit Nestle’s momentum. This is because the disposable income of consumers will influence demand as the economy continues to slow down.

However, inclusion of nutrition products lifted sales up with underlying sales growth at 5.2 percent.

The third quarter clearly represents only one period and we may yet see a growth in Q4, due to Christmas sales and 2016, if the nation's economic condition improves. It does show, though, that Nestle has, to date, managed to wade through an unfriendly business environment. The overall strategy of the company remains sound as it focuses on products that are essential to human living. This helps to improveits pricing power.

Consumer staple companies like Nestle look expensive against near-term valuation metrics. However, the sector has been resilient and delivered strong long-term results for investors.

Nestle’s forecast P/E ratio in 2016 is around 36.23X earnings and then it is expected to fall to 33.45X by 2017. Paying for quality makes sense in our view and Nestle is one of the highest quality companies listed on the exchange.

History

In 1957, Nestle began trading and distributing its products in the central and West African region, starting in Ghana under the name Nestlé Products Limited. The company then made a strong foothold in Nigeria and in Cote d’ivoire in 1959, followed by Senegal in 1961, before spreading to other neighbouring countries.
The simple trading operation that commenced in Nigeria back then, has today grown into a leading food manufacturing and marketing company. 

Nestle, which was listed on the Nigerian stock Exchange on April 20, 1979 has Nestle S.A. of Switzerland and Nestle CAW Limited, Ghana as the major shareholders, controlling 3.17 and 59.13 per cent respectively. The head office of the Nestle Central and West Africa region (Nestle CWAR) is based in Accra from where it oversees the management of the company’s operations and aligns in 22 countries of the region.

Nestle Nigeria PLC
Share Holding Structure
Nigerians	37.24%
Nestle S.A., Switzerland	3.17%
Nestle CWA Ltd, Ghana	59.59%
Other Statistics
Shares Outstanding (MN)	792,656,252
Opening Price (2015)	N995.60
Current Price as at (Nov 13  2015)	N810.00
Date Listed	20th April, 1979
Year End	31st December

                               

 

Management

Since Mr. David C. Ifezulike and Mr. DharneshGordhon started to oversee theboard and management of Nestle Nigeria Plc in 2013, the company's performance has been oscillating to reflect the challenging business environment facing the industry and the economy at large. Despite this harsh climate the company has continued to create value for all stakeholders in its shared valued principle that had kept it ahead of others in its industry and the market. 

Products

Nestle Nigeria Plc. manufactures, markets and distributes food products throughout Nigeria. The company also manufactures Hydrolysed plant protein mix and other food products based on its local agricultural raw materials under its backyard integration program.Among other products of Nestle Foods are: cereals baby food, food seasoning and beverages, Range of the Maggi brand of food seasoning, Nestle Nutrient, Cerelac, Nan- Baby food, Nestle Golden Morn - Cereal, Nestle Nido, Carnation - Milk and Nestle Milo, Nescafe brand of beverages. The company has a general license agreement with Societe Des Produits Nestle S.A., Nestec S.A and Nestle S.A for the provision of technical and other support services.

Industry

The sector faces many challenges caused by the environment in Nigeria such as poor infrastructure, poor standards of education (in some areas),insurgency, bad roads, erratic power supply, high level of corruption, high Dependency Ratio and a generally low level of disposable income of the population.The industry is generally characterized by wholesalers and distributors. This happens to be the popular method of selling over 70% of total sales within the industry.

Notable players include Cadbury Nigeria Plc, Nestlé Nigeria Plc, UAC Foods, and Wamco Nigeria Plc, of which four are listed on the floor of The Nigerian Stock Exchange. Wampco is currently tradable on NASD floor.In most cases, in other to present products to Nigerians at cheaper cost, large international companies often form alliances with Nigerian companies, to repackage and/or market their products in Nigeria. The essence of this is to reduce the risk of market entry, as well as enable the international company benefit from the existing marketing and distribution capabilities of the Nigerian company.

2014 PERFORMANCE ANALYSIS

Nestle's share price rides on very strong investors confidence built by constant/timely release of financials, good dividend payment, low Share Capital, and good board/management team. Total dividend paid to investors in 2014 was N27.50 per share. Although few of the quarterly results made available to the investing public during the year was below that of the comparable period, they are all in green. Much of its price could only be accounted for by investor confidence/sentiments while only a limited percentage of the market price could be estimated by available figures. As at the end of the 2014 financial year, Nestle closed at N995.60 on the floor of the Nigerian Stock Exchange.

Five-Year Financial Analysis

The management of Nestle Nigeria has been very consistent in the release of its financials during the period under review. This adds up to its valuation status as it stands sure in portfolio management effectiveness. The market price on the other hand experienced an outstanding growth from the N431.55 of 2010 to all high of N1250.00 in 2013 to close at N995.60 in 2014. Looking at the company’s performance critically between 2010 and 2014 – it is evident that there has been a stable up trend performance with positive numbers that reveal the competence of the company’s management. 
Its sales revenue for the period has grown by 79 per cent - from N80.11 billion in 2010 to N143.33 billion in 2014; while the bottom line for the same period was up by 76.45 per cent to N22.24 billion, from N12.60 billion recorded in 2010. 

Within the period, the economy moved from its gloomy state to a recovery stage due to positive reforms before this ongoing decliningeconomicsituation that had befallen the nation.

Meanwhile, Net Assets stands tall at N40.59 billion as against the N14.86 billion posted in 2010. Dividend grew through the period as the last dividend stands at N27.50.

NESTLE NIGERIA
FIVE YEARS FINANCIAL PERFORMANCE
YEAR	2014	2013	2012	2011	2010
Ticker	(N)	(N)	(N)	(N)	(N)
Date Released	25-Feb-15	26-Feb-14	20-Feb-13	22-Feb-12
Price At Released	820.00	1071.00	981.00	441.00	431.55
Turnover	143,329,000,000	133,084,076,000	116,707,394,000	97,961,000,000	80,108,000,000
PAT	22,236,000,000	22,238,279,000	21,137,275,000	16,808,000,000	12,602,000,000
Net Assets	35,939,640,000	40,594,801,000	34,185,562,000	23,492,000,000	14,865,000,000
DIVIDEND	27.50.	24.00	20.00	12.55
BONUS					1:5

Five Years Estimated Ratios

Current EPS of Nestle stands at N28.05 as against the N19.08 estimated from 2010 financials. In other words, investment periods have adjusted over the years observed, since the rate of growth in market price has not been same with the growth in both Earnings and Share Outstanding. The Book Value of the equity at the end of 2014 stands at N45.34 as against the market price of N995.60 this simply shows that Nestle share price is grossly overpriced but supported by it consistent dividend payment.

NESTLE NIGERIA
FOUR YEARS ESTIMATED RATIOS
YEAR	2014	2013	2012	2011	2010
EPS(N)	28.05	28.06	26.67	21.20	19.08
PE Ratio	35.49	38.17	36.79	20.80	22.62
Earnings Yield	3.68	2.62	2.72	4.81	4.42
Book Value	45.34	51.21	43.13	29.64	22.50
Return on Equity	0.48	0.55	0.62	0.72	0.85
Profit Margin	15.51	16.71	18.11	17.16	15.73
Year End	Dec	Dec	Dec	Dec	Dec