NESTLE PLC: COST CUTTING DRIVES EARNINGS IN GLOOMY ECONOMY

Recently, Nestle Nigeria Plc presented its scorecard for the first quarter ended march 31, 2016 to the investing community. The result kept to its quarterly and yearly records of improving performance as it out-performed the economy, its sector and the market generally during the period. As a result, it continues to support its record as the highest priced equity on the floor of the Nigeria Stock Exchange. The company's strong numbers and improved performance ratio are also a reflection of the management's commitment to deliver value to consumers, customers and other stakeholders, despite the challenging economic situation. Its consistency in releasing results, expansion of its market within and outside the shores of Nigeria with products innovation, added to effective cost management,have also supported performance and made the company's shares the toast of discerning investors at any particular time during in any market cycle and economic situation. 

The nature of the company's products boosted its performance as top and bottom lines for the period ended March 31, 2016 were up despite the falling purchasing power of many Nigerians.Its array of nutritional products continue to target a wide range of the market from infancy to adulthood. This product lines had over the years ensured that the company posted positive figures of which first quarter 2016 was significant as a result of improved cost, as well as the risk management strategy of the company in recent years.The company's Q1 earnings report is the basis for valuation in the market, compared to the2015 numbers which reveal that the market price dropped by 35 percent to N615.26 each from N950 in 2015. This market price is at the released date of the results.

Nestle Nigeria recorded a 31 per cent growth in sales revenue to N36.13 billion from N27.56 billion in the corresponding first quarter of 2015, despite the weak purchasing power of Nigerians. Its reclaiming of the northern Nigerian market with peace gradually returning to the region and neighboring countries have also impacted its sales revenue.Profitability level, after considering all interest and tax elements also rose by significant 126 percent to N6.68 billion as against the previous N2.9 billion. On the other hand, Net Assets improved by 15 percent to N44.80 billion, from N38.83 billion in 2015

NESTLE NIGERIA
Unaudited First Quarter Result For  Match 31, 2016
COY	2015	2016	% Chg
	(N)	(N)
Date Released	30-April-15	29-April-2016
Price at Released Date	950	615.26	-35.24
Turnover	27,556,355,000	36,130,866,000	31.12
Profit After Tax	2,954,308,000	6,681,389,000	126.16
Shareholders' Fund	38,829,652,000	44,804,367,000	15.39
Dividend	nil	nil
ESTIMATED RATIOS
Earnings Per Share	3.74	8.43	125.40
PE Ratio(x)	63.72	18.25	-71.36
Earnings Yield	0.39	1.37	251.28
Book Value	48.99	56.52	15.37
Price to Book	19.39	10.88	-43.89
ROE	7.61	14.91	95.93
Profit Margin	10.72	18.49	72.48
Year End	Dec	Dec

Source: Company Financial & Investdata Research 

Recommendations

 The leading role being played by the equity in its industry remains a very strong factor in the sustenance of its share price, especially with its recent strong performance at a time many companies issued profit warnings, while some posted negative numbers and others lower earnings compared to their previous year. If the company has shown prudence in its Q1 result in a directionless economy amidst many challenges militating against manufacturers, the possibility of better quarterly and year end result is high, should the management successfully sustain this tempo.  The company in April commissioned it water factory in Abuja axis to service the northern region which in no distant time will start contributing to its bottom line. 

With the impressive performance ratios traders can start looking the way of this stock as the company's share price will be adjusted as the market opens this morning ( May 9, 2016). The current pullback has created a tradable opportunity.Every investors at various levels may consider positioning in the equity for its sure dividend incentives and its defensive natureto support your portfolio. 

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, due to the consistent growth in earnings and expansion. 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, especially income investors.

Nestle Price Action

Nestle is currently trading above its 50 day moving average at N690 which is good.  MACD is also currentlybullish since it is trading above its signal line. The MACD crossed above its signal line 3 period(s) ago.  Since the MACD crossed its moving average, NESTLE's price has increased 1.72%, and has ranged from a high of 712.23 to a low of 678.32.  RSI is reading 65.43 and at the same signaling buy while other technical indicators like CCI and SO are signaling sell. The stock is trading at its two years low with strong financials suggests that major reversal is imminent.

Summary and valuation

Nestle is one of the multinationals in Nigeria that boasts of the best management teams in the beverage industry. The company's impressive performance in the midst of decline in the value of the Naira and harsh business environment is a pointer to where it is headed in this current financial year and beyond. Analysts argue that the market's instability will hit Nestle’s momentum but the recent rally on the strength of its earnings defies such analyst positions. This is because the disposable income of consumers have not influence demand as the economy continues to slow down and this was as a result of the nature of it products which has always attracted sales.

Nestle’s Q1 P/E ratio currently stand at 18.25x earnings and then it is expected to fall below 10.28X by 2017. Paying for quality makes sense in our view and Nestle is one of the best quality companies listed on the exchange. Its Q1 profit margin of 18.49 percent is good and above the 15 percent international standard, just as the return on equity of 14.91 is impressive, being a pointer to the fact that shareholders' funds is being effectively utilized by the company's management. 

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
Open Price (2015)	N995.60
Close Price (2015)	N860.00
Current Price as at ( May 6  2016)	N690.00
Date Listed	20th April, 1979
Year End	31st December

Source: Company Financial & Investdata Research Management

The strategic plans of the board led by Mr. David C. Ifezulike and management team led by Mr. DharneshGordhon  has started yielding results as cost management is driving expansion, production and others as reflected in its Q1 performance regardless of  the challenging business environment facing the economy at large. Despite this harsh climate the company has continued to create value for all stakeholders in its shared valued principle that has kept it ahead of others in its industry and the market.  

Five-Year Financial Analysis

The company has been noted for its consistency in the release of its financials during the period under review, not withstanding this year's slight delay. One must not fail to acknowledge that is was still within the approved time frame. This adds up to its valuation status as it stands sure in portfolio management effectiveness. The market price as at released dates on the other hand experienced an outstanding growth from the N441.00 of 2011 to all high of N1071.00 in 2013 to close at N680 in 2015, the price when the 2015 audited result hit the market last week. Looking at the company’s performance critically between 2011 and 2015, 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 54.42 per cent from N97.96 billion in 2011 to N151.27 billion in 2015; while the profitability level for the same period was up by 41.23 per cent to N23.74 billion, from N16.81 billion recorded in 2011, even when earnings remained almost flat in three of the years under consideration. Within the same period, the economy moved from its gloomy to a recovery stage due to the positive reforms before pulling back to the another depressed economic situation that had befallen the nation.

Meanwhile, Net Assets stands at N38.01 billion up from the N23.49 billion posted in 2011 after recording a high of N40.59 billion in 2013. Dividend grew through the period from N12.55in 2011 to the latest dividend of N29 representing 131.08 percent increase. Please note that dividend reward grew more than the revenue and earnings for that same period which is not too good. Such high payout ratio does not support future payments and expansion. 

NESTLE NIGERIA
FIVE YEARS FINANCIAL PERFORMANCE
YEAR	2011	2012	2013	2014	2015
Ticker	(N)	(N)	(N)	(N)	(N)
Date Released	22-Feb-12	20-Feb-13	26-Feb-14	25-Feb-15	16-Mar-16
Price At Released	441.00	981.00	1071.00	820.00	680.00
Turnover	97,961,000,000	116,707,394,000	133,084,076,000	143,329,000,000	151,271,526,000
PAT	16,808,000,000	21,137,275,000	22,238,279,000	22,236,000,000	23,736,777,000
Net Assets	23,492,000,000	34,185,562,000	40,594,801,000	35,939,640,000	38,007,074,000
DIVIDEND	12.55	20.00	24.00	27.50.	29.00
BONUS

Source: Company Financial & Investdata Research

Five Years Estimated Ratios

The earnings per share of Nestle stands at N29.95 as against the N21.20in 2011. In other words, the growth in earnings power has reduced the investment periods over the years as PE ratio stood at 22.71x from high of 38.17x in 2013. As observed, this is because  the rate of growth in market price has not been same with the growth in earnings, even while shares outstanding remain relatively the same over time. The Book Value of the equity at the end of 2015 stands at N47.95 as against the market price of N680, this simply shows that Nestle's share price is grossly overpriced, but supported by its consistent dividend payment. Long term investors over the years have recouped their investment and continue to enjoy relative capital protection in this stock.

NESTLE NIGERIA
FOUR YEARS ESTIMATED RATIOS
YEAR	2011	2012	2013	2014	2015
EPS(N)	21.20	26.67	28.06	28.05	29.95
PE Ratio	20.80	36.79	38.17	35.49	22.71
Earnings Yield	4.81	2.72	2.62	3.68	4.40
Book Value	29.64	43.13	51.21	45.34	47.95
Return on Equity	0.72	0.62	0.55	0.48	0.62
Profit Margin	17.16	18.11	16.71	15.51	15.69
Year End	Dec	Dec	Dec	Dec	Dec

Source: Company Financial & Investdata Research