NESTLE PLC: WHEN FOREIGN EXCHANGE LOSS WIPES PROFIT

The food and beverage giant, Nestle Nigeria Plc, recently released its half-year earnings report, showing that sales revenue  through its multiple products line and expanding market share, despite the dwindling purchasing power of many Nigerians, going by the nature of it offerings which have always made them consumers' delight.

The company's strong numbers and improved performance ratios in the previous quarter were short-lived in the earnings report under consideration, because of what its management attributed to foreign exchange loss that ate up the bottom line following the new CBN's flexible exchange that had thrown many companies into loss positions. Thecommitment of Nestle's management to deliver value to consumers, customers and other stakeholders reflected on the top line but were daunted by 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 not supported performance, as numbers posted were below expectation. Thishowever is not likely to affect the  company's shares  price much due to company's shareholding structure and long-term position of many  investors in the stock.

The nature of the company's products boosted its performance as sales revenue  for the period ended June 30, 2016 were up.Its array of nutritional products continue to target a wide range of the market from infancy to old age. This product lines have over the years ensured that the company posted positive figures of which first and second quarter 2016 was significant as a result of improved cost, as well as its risk management strategy in recent years.The company's Q2 earnings report is the basis for valuation in the market, compared to the2015 numbers which revealed that the market price  were flat at N850each from N850 in the same period of  2015. This market price is at the released date of the results.

Nestle Nigeria recorded a 22.02% growth in sales revenue to N80.44bn from N65.92bn in the corresponding second quarter of 2015. Its reclaiming of the northern Nigerian market with peace gradually returning to the region and neighbouring countries have also impacted its sales revenue.Profitability level,for the period was seriously depressed by foreign exchange loss after it had grew other income by more than 300% to N817m from N268.71m. On the other hand, Net Assets improved by 13.89% to N35.18 billion, from N30.89 billion in 2015

NESTLE NIGERIA
Unaudited Half Year  Result For  June  30, 2016
COY	2015	2016	% Chg
	(N)	(N)
Date Released	29-July 16	30-July-2015
Price at Released Date	852.13	850	0.25
Turnover	80,442,697,000	65,924,104,000	22.02
Profit After Tax	535,809,000	8,887,192,000	-93.97
Shareholders' Fund	35,180,463,000	30,981,052,000	13.89
Dividend	nil	nil
ESTIMATED RATIOS
Earnings Per Share	0.68	11.21	-93.93
PE Ratio(x)	315.15	18.95	1563.06
Earnings Yield	0.08	1.32	-93.94
Book Value	44.38	38.79	14.41
Price to Book	19.20	21.81	-11.97
ROE	1.52	28.77	-94.72
Profit Margin	0.67	13.48	-95.03
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. Nestle Nigeria'sweak performance came at a time many companies issued profit warnings, some posted negative numbers, while others reported lower earnings compared to their previous year. The lack of direction of the nation's economy has posed many challenges to manufacturers and indeed other sectors of the economy.

Nestle in April,commissioned its water factory in the Abuja axis to service the northern region, an investment expected in no distant time will start contributing to its bottom lineand help reverse this trend.

With the weak performance ratios traders should look away from the stock as there is nothing to drive the company's share price up for now. The possibility of pull back is nontheless high on the strength of this Q2 numbers.

Every investor at various levels must have to consider hold or exit to re-enter later as holding structure of the company and relative small shares in issue may help retain 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 for income investors.

Price Action

Nestle is currently trading above its 50-Day moving average at N850. Currently MACD is bearish since it is trading below its signal line. The MACD crossed below its signal line 14 period(s) ago.  Since the MACD crossed its moving average, NESTLE's price has decreased by 0.25%, and has ranged from a high of N854.00 to a low of 835.00 per share. RSI is reading 64.00 and at the same signaling sell while other technical indicators like CCI and SO are signaling buy.

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 unimpressive performance in the midst of decline in the value of the Naira and the 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 Nestlé’s momentum and its recent result that came supports such analysts' position. This is because unstable and unclear policy direction of the government has kept the  economy in this path of  slow down.

Nestle’s Q2 P/E Ratio currently stands at 315.15x earnings and then it is expected to fallbelow 15.28X by 2017 when things improve in the system and company. Its Q2 profit margin was poor at 0.67  compared to 13.48% which are  below the 15% international standard, 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 ( July 29  2016)	N850
Date Listed	20th April, 1979
Year End	31st December

Source: Company Financial &Investdata Research

Management

The strategic plans of the board and management led by Mr. David C. Ifezulike and Mr. DharneshGordhon has started yielding results as cost management is driving expansion, production and others. This has had however not  reflected in its Q2 performance due to the challenging business environment facing the economy at large.

Five-Year Financial Analysis

The company has been noted for 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 it 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 management.  

Its sales revenue for the period rose by 54.42% from N97.96 billion in 2011 to N151.27 billion in 2015; while profit level for the same period was up by 41.23% 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 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 per share, representing a 131.08% 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-Year 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