Nestle: Loss Highlights Worst Performance in 10 Years

Kayode Tokede

Nestle Nigeria Plc reported a modest growth in its revenue for nine months ended September 30, 2023 but the multinational company saw its cost of sales, finance cost and operating grew significantly.

The 2023 financial year may probably be the worst performance of the company in over 10 years. 

The multinational Fast-Moving Consumer Goods (FCMG) company reported a loss before tax of N56.66 billion in nine months of 2023 from N58.39 billion profit before tax in nine months of 2022. Nestle Nigeria also reported a loss after tax of N43.07 billion in nine months of 2023 from N40.15 billion in nine months of 2022.

In 2022 financial year, Nestle Nigeria declared N48.97 billion profit from N40.04 billion reported in 2021. In 2020, it reported N39.2 billion profit; N45.688 billion in 2019 and N43.01 billion in 2018.

The Naira devaluation policy of the Central Bank of Nigeria (CBN), inflation rate and challenging business environment compounded to the FMCG’s profit losses in nine months of 2023, making it worst performance in over 10 years.

As Nestle Nigeria declared N396.6 billion revenue in nine months of 2023, an increase of 19 per cent from N N333.5 billion in nine months of 2022, its outpaced 9.4 per cent growth in total Cost of Sales (CoS) that closed nine months of 2023 at N236.42 billion from N216.199 billion in nine months of 2021.

The revenue generated in Nigeria was at N396.1 billion in nine months of 2023 from N330.6 billion in nine months of 2022, while export closed nine months of 2023 at N488.02 million, a decline of 83 per cent from N2.89 billion reported in nine months of 2022.

Analysts’ Assessment

According to analysts at United Capital Research, “When the exchange rate of a country’s currency is high, its exports become more expensive, which can reduce demand for its products in the global market. This was quite evident in the 83.1per cent decline in the value of Nestlé’s exports (from N2.9billion to N488.0million) in nine months of 2023.

“Nestle Nigeria’s top line expanded at a decent pace (+19 per cent) in nine months of 2023, with revenue from Nigeria accounting for 99.9per cent of the company’s total revenue (N396.6billion) for the period. Strong brand name and preference played a key role in the company’s recorded turnover rate.

“Consumers remained willing to pay a premium for the company’s products. The company tilted more toward a cost optimization strategy, ramping up its local sourcing for raw materials. In June, the food and beverages manufacturer disclosed that its businesses in Nigeria and other African countries have as a priority, increased local sourcing for starch and turmeric, which are key raw materials.

“To that effect, Nestlé disclosed the replacement of imported corn starch with cassava starch (which will be locally sourced). It further disclosed it has invested in the growth and expansion of seven local suppliers, in terms of capacity expansion, to meet its supply needs and backward integration objective.”

The company’s CoS/Revenue stood at 59.6 per cent in nine months of 2023 from 64.8per cent in nine months of 2022. However, gross profit closed nine months of 2023 at N160.17 billion, representing a growth of 37 per cent from N117.3 billion reported in nine months of 2022. From the loss and profit figure, Nestle Nigeria posted N68.58 billion total operating expenses in nine months of 2023, a growth of 31 per cent from N52.41 billion in nine months of 2022.

Operating expenses

The breakdown of total operating expenses showed that marketing and distribution expenses stood at N58.88 billion, a growth of 36 per cent from N43.38 billion in nine months of 2022, while Administrative expenses moved from N9.03 billion in nine months of 2022 to N9.7 billion in nine months of 2022.

The company recorded a significant 41.2per cent climb in its operating profit in nine months of 2023, from N64.9billion to N91.6 billion. Conversely, Nestle Nigeria recorded a whopping 1,625.8 per cent climb in finance cost to N156.53 billion in nine months of 2023 from N9.07 billion in nine months of 2022.

The breakdown of finance cost showed that interest expense on financial liabilities stood at N29billion in nine months of 2023 from N7.38 billion in nine months of 2022 as   net exchange gain on translation of foreign currency denominated balances moved from N1.69 billion in nine months of 2022 to N127.46 billion in nine months of 2023.

Outlook, Investment Recommendation

Meanwhile, analysts as United Capital Research in their outlook for the company added that, “Looking ahead, we expect the Brewer’s revenue to continue to improve, growing by a Compound Annual Growth Rate (CAGR) of 26.7 per cent in the next five years, underpinned by the company’s product superiority. As a result of the enormous foreign currency revaluation loss incurred by the company in nine months of 2023, the company’s bottom line for 2023 financial year is expected to be negative.

“The elevated interest rate environment is also expected to place further strain on the company’s net finance income, underpinned by the company’s capital structure, as a highly levered manufacturer. Given the company’s cost optimization strategy, by ramping up its local sourcing for raw materials, we expect continuous improvement in its operating profit in 2024 financial year.

“Also, FG and CBN’s moves to douse the pressure on the Naira via improving local supply of the Dollar, will continue to stand as an upside for manufacturers in the consumer goods sector. That said, based on earnings forecasts and valuation multiples, we project a target price of N1115.50/share. Investors may opt to HOLD the company’s shares for dividend and growth potentials.”