Article summary
- Nestle Nigeria has recorded a 9.85% quarter-on-quarter decline in profit after tax, amounting to N1.771 billion, driven by a 200% increase in interest expense on intercompany loans.
- The company witnessed a 125.80% surge in finance cost and according to notes to the financials, included in the finance cost is the interest expense on intercompany loans amounting to approximately N5.52 billion in Q1 2023 (2022:N1.84billion).
- The FMCG giant having witnessed a strong 2022 FY for the year ended December 31, 2023, with double-digit growth in both PAT and revenue supported by healthy domestic sales is set to pay a final dividend of N36.50 on May 18, 2023.
Nestle Nigeria Plc has released its unaudited financial statements for the first quarter that ended on March 31, 2023, recording a 9.86% quarter-on-quarter decline in profit after tax, amounting to N1.771 billion.
The decline in the bottom line is attributed to high finance costs, especially interest expenses on intercompany and bank loans.
The company received about N8 billion in intercompany loans and added about N9.8 billion in bank loans pushing the loan book up by about N17.8 billion to N152.58 billionNestle Nigeria conducts business with related parties, and Nestle S.A. Switzerland owns approximately 66.18% or 524,559,457 shares of the company. It procures all its raw materials from overseas and local suppliers through commercial arrangements, including companies within the Nestle Group.
The company’s profitability has been affected by the high-interest expense incurred on its intercompany loans, resulting in a decline in its bottom line. In the 2022 fiscal year, the company reported interest expenses on intercompany loans amounting to N11.402 billion.
However, despite this challenge, the company’s strong operating profit has enabled it to cover its interest expense and achieve impressive returns for shareholders, as reflected in its 161% return in the 2022 fiscal year.
Furthermore, Nestle Nigeria is committed to providing returns to its shareholders, as evidenced by its status as a dividend-paying company. The company has announced its intention to pay a dividend of N36.50 per share for the 2022 fiscal year, which will be disbursed on May 18, 2023, in addition to the interim dividend of N25 per share paid on December 5, 2022.
Company’s operating profit
The company’s operating profit was boosted by a 16% increase in its top-line revenues of N127.970 billion, the highest over the past five quarters. The revenues were boosted by a rise in sales from its Food Strategic Business, which includes the production and sale of Maggi, Cerelac, Nan, Lactogen, and Golden Morn.
Revenues from this segment went from N66.135 billion to N81.176 billion as a combination of better distribution, price adjustments, and improved product positioning helped boost sales.
The company also reported improved sales from its beverages SBU, which includes the production and sale of Milo, Chocomilo, Nescafe, Milo ready-to-drink (RTD), and Nestlé Pure Life. The SBU saw revenues jump to N46.794 billion from N44.090 billion same period in 2022.
Despite the growth in revenues, the company faced a rise in operating expenses as rising inflation, exchange rate, and the new naira note swap policy exacerbated costs. Cost of sales took 59.64% of revenues much improved from 60.77% same period in 2022. But due to the elevated overhead costs, the operating margin was reduced to 22.39% from 23.95% the prior year.
This performance reflects our concerns about the weakening margins, driven by higher expenses, given the current inflationary pressure.
For the rest of the year, we expect Nestle to re-engineer its SBUs to shore up revenue generation driven by brand equity and production processes innovation, so as to be able to revert to positive net cash flow from operating activities.
The company’s successful introduction of the use of local raw materials such as soya bean, maize, cocoa, palm olein, and sorghum, in its production processes, if sustained, would help reduce the high cost of imported raw materials and consequently improve earnings.
