The current year seems to be presenting Nestle Nigeria with considerable challenges, leading to a break in earnings trends and possibly an anticipated break in its five-year streak of consistently paying dividends to shareholders.
This shift is largely attributed to foreign exchange (FX) losses resulting from the devaluation of the Nigerian Naira.
The recently released 9-month results of the company unveil a loss after tax of N43.068 billion.
This loss led to a substantial negative retained earnings balance of N42.227 billion, which, in turn, adversely impacted shareholders’ equity. As of September 2023, shareholders’ equity stands at -N41.673 billion.
The post-tax loss and the subsequent negative retained earnings balance are likely to have an adverse impact on the company’s capacity to pay dividends for the present fiscal year.
This marks a departure from the company’s track record of earnings and consistent dividend payments over the past five years, underlining the substantial challenges posed by the devaluation of the Nigerian Naira and the ensuing foreign exchange losses.
Retained earnings represent the cumulative net income a company has earned over its existence, minus any dividends paid to shareholders. If a company has negative retained earnings, it means that it has accumulated losses over time, rather than profits.
These losses can result from a variety of factors, such as operating at a loss for several years, accounting adjustments, or one-time events that significantly reduce the company’s net income.
In Nestle Nigeria’s case, the negative retained earnings and its adverse effect on shareholders’ equity can be traced back to a post-tax loss of N43.068 billion in the first nine months of 2023.
This loss is primarily driven by an N127.458 billion in net foreign exchange loss on the translation of foreign currency-denominated balances.
While the primary factor behind the negative retained earnings this year is the foreign exchange loss, it’s equally crucial to evaluate both the bottom-line trend and its current middle-line performance.
This assessment will provide insights into where the impact of the FX losses, started, the trend, and possibly gauge the timeline for recovery.
In this context, in 2022, Nestle recorded retained earnings of N29.773 billion and a shareholders’ equity of N30.291 billion.
Furthermore, over the past five years, the company was able to maintain a consistent profit after tax with a Compound Annual Growth Rate (CAGR) of 2.66%. In 2022, the profit after tax saw remarkable growth, surging by 22.30% to reach N48.966 billion.
For the first nine months of 2023, the company’s performance at both the top and middle lines is indeed impressive, characterized by robust profit margins.
Profit from operations experienced a substantial year-over-year growth of 41.17%, reaching N91.586 billion.
On the bottom line, there is a little recovery as its Q3 post-tax profit stood at N6.913; much better than the loss after tax of N58.692 billion recorded in Q2.
While there is potential for gradual improvement if Nestle Nigeria manages to sustain profitability and effectively handle the foreign exchange loss, it seems likely that the company won’t be able to pay dividends for the 2023 financial year given the challenging financial situation.
While this decision will provide the company with the opportunity to preserve cash and direct its efforts toward resolving the financial challenges, such as reducing and/or eradicating the negative equity and restoring the shareholders’ fund, it might not be viewed favourably by investors in terms of their anticipated total returns.
This is especially worrisome because investors might not only lose out on dividend earnings but also fail to realize any capital gains as the company’s stock price continues to decline.
So far this year, the share price has dropped by 4.55%, and in the preceding year, it experienced a substantial year-to-date decrease of 29.33%.
Furthermore, the trailing twelve-month earnings per share of -N43.22 indicates that the company is not generating profits for its shareholders.
Nestle’s Price to Sales (P/S) ratio stands at 1.95, a figure significantly surpassing Cadbury’s P/S ratio of 0.4. This differential implies that investors place a higher relative value on Nestle’s sales, demonstrating their willingness to pay N1.95 for every Naira generated by Nestle’s sales.
This suggests that investors have elevated expectations for the company’s future growth and profitability.
Also, a price-to-book ratio of 28.78 implies that the market places a high premium on its shares relative to its book value.
Such a high P/B ratio could reflect the market’s strong confidence in Nestle’s future growth and profitability, as well as other factors that contribute to the company’s overall value.
If the expectations are not met it will have a visible effect on the share price, loss of investor confidence, etc.
It is, therefore, necessary that Nestle maintain or achieve the market’s high expectations, especially in the face of macroeconomic headwinds that have led to a loss after tax in the first nine months of the year through improving operational efficiency to reduce cost, manage and reduce unnecessary expenses, etc.
