Welcome to Results Sheet, a newsletter focussed on the interim and audited results released by companies quoted on the Nigerian Stock Exchange.
Despite being an advocate of fundamental analysis, it is often an onerous task sifting through over 100 pages of financial statements published by companies. To understand the contents, one must be really patient and have the expertise to analyse financial statements and relate the numbers with some of the disclosures contained in them. So, it is quite easy to appreciate why a lot of people prefer to just grab the headline numbers and do not bother with flipping through the pages of financial statements.
This newsletter is for retail investors who are looking for the key details in a financial statement but do not have the time or expertise to read all that wonky stuff. It is also for you, if you are a discerning investor looking for any information that can help bridge the asymmetric hole that is typically the bane of smart investing.
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1. MAIN STORY
Nestle and the Water Factory
Nestle released its first quarter results and as expected, they did not disappoint. Earnings per share was up 2.9% to ₦10.85 compared to ₦10.55. More importantly, revenue rose 10.3% year on year and I am glad for that.
Perhaps you are thinking, “this compares to a 69% rise in revenues in March 2017, so why is 10% so great?” In 2017, Nestle’s revenues were largely driven by price increases and not necessarily volumes. To counter a difficult inflation laden 2016, they had to raise prices. It is also important to note that 2016 was a very low base for Nestle.
So long as Nestle grows its revenue enough to maintain a gross profit margin above 35%, then I believe that they are doing just fine. The company also recently launched a slew of products such as Nestle Milo (ready to drink) RTD, Maggi Naija Pot, and Golden Morn Puffs. We will be tracking these products to see how they are faring in key markets across Lagos.
Nestle also dropped a bombshell in its Q1 results. The company disclosed that it had taken a ₦3.8 billion loss provision on its new Water Factory in Abaji Abuja. This was a rude shock to me as I had all the while thought that the factory was producing already and that the company was starting to make some money from it. According to Nestle, “the expected business growth and gain of market share for the factory has not been realised and outlook for future expansion is below estimates.” The company tested the factory’s facility for impairment and recorded an impairment loss of ₦3.4 billion in respect of related property plant and equipment.
Nestle may have reported a profit of just over ₦13 billion if it had not taken on that provision. Nevertheless, it is a good thing that they have acknowledged the failure recorded in this water plant. Consumer business is very challenging and competitive even if you are a Nestle.
In terms of share price appreciation, Nestle is currently trading at ₦1,596 with a price earnings multiple of 32x and price to book at 27x. This is as expensive as it gets for this stock and I don’t see any more upside, at least until they release their next results. Something inside me suggests that Nestle might raise equity in the nearest future. Most of its loans are related party loans and a conversion into equity may trigger a price rally. Just saying.
2. Cement Co Northern Nigeria (CCNN)
Officially the best performing stock on the exchange, the stock is up 385% in the last one year and still trading at 10x earnings per share. The dilemma here now is whether to still buy this stock or just admit that I lost a massive opportunity to make money. Their latest results provide a guidance so let’s look at the talking points.
The company reported a revenue of ₦5.39 billion up 25%, year on year. Earnings per share also doubled to 86 kobo per share. This is basically in line with the earnings growth recorded in the full year ended December 2017. It is interesting to also note that volumes have been in line with production.
CCNN also has little debt and has ₦2.44 billion in cash in the bank. So is this why the share price has been on the rise? I have seen far cheaper stocks with perhaps better potentials without this sort of capital appreciation.
My gut feeling is that the beneficial owners of the company, BUA Group may be working on a merger deal and investors are taking positions ahead of this announcement. BUA owns about 50.7% of CCNN via its subsidiary, Damnaz Ltd. To forge a merger, they might need to raise the stakes to over 60%. I might be widely wrong but I like to follow my instincts.
3. Diamond Bank postpone the evil day
The tier 2 bank issued a press release last week informing investors about yet another delay in the release of its full-year results. There is a bit of apprehension about what is going on in this bank but from what I gather, the company is likely going to be taking more provisions on its bad loans thus, the back and forth with regulators.
It’s been a tough ride for the bank and indeed investors in this bank. I first bought Diamond Bank shares at ₦7 at a time when we thought they had the SME banking model on lock.
Source: Bloomberg
How time has changed. Uzoma Dozie has been cleaning up some of the mess created in the Alex Otti era while still creating his own mess too. I still have a bit of hope about this stock but not at the current price earnings ratio. I should have this stock on my radar if it drops below 4x price earnings (provided it reports a profit in 2017, which is unlikely).
4. London and Presco’s Biological Issues
The Oil Palm company reported a surprising 25% drop in earnings per share. Earnings dropped to ₦3 per share compared to ₦4 a year earlier. Rummaging through the results, I observed that the problem was with the revenues from CPO (Crude Palm Oil).
The company’s CPO sales to UK dipped by 76% to ₦468 million and affected bottom line. Nigerian CPO sales did rise 13% to close at ₦6.1 billion but it could not make up for the decline in overseas sales. Gains from biological assets also declined to just ₦96k. Presco has over the years relied on this accounting entry to declare profits. Sometimes it works and other times it doesn’t. The latter is what investors are experiencing.
5. Fidelity Bank scouting for more capital
They finally released their earnings during the week and as expected, earnings per share was up 86% to 65 kobo per share. The stock is also up 184% in the last one year and is one of the better performers this year. At a price earnings ratio of 2x, buying this stock is a no brainer. There would be a little more analysis about the results in our subsequent newsletter, so watch-out for that.
The company also announced that it was going to raise capital from the debt market. The bank said that they were looking to raise funds via commercial papers. Last year, they raised $400 million in Eurobonds which they deployed into trade finance and used part to refinance existing loans.
That’s all for the week. Have a profitable week ahead.
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I’m sorry, did you say Fidelity has a PE ratio of about 2x? How’s that?