Nestle Nigeria Q1 profit down 50.8% on weak consumer spending

Nestle Nigeria’s first quarter (Q1) 2015 net income fell 50.83 percent as the consumer goods company continues to grapple with weak consumer spending, security challenges and huge borrowing costs.

Profit was N2.95 billion in the period, compared with N6 billion the previous year, the Lagos-based company said in an e-mailed statement. Sales shrank by 34.40 percent to N27.55 billion.

“We believe the weak topline suggests slow consumer demand as the nation prepared to go to the polls amid high uncertainties,” said Uwadiae Osadiaye, an equity research analyst with FBN Capital in an April 30 note to BusinessDay.

“Beyond this, it also appears that topline growth continues to be challenged by increased competition across various product segments, insecurity in Northern Nigeria and lower discretionary income,” said Uwadiae.

The challenges facing Nestle tell the story of Fast Moving Consumable Goods (FMCG) companies where the fuel hike of 2012 continuously constrained consumer spending.

Nigeria’s inflation rate rose for the fourth consecutive month to 8.5 percent in March, from 8.4 percent the previous month, data from the statistics bureau show.

The menacing insecurity in the North part of the country has also hindered Nestle from fully tapping into the growing Nigerian population that craves consumption.

Nestlé recorded a 166.90 percent increase in borrowing costs to a record N2.33 billion, while total debt in the company’s balance sheet also increased by 29.74 percent to N41.96 billion in the review period.

“Earnings from firms like Nestle and Flour Mills with dollar loan exposures will be negatively impacted in the near term, due to foreign exchange losses on the loans,” said Kayode Omosebi, equity analysts at United Capital plc, in an e-mail note to BusinessDay.

Nestle wasn’t efficient in the management of direct costs attributable to projects as gross profit reduced by 18.03 percent to N12.18 billion in 2015, as against N14.86 billion in 2014.

Net margin, a measure of profitability and efficiency, reduced to 10.70 percent in 2015 compared with 17.95 percent in 2014.

Return on equity (ROE) fell to 7.59 percent in 2015 from 16.76 percent in 2014, as macroeconomic challenges hindered the company from utilising shareholders resources in generating increased profit.

Nestlé’s share price closed at N935.72 on the NSE, while market capitalisation was N741.72 billion.

“We also believe this set of results may spark a sell-off and consequent re-pricing of the stock. Given its position as a bellwether in the sector, we believe the outlook for Nestle is likely to be challenging as we do not see a quick turnaround in the consumer environment,” said Uwadiae.