Nestle Nigeria earnings are stable even amid rising energy cost, supply chain disruption, red-hot inflation, and decrepit infrastructure as the company has the highest Earning before, interest, depreciation, taxation, amortization, and taxation (EBITDA) in the consumer space.
This means Nestle generates enough cash from every Naira of revenue earned and that gives it the leeway to pay bumper dividends that makes its shares an allure to investors.
Investors and owners can get a sense of how much cash is generated for every dollar of revenue earned and use the margin as a benchmark in comparing various companies.
The EBITDA margin, which is calculated as earnings before interest, tax, depreciation and amortization divided by total revenue, is a good indicator of a company’s financial health as it doesn’t consider the effect of unique decisions and tax laws when assessing the performance of a company.
These decisions refer to the recognition of amortization and depreciation, which may differ significantly, even among companies that operate in the same industry.
Nestle Nigeria with a market capitalisation of N1.09 trillion which is the largest in the consumer goods sector recorded an EBITDA margin of 22.85 percent in the first quarter (Q1) of 2021.
And that compares to Dangote Sugar, 17.59 percent; Flour Mills, 11.60 percent; Unilever, 6.69 percent; Nascon Allied Industries, 20.69 percent; UACN of Nigeria, 8.21 percent; PZ Cussons, 4.92 percent, and Cadbury, 11.66 percent.
A well-diversified and the essentiality of the products combined with focus and market penetration strategies have helped Nestle to generate profit from core operations more than peer rivals for over two decades.
Of course, the company like other consumer goods firms benefited from price increases across products which compensated for rising input costs.
Companies have been passing rising costs to consumers in the form of higher prices, but the fear is that consistent hikes are deleterious to beleaguered consumers whose disposable income has been squeezed by high transport fare and spiraling utility bills.
“For Nestlé Nigeria Plc, the cost pressure was more locally driven as 80.0 percent of raw materials were sourced domestically,” said analysts at Afrinvest Securities in a note to clients.
“This came on the back of elevated price levels in 2021 driven largely by high prices of agricultural products. Consequently, this snowballed to elevated raw material costs for companies with agricultural produce as key inputs,” said the analysts.
Also, Revenue from beverages is a major driver of Nestle’ revenue. The share of beverages has increased over the last three years to 40.80 percent and contributing an average of 5.40 percent to growth in revenue, higher than the average for the food segment.
Analysts at Chapel Denham Ltd have maintained their BUY ratings on Nestle’ stocks.
“Nevertheless, we expect the recent price increases, product innovation, and improved product mix to sustain revenue growth over FY-22,” said the analysts.