Nestle Nigeria’s balance sheet position strength, product innovations and brand durability means it is in a better position to overcome the headwinds and still deliver returns to shareholders.
It is the largest consumer goods firm in Nigeria, which has delivered growth in bottom-line over the last decade.
The resilient performance has largely been supported by key factors including: strong and stable demand for the company’s products; consistent investment in brand development and expanding route-to-market initiatives and consistent dividend payment, with an average pay-out ratio of 98 percent over the last five years.
Because most of the products in its brand portfolio are essential goods, Nestle was able to magnify sales even amid the stringent lockdown imposed by the government to curb the spread of the coronavirus pandemic.
Analysts have been saying that investors should start paying attention to the consumer goods giant with a solid working capital position and enough liquidity to meet short term obligations.
The company recorded 24.07 percent growth in sales to N87.25 billion in the first three months of the year, the fastest expansion at the top line in the industry.
Interestingly, Nestle is effective in converting sales into cash as cash margin increased to 36.12 percent in March 2021 from N31.23 percent the previous year.
An increase in operating cash flow margins indicates that free cash flow is improving, and that the firm has the financial strength to expand its asset base and create long-term value for shareholders.
Nestle cash flow from operating activities rose by 46.32 percent to N31.40 billion in the period under review from N21.46 billion as at March 2020.
While peer rivals are falling off the cliff and seeing margins deteriorate with alacrity, Nestle saw net income increase by 10.76 percent to N12.40 billion in the period under review from N11.19 billion the previous year.
Interestingly, the company has enough cash left to cover interest expenses as operating profit spiked by 15.83 percent to N20.31 billion as at March 2021.
“I am inspired by the way our team has performed under difficult circumstances. With three more quarters still ahead of us, we will continue to drive sustainable growth despite the challenges of the COVID-19 pandemic,” said Wassim Elhusseini, managing director and CEO of Nestlé Nigeria Plc.
“With the roll-out of COVID-19 vaccination in progress, we are optimistic that the business environment will continue to improve. Our priorities will remain keeping our people safe, assuring continued supply of essential nutritious food and beverages to consumers and caring for our communities and business partners, said Elhusseini, said Elhusseini.
While there has been marked improvement in earnings, Nestle is facing challenges on different fronts.
Of course, the consumer goods firms are the hardest hit from the Covid-19 crisis and difficult business environment.
The sector has been at the receiving end of poor regulations, rising inflation that erodes consumer purchasing power, decrepit infrastructure, and currency devaluation that is ballooning cost of production.
Nigeria’s unemployment rate rises to 33.30 in the three months to December 2020, the second highest on the global list. That’s up from 27.10 percent in the second quarter of 2020, according to a recent data from the National Bureau of Statistics (NBS).
Nigeria’s inflation rate for the month of March 2020, rose to 18.17 percent from 17.33 percent recorded in February 2021. This represents 0.82 percent points higher than the February figures.
The country’s misery index is at 51.50 percent, which makes it rank among the six most miserable countries in the world.
Nigeria’s Gross Domestic Product (GDP) grew by 0.11% (year-on-year) in real terms in the fourth quarter of 2020, representing the first positive quarterly growth in the last three quarters.
There are indications that the consumer wallets will be under pressure this year as the government mulls hike in pump prices as it is poised to deregulate the downstream oil and gas industry.
At the start of the year, the Federal government implemented a VAT hike of 50.0 percent to 7.5 percent in Feb-2020. Shortly after, the Covid-19 pandemic hit, leading to job losses and wage cuts.
However, analysts say there is light at the end for consumers as they expect gradual economic recovery to underpin their pockets.
“Looking ahead, we see little respite for Nigerian consumers. While we believe that increased economic activity will marginally improve household income, cost pressures on household consumer baskets will dampen any growth,” said analysts at United Capital Limited in a recent to clients.
“A further electricity tariff hike is likely by Jun-2021 and despite the resistance to the PMS price hike, we believe a hike is inevitable in the mid to long term. Also, food prices continue to soar as FX challenges remain. Overall, in the short-term, the outlook looks grim for the Nigeria consumer; however, sometimes it is darkest before the dawn.”
Again, the government is mulling slashing salaries of civil servants to maintain a level of fiscal sustainability as the vagaries of crude oil price continues to undermine its revenue.