How Forex, Tax Frustrated Nestlé Nigeria Plc in 2016

March 24, 2017
How Forex, Tax Frustrated Nestlé Nigeria Plc in 2016

How Forex, Tax Frustrated Nestlé Nigeria Plc in 2016

By Modupe Gbadeyanka

The year 2016 would go down as an annus horribilis in the annals of Nestlé Nigeria Plc as the company posted its lowest EPS (-67% YoY to N10) in eight years even as the stock price declined to multi-year lows as noted by ARM Securities in its earlier report.

According to ARM Securities, as with the broader economy, Nestlé’s result was weighed down by fall-out from the 53 percent Naira depreciation which cascaded into N16.3 billion in FX losses over 2016.

In addition, the expiration of tax holidays on its Agbara factory drove a 44pps YoY jump in effective tax rate to 63 percent.

Accordingly, Nestlé reported a weighty decline in dividend per share of N10.00 (-67% YoY) which translates to a dividend yield of 1.3% using last trading price.

Going into 2017, the key risk for Nestlé remains the sizeable FX exposure on its books which comprises FCY loans to its parent and trade payables.

In addition, continued rise in domestic grain prices, which drove gross margin pressures in 2016, poses downsides to earnings.

As earlier stated by ARM Securities, Nestlé booked N16.3 billion in FX losses, housed under finance expenses, following Naira depreciation over 2016.

The FX losses stemmed from sizable Dollar borrowings, which rose 27 percent YoY to $152 million (92% of total debt).

Nestlé noted that an illiquid FX market compelled the company to acquire a one-year $40 million loan1 from its parent company (Nestlé S.A) to address working capital needs.

Furthermore, Dollar paucity forced Nestlé to seek extended credit terms from related parties (+182% YoY to N38.6 billion) which underpinned the jump in trade payables to record levels

(+76.4% YoY to N64.7 billion).

Over FY 16, Nestlé paid $15.1 million to related parties as part repayment on FCY loans owed while cash rose four times to multi-year highs of N51.4 billion presumably being stockpiled to acquire needed FX for loan repayments of N38.3 billion due in 2016 and 2017.

As earlier stated, higher effective taxes over 2016, following the expiration of pioneer tax holiday on its on Flowergate factory at Agbara, piled more pressure on earnings. The development drove a steeper contraction in post-tax earnings (-67% YoY) relative to pre-tax (-25% YoY).

In addition to FX and taxation issues, Nestlé struggled with rising input costs as elevated West African demand for Nigerian grains, a by-product of naira weakness underpinned an upswing in prices of key inputs YoY (CPO: +250%, sorghum: +150%, Maize: +108%).

To combat input cost inflation (COGS: +27% YoY), Nestlé implemented price increases of 30%-40% across its product portfolio (particularly Maggi and Milo which comprise ~75% of revenue) which translated into double digit growth in revenues (+20.3% YoY) largely buoyed by its food segment (+25.4% YoY).

Nonetheless, relative to the inflation in grain prices, the price hikes paled in comparison, which resulted in gross margin compression to four-year lows of 41 percent.

Going into 2017, as with most FMCGs, Nestlé guides to pushing through further price hikes to offset the inflationary pressures. That said, softer real income levels2 should result in subdued volume growth and as such we see topline growth pulling back from the 2016 heights. Specifically, we look for a 14.5 percent YoY increases in sales to N208.3 billion as we think Nestlé’s defensive product portfolio and relatively better pricing power should help weather the macro headwinds to consumer purchasing power.

In terms of input costs, we expect grain prices to remain elevated over H1 2017 due to higher regional demand for domestic grains (such as maize and sorghum) on the back of relative weakness of the Naira (NGN) vis-à-vis other West African currencies. However, towards H2 2017, we expect regional demand for local grains to moderate as improving FX liquidity drives naira appreciation at the parallel market and reduces bargaining power of local suppliers.

Source: www.armsecurities.com.ng

“All rights reserved. This publication or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of ARM Securities Limited.”

Modupe Gbadeyanka

Modupe Gbadeyanka is a fast-rising journalist with Business Post Nigeria. Her passion for journalism is amazing. She is willing to learn more with a view to becoming one of the best pen-pushers in Nigeria. Her role models are the duo of CNN's Richard Quest and Christiane Amanpour.

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