December 25, (THEWILL) – Nestle Nigeria Plc had a good third quarter (Q3) 2021 report (July – September). However, the aching spot of high finance cost has lingered since the year. This would, inexorably, impact on the bottom line and further lower the dividend graph that almost hit the bottom of the trough in 2020.
At a glance, the foremost food manufacturing and marketing company’s revenue haul had a 25.7 percent jump from N71.73 billion in Q3 ’20 to N90.15 billion in the reporting period. At the nine-month level (January – September), the trend was the same: from N212.73 billion in the corresponding period (of the preceding year) to N261.59 billion in the review period, representing a 23 percent increase.
This dragged the bottom line as profit after tax (PAT) rose by 17.5 percent from N10.11 billion to N11.85 billion in Q3 ’20 and Q3’ 21 respectively. For nine months to September 2021, PAT rose to N33.58 billion in Q3 ’21 from Q3 ’20 figure of N31.97 billion. Basic earnings per share (EPS) also moderated upwards to 14.95 kobo in the reporting period from 12.76 kobo in Q3 ’20, a rise of 17.2 percent.
But unlike the top and bottom lines which moderated upwards during the period thus providing a soothing relief from the combined effects of COVID-19 restrictions and the 15-month land border closure, the consumer goods firm is severely pained by the significant upward jump in finance cost. Finance cost (FC), also known as the cost of finance (COF), is the cost, interest and other charges involved in the borrowing of money to build or purchase assets during a given period. This increases operating expenses, reduces profit and dividend payable.
In Q3 ’21, Nestle’s finance costs jumped from N687.58 million in Q3 ’20 to a whopping N2.34 billion in the review period – an increase of 246.6 percent. This mirrors the trend at nine-month level to September 30, which shows a huge spike of 253.7 percent, from N1.62 billion to N5.73 billion in 2020 and 2021 respectively.
Net finance cost, which is finance cost less finance income (such as interest on deposit or foreign exchange gains) was N1.58 billion in Q3 ’21, an upward jump of 245 percent from N458.32 billion in the corresponding period (of the preceding year). As of nine months to September 30, the picture is no less worrying. Nestle’s net finance cost leaped from N923.65 million in 2020 to N4.53 billion in 2021, representing 391 percent.
“The company has a huge problem in its hands. It is running short of cash or expanding above the treasury. No matter the source of the borrowed funds – parent or sister companies or financial institutions, it will have an impact on the profit and, ultimately, lead to lean return on investment, by way of dividend for the investors”, said Abiodun Abioye, a chartered accountant and tax expert. “It shows the company is not generating the quantum of revenue or that the operating cost is ballooning due to several factors”, he added.
This could be gleaned from the firm’s troubling rises in cost of sales (COS), marketing and distribution and administrative expenses.
At the close of business on September 30, 2021, the company recorded a 30 percent increase in cost of sales from N42.52 billion in Q3 ’20 to N55.29 billion in Q3 ‘21. In nine months ending September 30, the cost of sale jumped to N160.3 billion in 2021 from N122.7 billion in the corresponding period, showing a rise of 60.3 percent.
Marketing and distribution expenses as gleaned from the Q3 ’21 report showed an increase in their costs: from N10.93 billion in the corresponding period to N12.12 billion in the review quarter (July – September), or 10.8 percent. Administrative expenses reflect the same trend. It increased from N2.39 billion in Q3 ’20 to N2.94 billion in the quarter being reviewed. This represents an increase of 23 percent. At nine months level, the 60-year-old consumer goods firm in Nigeria recorded N9.55 billion and N8,97 billion in 2021 and 2020 respectively, which shows an increase of 6.4 percent.
Declared dividend dropped by 21 percent in the review period to N28.13 billion from N35.66 billion achieved in Q3 ’20.
When contacted, a member of the Corporate Communications and Public Affairs Department of Nestle Nigeria Plc, who would not want the name published, declined comment.
Nestle is among the Nigeria major Fast-Moving Consumer Goods (FMCG) firms listed on The Exchange that recorded significantly impressive performance in their half year (H1 2021) operations – beyond industry expectations.
Firms in the FMCG sector were badly hit at the peak of the 2020 COVID-19 outbreak. The 15-months land border closure also had its toll on these companies as many could not distribute or export their products. Procurement of raw materials was also severely challenged.
Nestle Nigeria and PZ Cussons reportedly spent weeks on sea while exporting their products to the West and Central African markets following the land border closure. The outcome of these bold but ‘suicidal’ steps was loss of forex earnings, dwindling revenue, contraction of activities and disengagement of workers in some cases. Their ill-fortune also extended to the small businesses engaged in the active supply chain under the backward integration policy.
The fast recovery of the FMCG firms after the double tragedy of the 2020 COVID-19-induced recession and the 15-months land border closure is a ray of hope for the small firms engaged in the backward integration policy. Backward integration is a practice where companies are encouraged to cultivate their own raw materials by purchasing their suppliers or establishing farms to grow produce for their factories.
Operators in the SME space belonging to various sectors, especially agriculture and transportation, have benefited from the policy as the FMCG firms take giant strides in supporting and implementing the policy. Governments at the three levels have also benefited from the measure by way of tax revenue, skill acquisition, infrastructure and technology.
For instance, Nestlé Nigeria plans to engage 5,000 smallholder farmers for the supply of raw materials for its agro-business operations. The initiative, ‘Developing Inclusive Grain Value Chains Project’, is in partnership with IDH— a Sustainable Trade Initiative and TechoServe outfit. According to Nestle, the initiative is a seven-month project that will facilitate the supply of maize, soybeans, millet, and sorghum. It added that the scheme will increase the income of farmers and create a steady supply of locally grown crops as the COVID-19 pandemic disrupted global importation of these materials.
Nestle revealed that the objectives of the project include: working with six small and medium-sized enterprises (SMEs) that aggregate crops and supply them to Nestlé factories; aggregators and sub-aggregators will receive training on proper grain handling, storage, and testing, as well as entrepreneurial and financial skills; while logistics partners will receive training on proper handling and storage of grain during transit.
“You can be sure that Nestle’s high finance costs, which impacts negatively on the top and bottom lines, will have adverse effects on the backward integration. Many of the SME operators will experience a reverse in their fortunes because, especially as lack of enabling environment and hostile operating climate kill Nigerian businesses in their droves,” said Adedoyin.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
