Bamidele Famoofo 
Nestle’s debt rises 78% to N71bn
BUA records 51% growth in admin expenses
Unilever’s food business shrinks
Despite rising cost of doing business in the country, leading conglomerates have continued to grow revenue and profit, boosting the chances of their shareholders to earn fair returns on their investments. Bamidele Famoofo reports.
Financial performance of leading conglomerates listed on the platform of the Nigerian Exchange Limited (NGX) for third quarter ended September 30, 2021, suggests that there are prospects for their shareholders to make money at the end of the season. The performance also is an indication that manufacturers have devised ways to tackle the challenge of rising cost of doing business in the country.
Analysts at Cordros Research noted that there are better days ahead for the manufacturers as well as their shareholders as macroeconomic conditions continue to improve in the last quarter of the year. Financial pundits have also attributed the gains to leveraging on economics of scale for some of the conglomerates.
BUA
For BUA Cement Plc, lower net finance cost, top-line growth propels earning in the audited financial period ended September 30, 2021, according to estimates from Cordros Research. BUA reported profit after tax (PAT) growth of 23.2 percent year-on-year (y/y) to N65.91 billion while EPS printed N1.95 (+23.2% y/y). The growth in EPS was due to the strong top-line growth of 19.4 percent and moderation in net finance cost (-63.5% y/y), both of which outweighed the increases in cost of sales (+17.3% y/y) and operating expenses (+31.4% y/y). The leading cement producer grew revenue by 13.3 percent y/y in third quarter as against 19.4 percent in nine months ended September 30, 2021.
“Although management is yet to provide details behind the double-digit growth in revenue, we imagine that sustained private sector demand combined with the upward adjustment in cement prices, implemented at the start of the year, supported the top-line performance,” Cordros noted. At the half year (June’21) conference call, management disclosed that the increase in price per tonne (+10.6% y/y) was due to reduction in the discounts offered to key distributors. Meanwhile Analysts said the action must have been induced by the need to mitigate the impact of the local currency devaluation on margins.
Revenue growth in BUA outstripped the growth in cost of sales ex-depreciation and operating expenses (OPEX) ex-depreciation. The surge in OPEX was due to growth in admin expenses which stood at 50.8 percent y/y in Q3-21, reflective of the impact of the increment in wages and salaries. As a result, the trickle down impact of the revenue growth on margins was limited as margin rose marginally by 0.6ppts to 48.4 percent in Q3-21. BUA’s earnings were also lifted by the steep deceleration in net finance cost (-81.7% y/y in Q3-21), following the decline in interest expense (-80.5% y/y) even as finance income moderated (-69.5% y/y in Q3-21).
The decline in interest expense is traceable to gains from refinancing expensive debts in the prior year given the low yield environment. Further commenting on the result, Cordros disclosed: “We are impressed with the margins delivered by the company despite energy cost pressures caused by the local currency devaluation amidst high inflationary pressures. We expect private sector demand for cement to remain healthy in Q4-21 as macroeconomic conditions continue to improve.”
Nestle
Nestle Nigeria Plc, Nigeria’s leading foods and Beverages Company recorded a solid top-line growth which lifts its earnings in the review period. The result showed a 17.2 percent y/y growth in the company’s earnings per share (EPS) to N14.95 in Q3-21 compared to N12.76 in Q3, 2020, on the back of solid top-line growth of 25.7 percent y/y. The board has proposed an interim dividend of N25/share translating to a yield of 1.8 percent on the last closing price of N1, 405 /share (26th October). Revenue grew solidly by 25.7 percent y/y in Q3-21, representing the highest quarterly growth since Q3-17. On a quarter-on-quarter basis, revenue also grew by 7.1 percent.
The growth is underpinned by substantial growth across the company’s Food and Beverages segments. “Based on our channel checks, we believe a c. 5.0% price increase in Maggi retail prices supported the growth in the food segment. For the beverage segment, higher sales volume drove the growth in this segment, with product prices in this segment broadly unchanged,” Analysts noted.
The higher cost of sales reflects the pass-through impact of elevated inflationary pressures on raw material costs as the company sources about 80 percent of its raw materials in Nigeria. Nestle’s higher operating expenses were triggered by an increase in the administrative and selling & distribution which increased by 22.7 percent and 10.9 percent respectively y/y. Nestle’s earnings were tempered by a 240.3 percent y/y surge in net finance costs as a faster increase in finance costs masked the increase in finance income which stood at 228.4 percent.
The surge in finance cost was underpinned by the rise in interest expense from N1.62 billion in Q3-20 to N5.17 billion in Q3-21 following increased borrowings during the period. The company’s total debt increased to N71.72 billion as of 9 months in 2021 from N40.21 billion in the same period in 2020. In addition, a net foreign exchange loss of N562.84 million contributed to the woes. Notwithstanding, PBT grew by 18.2 percent y/y to N18.21 billion in Q3-21as againstN15.4billion in Q3- 20. Following a tax expense of N6.35 billion, PAT printed N11.85 billion as against N10.11billion in 2020.
Cordros noted that although Nestle’s Q3-21 revenue growth remains supported by low base effect, it marked the fifth consecutive quarter of top-line expansion. “Over the medium term, we believe the revenue growth is sustainable given the gradual pickup in the food segment amid stiff competition from unlisted brands. However, concerns remain on the growing finance costs arising from the increase in foreign currency debt amid the weakening naira,” Analyst said.
Unilever
Unilever Nigeria Plc sustained its earnings on higher revenue and finance income in the review financial period ended September 30, 2021. Unilever published an EPS of N0.06 as opposed to a loss per share of N0.27 recorded in Q3-20. The positive performance was supported by a 12.5 percent top-line growth and a surge in finance income (+284.0% y/y).
Revenue grew by 12.5 percent y/y to N19.73 billion in Q3-21, primarily driven by strong revenue growth in the HPC (+33.2% y/y) segment. Analysts attributed growth in this segment to increased investment in its distribution network, which drove strong volume growth and marginal price increases in some core categories. Meanwhile, the company’s food segment contracted for the first time in five quarters, owing to intensified competition from cheaper substitutes in the seasonings market.
Notably, sales cost surprised positively during the period, declining for the first time in five quarters at -0.6 percent, despite the heightened operational challenges facing companies in the sector. Analysts explained that given that the company imports about 50 percent of its inputs, they believe the reduction in cost of sales was underpinned by reduced exposure to the spiking rate at the parallel market.
The company’s higher operating expenses were linked to the 18.1 percent y/y increase in marketing and administrative expenses amid the decelerating impairment loss on trade receivable. It recorded a net finance income of N133.03 million in the period (vs net finance costs of N584.16 million in Q3-20). The outturn was driven mainly by a 284.0 percent y/y increase in the finance income, in the absence of finance costs. Overall, the company recorded a PBT of N385.77 million as against Loss Before Tax of N1.54 billion in Q3-20). Following a tax expense of N17.79 million, PAT printed N367.98 million.
