Nestle Nigeria, the country’s leading food and beverage company, has reported a massive loss after tax of N43.068 billion for the first nine months of 2023, mainly due to the impact of the naira devaluation on its foreign currency-denominated balances.
The company, which has been paying dividends to its shareholders consistently for the past five years, is likely to break this record as it faces a challenging financial situation that has eroded its shareholders’ equity and retained earnings.
According to its financial statements, Nestle Nigeria has a net currency risk exposure of $439.98 million, €30.43 million, and CHF 3.35 million, among others, as a result of sales, purchases, and borrowings made in currencies other than its main currency, the naira.
The naira has lost more than 40% of its value against the dollar since June 2023, when the Central Bank of Nigeria (CBN) adopted a more flexible exchange rate regime to attract foreign inflows and improve liquidity in the forex market.
However, the forex market has remained under pressure as foreign investors have largely stayed away from Nigeria due to the uncertainty over the exchange rate policy and the backlog of overdue dollar liabilities estimated at $6.8 billion.
The CBN has also struggled to meet the demand for forex from importers and manufacturers, who rely heavily on imported inputs.
Nestle Nigeria is one of the many companies affected by the forex crisis, as it imports about 70% of its raw materials and packaging materials.
The company’s revenue grew by 18.93% year-on-year to N396.59 billion in the first nine months of 2023, driven by increased sales volumes and prices across its product categories.
However, its cost of sales also increased by 10.88% year-on-year to N243.99 billion, reflecting the rising cost of imported inputs and logistics.
The company’s operating profit rose by 41.17% year-on-year to N91.59 billion, which was offset by a net foreign exchange loss of N127.46 billion on the translation of its foreign currency-denominated balances.
This resulted in a loss before tax of N56.66 billion and a loss after tax of N43.07 billion for the period under review.
The loss after tax also led to a negative retained earnings balance of N42.23 billion, which represents the cumulative net income a company has earned over its existence minus any dividends paid to shareholders.
If a company has negative retained earnings, it has accumulated losses over time rather than profits.
This also adversely affected the company’s shareholders’ equity, which stood at -N41.67 billion as of September 30, 2023.
Shareholders’ equity is the difference between a company’s total assets and total liabilities, and it represents the owners’ stake in the company.
A negative shareholders’ equity implies that the company’s liabilities exceed its assets, which indicates that it is insolvent or bankrupt.
This means that Nestle Nigeria may not pay dividends to its shareholders for the 2023 financial year, as it would violate the Companies and Allied Matters Act (CAMA), which prohibits dividend payments from negative retained earnings or shareholders’ funds.
This would be a departure from the company’s earnings record and consistent dividend payments over the past five years, making it one of the most attractive stocks on the Nigerian Stock Exchange (NSE).
The company’s share price has also been declining since the beginning of the year, dropping by 4.55% as of October 29, 2023.
The company’s trailing twelve-month earnings per share of -N43.22 indicates it is not generating profits for its shareholders.
Nestle Nigeria’s price-to-sales ratio of 1.95 implies that investors place a high relative value on its sales, demonstrating their willingness to pay N1.95 for every naira generated by its sales.
This suggests that investors have high expectations for the company’s future growth and profitability.
However, if these expectations are not met, it could harm the share price and investor confidence.
Nestle Nigeria is not alone in facing the challenges posed by the naira devaluation and forex scarcity.
Other companies in the food and beverage sector, such as Cadbury Nigeria Plc and Unilever Nigeria Plc, have also reported losses or reduced profits due to these factors.
The Manufacturers Association of Nigeria (MAN) has called on the government and the CBN to intervene and provide more forex for manufacturers to import essential inputs and machinery for their operations.
The association has also urged the government to implement policies that would boost local production and reduce import dependence.
Nestle Nigeria has said it remains committed to investing in Nigeria and supporting its economic development.
The company has also said that it is exploring various options to mitigate the impact of the forex crisis on its business and financial performance.
The company has also embarked on various initiatives to increase its local sourcing of raw materials and packaging materials, as well as to improve its operational efficiency and reduce costs.
Nestle Nigeria is optimistic that it will overcome the current challenges and return to profitability and growth in the near future.
Source: Nairametrics
