The review of the financial statements of key players in the fast-moving consumer goods space – Nestle, Unilever and Cadbury, revealed that these firms reported improvement in their top and bottom-lines in 2018, but these failed to rub-off on their market performance.
Key metrics such as operating margin, profit margin, return on asset & equity, cost-of-sales to revenue ratio, price-to-earnings ratio and share price movement were employed to assess the financial health of these companies.
Operating Margin
Nestle outshines peers by making enough money from its operations to pay its variable cost. While Nestle retained N23 from every naira of revenue, Cadbury and Unilever kept N5 and N10 respectively as profit before settling interests and tax.
According to Gbolahan Ologunro, research analyst at CSL Stockbrokers, this is so as Nestle source a large chunk of its raw materials like sorghum, maize, soya beans, sugar, cassava and cocoa locally, which minimizes the adverse impact of currency depreciation which bodes well for operating margin.
Operating margin measures what percentage of revenue is made up by operating income. In other words, it demonstrates the strength and profitability of a company’s operations.
Going year-on-year, only Cadbury saw bettered operating margin of 257 points to 4.72 percent in 2018 against 2.15 percent a year earlier, Nestle’s margin pared slightly to 22.77 percent in 2018, masking 4 basis points decline from 22.81 percent in 2018.
Unilever got the worst hit among three as margin dropped some 446 basis points to 9.9 percent in the review year compared with 14.36 percent in 2017. We discovered this was an aftermath of operating profit dipping nearly a quarter to N9.2 billion in 2018 from N12.2 billion in the prior year on elevated operational expenses.
Profit Margin
Growth investors picture this metric to assess the profit-generating capacity of firms. Profit margin represents how many naira of profit the businesses generated for each naira of sale.
The three firms grew their profit margin in the review period, with Unilever leading the 2.58 percent points rise, trailed by Nestle (2.34pcts) and Cadbury (1.38pcts).
Nestle and Unilever kept N161 and N110 respectively from each thousand naira of revenue in full year 2018 compared with N138 and N87 retained in 2017.
We found that the firms were able to grow their profit margin given their improved top and bottom lines in 2018. Cadbury’s after-tax profit surged buoyed by reduced expenses. Unilever and Nestle’s bottom-line grew 28 percent and 40 percent year on year respectively.
Return on Asset (ROA)
The three firms posted improvement in their capacity to earn profit from assets. The ROA gives investors an idea of how effective the company is in converting the money it earns. The higher the ROA figure, the better, because the company earns more money on less investment.
Our analysis showed that Nestle generated more profit per naira assets than Cadbury and Unilever.
Nestle converted N260 to profit from every thousand naira invested in assets in 2018, compared with Unilever (N80) and Cadbury (N30). Comparing 2018’s ROA with that of previous year, Nestle led the pack with 3.52 percent points, followed by Cadbury (1.93 pcts) and Unilever (1.83pcts).
Return on Equity (ROE)
Our analysis revealed that the three firms recorded improvement in their ability to generate profit from equity financing, with Nestle leading the pack with 10.3 percent points, Cadbury (3.94 pcts) and Unilever (2.89 pcts).
ROE provides investors with insight into how efficiently a firm is handling the funds that shareholders have contributed to it.
Nestle generated 86 percent in profit for every naira of shareholders’ equity in the review period, and this compares with Unilever and Cadbury that made N13 and N7 respectively.
Nestle’s high ROE figure is due to the fact that its 69 percent of its capital is majorly financed by debt, implying that it uses less shareholders’ equity (31 percent), compared with Cadbury and Unilever in which equity accounted for 46 percent and 63 percent of their capital structure.
A high level of debt can artificially boost ROE because the more debt a company has the fewer shareholders equity, and the higher its ROE.
Cost-efficiency
We used cost-of-sales to revenue ratio metric to capture cost-efficiency. This metric measure how productive or efficient a company’s sales operation is.
Nestle was more cost efficient than peers in the review period, as production cost accounted for 57 percent of revenue, compared with Unilever with 70 percent and Cadbury, 78 percent.
“In terms of cost-efficiency, Nestle enjoy economies of scale from their wide range of products that gets to the market, underpinned by their route to market strategy”, said Ologunro.
Year-on-year comparison showed that Unilever recorded the biggest decline in the share of production cost in revenue from 67.7 percent to 69.62 percent in 2018, that of Cadbury declined by 0.36 percent points from 77.88 percent in 2017, while Nestle posted 1.47 percent.
Stock Performance
Cadbury got the heaviest blow among peers in the 2018 bear rout, which saw the entire equities market decline some 17 percent as a result of massive foreign outflows driven majorly by policy normalization by the Federal Reserves and heightened political risks related to 2019 general election.
Nestle and Unilever lost 4.56 percent and 2.21 percent in value respectively in 2018.
Cadbury’s year-to-date return which stood at 10 percent after Tuesday’s trading, outperformed peers, and the benchmark index, which lost some 5 percent since the start of 2019.
However, the improved figures posted the firms in the review period failed to reflect in their stock performance, an indication that investors want more than better scorecards before taking positions.
Price to Earnings ratio
Among the three fast moving consumer goods, price to earnings ratio was lowest for Cadbury at 0.23x compared to Nestle (27.31x) and Unilever (20.11x) in 2018, indicating that Cadbury is the cheapest among peers.
The price to earnings ratio is a valuation metrics that show how much investor are willing to pay for one naira of a company’s earnings. It is computed by expressing the company’s share price as a proportion of its total earning.
A high P/E compared to peers and the industry means that a stock is overvalued while a low P/E ratio is undervalued. A high ratio also means investors expect a higher growth in future.
Nestle traded 27 times its earnings, compared with Unilever in which investors were willing to invest 20 times in its stock for each naira of earnings, an indication that both stocks were overpriced in the review period.
Price to Book ratio
Price to Book is a valuation metric used to determine whether a stock is overpriced or underpriced. It is arrived out by comparing the company’s stock price, which indicates what the market think the company’s is worth, to its net asset.
A ratio of above 1 indicates that the market is willing to more than the company’s net asset is actually worth. This is usually an indication of confidence in the company’s ability to generate more profit in the future.
Conversely a ratio under 1 show that investors are paying a discount for the company below its net asset.
Our analysis show that Investors are willing to pay a premium 23x of what Nestle net assets are worth, while they pay 1.48x for Cadbury and 2.57x for Unilever.
ISRAEL ODUBOLA & SEGUN ADAMS
