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Nestle’s success rests on the back of the economic power of Nigerians

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Top 5 in market capitalization and a long run as the most expensive stock on the NGX, Nestle’s market positioning as a consumer goods giant in Africa’s largest and most populated economy, has clearly paid off. However, the symbiotic relationship also has its downsides, as Nigeria’s socio-economic situation expectedly takes a direct toll on its books.

Despite scoring a 22% increase in revenue in the first half of the year, its results for the period – as well as last year – were significantly impacted by the recent challenges including border closure, rising international commodity prices, double-digit food inflation, and volatility in the FX markets.

The increase in H1 sales is attributable to a 10% price increase in Q2, as well as soaring finance costs and interest expenses on financial liabilities. On one hand, price increases are not sustained because people can only afford so much, and competition will not hesitate to take a slice off the company’s market share if given the chance to. On the other hand, supply chain disruptions owing to these same socio-economic conditions will ward off additional cash.

An interesting perspective is that consumer goods, by having a share of the everyday person’s pockets, capture the wider population and ultimately reveal the average buying power of members of an economy. Nestle’s run has proven that investing in the stock is a good deal if you’re betting on Nigerians.

Why investors see the opportunity

At N1,400 the blue-chip stock is not far from its 52-week high of N1,540 and has an EPS of 49.35. In other words, investors are betting on the stock’s future success and there are a few reasons they’re not wrong. Earnings can be projected to increase based on trend analysis, expansion of the nation’s middle class, and further enhancement of global trade.

Trend analysis for one, points to an increase in EPS owing to their new sales prices along the mid-term. This is good, as stock prices are typically parallel to EPS growth over the long term. Better still, there’s a reason Nestle has stayed this long in the market in the first place. As far as the enhancement of global trade goes, the company has noted the amazing potential the African Continental Free Trade Agreement (AFCFTA) stands for in increasing its exports. However, with less than 2% of Nestle’s revenue coming from exports, this is still a tough call.

This is why consumer income remains a big deal for Nestle. Everything rests on the back of a healthy economy because while further price increases will ultimately lead to a loss in market share, and otherwise will lead to a slash in the company’s profits, by increasing employment levels and reducing inflationary pressures on Nigerians’ income, the market will be empowered for the good of themselves and for investors. In other words, if Nigeria by some miracle simply moves from being the poverty capital in the world to quite frankly, a little less poor, Nestle’s investors will be all the better for it.

The question then is, how optimistic are investors about this, and how much are they willing to stake for it? This is despite its price-to-book value of 48.587 which signals possible overvaluation. Increased investments from Nestle South Africa – the majority shareholder of Nestle Nigeria Plc – reveals that they’re betting on themselves, while also providing a cheaper source of financing to enable them take on expansionary and more strategic projects.

Summarily, bet on Nestle – preferably at a price lower than the 52-week average, if you believe that Nigerians will have just the right means to lead better lives soon enough. But, of course, it’s never really that simple.

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