Nestle, Cadbury are good investment as ROE surges amid headwinds

Companies that utilize their capital resources efficiently are financially and fundamentally strong and investors should pay attention to them because they tend to outperform the All Share Index.

Of the ten consumer goods firms under our coverage, only Nestle Nigeria Plc and Cadbury Nigeria Plc are able to growth annualized return on average equity (ROAE), making them capital efficient firms good for investment.

For investors, it is paramount to evaluate the capital efficiency of a company before picking their stocks or investing in them.

For the first six months through June 2019, Nestle’s ROAE increased to 109 percent from 96.12 percent the previous year while Cadbury’s ROAE moved to 10.12 percent in June 2019 from -0.07 percent in June 2018 after the company reverted to

the path of profitability.

However, peer rivals fell off the clip as they succumbed to the harsh and unpredictable macroeconomic environment.

Unilever’s ROAE dipped (-14 percent), Flour Mills Nigeria’s ROAE was flat at 6.12 percent, Dangote Sugar’s reduced by (-7.44 percent); Nascon Allied Industry’s fell by 26.15 percent while International Breweries and Dangote Flour Mills recorded losses in the period under review.

Consumer goods firms have felt the pangs of a sluggish economy, and to exacerbate the anaemic situation they are in is inability of the government to formulate policies that will help remove a huge infrastructure deficit and propel the country to economic growth.

Post-recession, growth in real household consumption peaked at 3 percent in the final quarter of 2017, before falling to 1 percent in the second quarter of (Q2) 2018.

Nigerians are getting poorer as over 50 percent of a population of 200 million live on less than $1.98 dollars a day, as the country overtook India to become the world’s poverty capital.

Nestle Nigeria has seen growth strong growth in the Beverage business, as the Milo Ready To Drink (RTD) pack and Maggi seasoning continues to gain widespread acceptance in the market place.

The country’s GDP expanded by 2.01 percent in the three months through March 2019, from a year earlier; that compares with 2.4 percent expansion in the fourth quarter.

While inflation figure for the month of June fell to a 12 months low of 11.22 percent, the figure, however, falls below the central bank’s target range of 6 percent and 9 percent.

The near term outlook for the consumer goods firms is unimpressive. The macroeconomic environment has not supported growth in revenue. And those growing revenue are not efficient, according to Opeyemi Ani, consumer goods analyst at Cordros Securities Limited

Nestle and Cadbury have been more innovative and proactive to launch market penetrating products while contemporaneously spending on research and development with a view magnifying earnings. They have expanded their product portfolio, opened new factories, and curtailed costs.

Nestle’s Milo Ready To Drink pack and Maggi seasoning continues to gain widespread acceptance in the market place, adding impetus to earning.

Last year, the company opened a N4.10 billion RTD factory in Agbara Ogun State, and it has invested N74.10 billion on its operations in 5 years.

Cadbury re-launched its iconic cocoa beverage drink, Bournvita, with a new improved taste in line with consumers’ tastes and preferences.

The company’s Cadbury Hot Chocolate 3-in-1 brand, its treat portfolio, recorded substantial growth, driven by its unique offering, while the gum and candy brands also recorded success in their respective categories.