The first half of 2017 (H1’17) has proved to be a turning around period for many companies in Nigeria, especially for those in consumer goods, the beverage companies.
There have been many positive numbers in the macroeconomic performance indicators – the foreign exchange market, the gross domestic product, GDP, the inflation rate and many others have been on positive run.
Consequently, the Nigerian consumer goods companies’ story is changing positively, and quite rapidly. Moreover, analysts believe the change would even resonate more strongly in the second half 2017 financial performance of the companies in this sector, all things being equal.
Though some analysts had pointed out at the beginning of the year that earnings outlook was better compared to last year, the results for the January-March 2017 period announced by most companies were well ahead of forecasts, including consensus view.
This followed a broadly strong recovery in the final three months of 2016, after declaring record-poor earnings and margins in the four to five consecutive previous quarters. Consumer confidence Analysts at Cordros Capital Limited, a Lagos based investment house, had noted that “from considerably improved access to the dollar, to moderately recovering consumer confidence, easing energy challenges, balance sheet deleveraging, and cost-reflective pricing, the prospects of our universe of consumer goods companies appear much better than a year ago.
We would link this claim to the growth in the manufacturing sector GDP — where food/beverage is 44% — in the first quarter of this year, coming after four quarters of negative growth.’
“In line with the broad economic growth outlook, and baring major external shocks, especially as relates Nigeria’s ability to earn foreign exchange, we expect the recovery in the performance of our consumer universe to progress with the year.”
The companies second quarter ended June 2017 results were even far more impressive than the performances of the two previous quarters. Revenues continue to grow at double-digit on Year-on-Year (YoY) basis, gross margins are nearing the pre- 2016 levels, operating expenses remain under control, cash is growing, and importantly, impressive growth in operating profits. Consequently, analysts at Cordros Capital have revised revenue, earnings and net profit growth forecasts over 2017/18 to 21%, 26%, and 115% respectively on average, from 14%, 9%, and 67% at the beginning of the year.
While acknowledging possible FX shock, they also believe the accretive potential of the nation’s external reserve remains decent, and would offer the Central Bank of Nigeria, CBN, the comfort to continue to intervene in the markets for the rest of this year. Broad expectation remains for Nigeria’s economy to exit recession in 2017. Although the economy contracted in Q1‘17, some glimmers of a nascent recovery are appearing. The non-oil sector returned to growth in Q1‘17, crude oil production has increased significantly since last year’s nadir, forex is relatively available, and business expectation and consumer confidence are seen rising. The 2017 budget has gone into full scale implementation along with the recovery growth plan launched in March. Budgetary distribution to all tiers of government between January and April is by 42% above last year’s level, suggesting improved scope for public sector spending.
Overall, an improvement in Nigeria’s economic health over 2017 will provide some relief for the Nigerian consumers. More importantly, reduced FX-related pressure on consumer prices should encourage a modest uptick in aggregate consumption.
Besides, the slow recovery of the highly import-dependent competition is supportive of the sales outlook for companies within Fast Moving Consumer Goods (FMCG) market segment, the CBN will continue to prioritize FX availability in favour of local manufacturers. Sector reports indicate that the growth in market share, which the likes of Unilever Nigeria Plc, PZ Cussons Plc, Nestle Nigeria Plc, Flour Mills of Nigeria Plc and Dangote Sugar Refinery Plc, have been experiencing as a result, will continue over 2017/18.
They also indicate that the emergence of aggressive price war leading to cuts is less likely. Hence, with the increases announced earlier this year, the average product prices of the companies in the segment would remain ahead of last year’s.
Combining higher prices with fairly stable volume will lead to revenue growth in line with the new forecasts. Aligning with the above postulations, analysts at Cordros Capital stated: “From 24% average in Q3-16, the average gross margin of our universe of consumer goods companies grew to 25.4% in Q4-16 and was unchanged Q1-17. We note the glaring rebound in the gross margins of CADBURY (to 22%, from 6%), GUINNESS (to 55%, from 29%), UNILEVER (to 28%, from 25%), and DANGSUGAR (to 13%, from 11%) between Jan-Mar 2017, compared to Jul-Sep 2016.
“The recovery around the mentioned period was aided by the increase in product prices. Though the Q1-17 average gross margin was below both Q1- 16’s and the pre-2016 average as shown in the chart below, emerging April-June 2017 results show that the gross margins of some companies are well-near the pre-2016 levels. “The significant appreciation in Q2, and going forward, expected stability of the foreign exchange will remain crucial to margin recovery.
Excluding NESTLE, GUINNESS, and CADBURY (30% average), exposure to imported major raw materials range from about 45 per cent to 97 per cent across the coverage of our consumer universe. Increased gas substitution The likely non-reoccurrence of the magnitude of FX shocks experienced in 2016 is thus a potential tailwind for margins.
“In addition, while the nationwide gas situation remains challenging, we understand that supply to manufacturing plants is gradually improving due to cessation of attacks on gas pipelines. Increased gas substitution over H2 (for DANGSUGAR and FLOURMILL especially) is a potential tailwind for production cost, and consequently margins. More fundamentally, we are seeing increasing drive towards backward integration, where possible, among companies.
“FLOURMILL, for instance, is aggressively exploiting local raw materials sourcing opportunities in growing its Agro-Allied business – maize and soya beans, major raw materials for the feeds business, are wholly locally sourced. GUINNESS has set up local spirit production facility in line with plan to increase local content to 80% by 2019.
“NESTLE’s management plans to enroll 30,000 cassava and soya farmers in its training program and enable the local sourcing of 100% of its soya beans and cassava flour. NB’s management stated recently that it has engaged about 60,000 farmers in the cultivation of sorghum alone in line with the target to achieve 60% local content by 2020.”