Diesel, raw material costs pile pressure on FMCG firms

Diesel price hike and raw material costs are piling pressure on Fast-Moving Consumer Goods (FMCG) companies in Nigeria, analysts at FBNQuest have said in a new report.

The report said the Russia-Ukraine conflict would likely impact the group negatively in 2022.

“The conflict has pushed commodity prices higher as supply chains adjust. We see two new cost pressure sources for FMCG companies in 2022 which are raw material costs and abnormally high energy costs,” the analysts said.

According to the report, the primary commodities imported by FMCG companies that are impacted include wheat, crude palm oil, maize, and barley.

“Also, diesel prices are up by more than 150 percent month-on-month on the back of global shortages and forex scarcity,” it said.

Diesel is an important fuel for manufacturers not connected to gas distribution lines, as well as important for logistics and distribution.

Guinness Nigeria, PZ Cussons, UAC of Nigeria and Flour Mills of Nigeria (FMN) saw an impressive return in the fourth quarter of 2021 results that showed strong improvements in fundamentals, according to the report.

It said, “Guinness Nigeria, PZ Cussons, and UAC of Nigeria gained 82.6 percent, 73.0 percent and 24.5 percent respectively between Q4 ’21 to Q1′ 22. The worst performing stocks were Nigerian Breweries (15.7 percent loss), International Breweries (6.4 percent loss) and Dangote Sugar Refinery (3.0 percent loss) quarter on quarter.

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“The average sales growth for our coverage in Q4 ‘21 was 47.5 percent year on year, led by strong price increases through 2021 and a recovery in sales volumes. FMN, Guinness and Unilever led the way on this, with each company beating our estimates. Our coverage’s net profit margin expanded 447bps year on year to 6.1 percent, led by Unilever, PZ and Dangote Sugar Refinery.”

The report said dividend yields for the group averaged 4.0 percent, with the highest being Dangote Sugar Refinery (6.4 percent) and the lowest, Nestle (1.8 percent).

The analysts said, “The rally in the share prices obviously limits the yields. Announced dividends are still subject to the respective companies’ shareholder’s approval.

“Currently, our preferred names in the group are NB, FMN and Guinness because we believe their fundamentals are strong enough in the face of macro headwinds in 2022.”