Higher Volume, pricing and baseline effect help leading firms record massive growth

Published second quarter results of Nigeria’s leading companies show strong growth as they put behind them the devastating effect of the COVID pandemic according to a report by FBNQuest.

It based its report on emerging evidence from the Q2 ’21 earnings season which is well underway and with over 65% of companies within its coverage universe having published their results.

According to FBNQuest analysts, “excluding most of the banks which are yet to publish their results because of ongoing audits, almost all of the non-financial companies that we cover have released their Q2 ’21 earnings. The results show robust sales and after-tax earnings growth of 49% y/y and 60% y/y on average across our coverage universe.”

According to the analysts, “If we exclude the results of FCMB Group, the only bank that has reported within our coverage, the sales and earnings growth rates are 52% and 68% respectively.

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“On average, the non-financials reported a positive revenue surprise of c.+15% relative to our expectation. However, earnings missed our forecasts by -4%, largely reflecting negative earnings surprises by the fast-moving consumer goods (FMCG) companies. If we strip out the FMCG names, the earnings surprise was +12%.”

Other highlights of the report are-

· The above-average growth rates were driven by a combination of factors including strong unit volume growth, pricing and favourable base effects compared with Q2 ’20 due to the negative impact of the COVID-19 pandemic.

· The analysts estimate that unit volume for the cement sector, which we use to gauge the temperature of the housing and construction market in the absence of data on home starts or building licenses, increased by over 30% in Q2, thanks to strong private housing and public demand, mainly for infrastructure projects.

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· Dangote Cement (DangCem) and Lafarge Africa, the two cement names that we cover, posted exceptional sales and PAT increases of 42% to 44% y/y. Both firms’ earnings surprised positively by 24% on average. Notably, industry leader DangCem’ s earnings grew 59% y/y on the back of a 57% y/y sales growth and a 34% y/y growth in unit volume.

· Looking at the oil and gas space, Seplat boosted its PAT to USD11m from a loss position in Q2 ‘20, thanks to sales growth of 52% y/y, which was underpinned by robust production growth and higher average realised oil prices. Its earnings outperformed our forecasts by 24%. Downstream energy firm Total Nigeria reported earnings of NGN5.1bn, compared with a loss of -NGN0.5bn in Q2 ’20. Its earnings beat was c. 70%.

· The earnings performance of FMCG companies was mixed. We see the adverse impact of elevated commodity prices, input costs and food inflation on the bottom-line fortunes of some names in the sector, notably, UAC of Nigeria, Nestle Nigeria and Dangote Sugar Refinery whose earnings fell -16% on average. On average, the sector’s earnings (excluding Unilever Nigeria) missed our forecasts by -41%, a reflection of rising opex and shrinking gross margins.

· However, the earnings of Unilever Nigeria and Flour Mills of Nigeria bucked the trend thanks to positive price/volume mix.

· Topline and bottom-line growth for the palm oil producers, Okomu and Presco, were impressive, averaging 68% and 129% y/y respectively, thanks to higher pricing and production from newly matured acreages. Unlike FMCG firms whose fortunes are negatively correlated with elevated commodity prices, the palm oil companies profit from rising commodity prices due to their ability to transfer price increases to consumers. Their earnings also exceeded our expectations by 33% on average.

· Looking ahead, we expect the robust sales and earnings growth to be sustained into H2 ‘21, on the back of related drivers including strong volume growth, favorable base effects and supportive price/volume mix. Across our universe of non-financials, we see an average potential upside of c.16% over the next 12 months.