Increasing consumer goods prices won’t offset impact of weak naira – Renaissance Capital

Renaissance Capital Nigeria, an investment bank, has updated its views on Nigerian consumer stocks, noting that increasing the price of consumer goods will not offset the negative impact of naira devaluation on imported consumer goods.

In response to a weakened naira on account of devaluation and inflation rising to 17 percent according to Nigerian Bureau of Statistics figures, the investment institution had a series of meetings with listed and unlisted companies, carried out product price checks, and reviewed 2016 half year results of consumer goods companies and came to the conclusion to update its previous views on the industry.

In a note sent to BusinessDay, the investment outfit reported that most companies were considering increasing product prices by 10 to 20 percent in the second half of 2016 to offset the impact of naira devaluation on imported consumer goods and higher inflation.

“We do not think this will be enough to offset the negative impact of the naira devaluation on imported costs and generally higher inflation; however, management feedback is that this is likely the maximum range consumers can absorb without a significant negative impact on volumes,” the company said.

It reported that consumer goods sector has not seen an improvement in foreign exchange availability in the interbank market since the devaluation of the naira in June and this has resulted in capital expenditure deferral and rising foreign exchange-related trade payables.

While the company sounded a cautionary note to investors over declining value of stocks but preferred Nestlé Nigeria’s track record.

“We prefer Nestlé Nigeria given the brand loyalty of its key products Maggi and Milo, consistent track record of positive top-line growth, returns above the cost of capital and reasonable valuation. On our new estimates, we increase our take profit for Nestlé Nigeria by 26% but cut our other TPs in the sector by about 25 percent,” the company said.

It further noted, “Outside of the brewers, which operate in a more favourable oligopolistic market, we prefer Nestlé Nigeria, which we upgrade to HOLD (from Sell), given strong brand equity and a proven track record that we think leaves it better-positioned to deal with macro challenges.

“We downgrade GlaxoSmithKline Consumer Nigeria (GSK Nigeria) to HOLD (from Buy) and Flour Mills of Nigeria to SELL (from Hold). We maintain our SELL rating on Unilever Nigeria.”

Renaissance Capital warned investors that a key risk to consider is the impact of higher prices on volumes.

“Despite what we view as cost-push inflation prompting consumer companies to increase product selling prices, we remain uncertain about the impact on volumes resulting from planned product price increases. Our view remains that staple products at traditionally low pricing points will fare relatively better than discretionary products, should companies, on average; adopt a strategy of blanket price increases.

 

ISAAC ANYAOGU