So far, earnings releases by Fast Moving Consumer Goods Firms (FMCGs) have been disappointing, validating analysts’ bleak outlook for the industry.
Analysts had said that a myriad of challenges such as weak consumer spending, poor job creation, border closure, and eroding impact of double-digit inflation would hurt earnings.
That is beginning to show up in the 2019 audited financial statement of corporates. Nascon Allied Industries plc saw a 56.75 percent drop in profit, the worst results in five years as revenue growth couldn’t cover or absorb spiralling cost of production.
The company wasn’t able to generate much net income from each naira of sales as profit margins fell to 7.01 percent in December 2019 from 17.15 percent the previous year.
Guinness Nigeria plc’s net income dipped by 32.45 percent to N1.74 billion as at December 2019 while net margins dipped to 2.55 percent in December 2019 from 3.80 percent the previous year. However, an increase in price of key products could underpin future revenue as brewers in the country are one of the hardest hit from a harsh and unpredictable macroeconomic environment.
UACN Nigeria plc recorded a loss of N9.23 billion in December 2019 from N9.58 billion as at December 2018.
Analysts at CSL Stockbrokers say FMCGs particularly businesses with product portfolio skewed towards personal care will continue to struggle with volume growth in 2020 as familiar challenges continue to bite.
The research house added that beverage producers, particularly cocoa-related, would witness significant pressure on margins in 2020 as the cartel formed between Ghana and Ivory Coast (both of whom control 60 percent of world cocoa output) would keep cocoa prices high, hence significantly impacting material costs.
Nigerians are getting poorer as over 50 percent of a population of 200 million live on less than $1.98 a day, which means they have little in their pockets to go shopping.
According to data from Fitch solutions, household income is estimated to have grown by 8.8 percent year on year to $4,252 in 2019 from $3,908 2018. 2019’s 8.8 percent year-on-year growth comes in lower than the 10 .7 percent year-on-year (y/y) growth in 2018.
Inflationary pressures and the hike in fuel price continue to hurt consumers’ ability to increase expenditure which in turn continues to pressure consumer companies’ revenue.
Inflation for the month of December accelerated to 11.98 percent, the highest in seven months as price of basic foodstuffs skyrocketed on the back of border closure.
High level of unemployment at 23.1 percent as at September 2018 and poor job creation continue to pressure expenditure levels.
Valuations of consumer goods firms have been relatively expensive and the stocks are unattractive to investors who have been dumping shares.
The industry felt the pang of a severe dollar scarcity that tipped the country into its first recession in 25 years.
The consumer stock index is trading at a price to earnings ratio of 25.70 times. This compares to the NSE-ASI average of 8 times.
“They have lost considerable amount of value in the last two years. Their earnings have been reducing but share price has been reducing faster,” said Wale Olusi, head of research at United Capital Research Limited.
“Investment sentiment for them is poor and will remain so because of competition from cheaper brands. Consumer wallets will remain squeezed on the back of hike in VAT,” said Olusi.
Abiola Gbemisola, consumer goods analysts at Chapel Hill Denham Limited, said that the new minimum wage could invigorate consumer wallets as they would have more money in their pockets.
Gbemisola added that the higher Loans to Deposit (LDR) limit for deposit money banks would make it easy for consumers to access loans, hence paving the way for them to open their purse string in the short term.
“We see continued deterioration in margins but an increase in price of key products could underpin bottom line,” said Gbemisola.
It isn’t all gloom for the industry, though, even as the firms operate in a tough environment.
Analysts say if the Federal Government closes the borders for two years, then companies such as Flour Mills Nigeria plc and Dangote would continue to record stellar numbers.
This is because the companies produce goods that are susceptible to smuggling across the borders.
Flour Mills Nigeria just released its result for December 2019 and it recorded a 5.70 percent uptick in revenue to N423.37 billion and 3.17 percent increase in net income to N8.15 billion. But the miller’s margins were flat.
BALA AUGIE
