Fast Moving Consumer Goods (FMCG) companies may need to brace up for a tough 2017 as a combination of high inflation, dollar shortages and high energy cost is expected to crimp their margins.
Analysts are of the view that the said challenges are putting pressure on these companies revenues and profitability margins which push share prices down.
“We believe inflationary pressures will continue to weigh heavily on consumer spending, while higher input costs that cannot be passed on to consumers will tighten their squeeze on margins,” said analysts at CSL Research Limited, in a recent report seen by BusinessDay.
A tough macro environment which resulted to weak consumer spending dealt a blow on some of the consumer good companies’ bottom lines, as reflected in their full year results released at the Nigerian Stock Exchange (NSE).
The cumulative cost of sales of NSE Consumer Goods 15, – the most liquid stocks in the sector- increased by 36.07 percent, to N1.03 trillion from N758 billion the previous year. This has made many analysts reduce their 2017-2018 expected earnings forecast for some of these companies, leading to cuts in their share price target as well.
The NSE Consumer Goods-15 are: Seven-Up Bottling Nigeria Plc, Cadbury Nigeria Plc, Champion Breweries Plc, Dangote Flour Mills Plc , Dangote Sugar Refinery Plc, Flour Mills Nigeria Plc, Guinness Nigeria Plc, Honeywell Flour Mills Plc, International Breweries Plc, Nascon Plc, Nigerian Breweries Plc, Nestle Nigeria Plc, PZ Cussons Nigeria Plc, Unilever Nigeria Plc and Vitafoam Plc.
Research analysts at FBNQuest in their reaction to Cadbury results, said tough trading conditions and reduced consumer spending, due to rising inflation, impacted negatively on the numbers, adding that the dominant headwind was the impact on inputs of the devaluation of the naira.
Meanwhile, Vetiva Capital analysts, in their commentary on Nestle Nigeria Plc result, said they remain optimistic for a sturdy growth trajectory for the company, adding that “one major factor has clipped our confidence in full year (FY) 2017 earnings – FX”.
Year 2016 was tough for Nigerian consumers goods, as all major indicators performed woefully, evidenced in the 1.50 percent contraction in fourth-quarter (Q4) 2016. Some of the consumer good companies faced severe dollar scarcity which hindered them from importing raw materials and machinery for the purpose of meeting production demand.
“High levels of competition from established players, as well as from cheaper, unbranded substitutes, will limit firms’ abilities to pass on higher input costs to consumers, meaning that margins are likely to be squeezed further in the coming years,’’ said analysts at CSL Research.
Analysts are also seeing a tipping point in raw material prices, saying some raw material prices may experience headwinds and some manufacturers will pass these on to their prices.
Dangote Sugar Refinery, the largest producer of the sweetener, attributed rising costs to the rise in sugar price by 97 percent and shortages of gas, caused by the destruction of pipe lines by Niger Delta militants.
BALA AUGIE
