Investors do not think earnings of consumer goods firms are going to get better as companies continue to lose money and the impact of coronavirus on global and domestic economy, devaluation risks, and inflationary pressures escalate.
The health of earnings and valuations has been continually and protractedly weak in the past two years while the industry average price-to-earnings growth (PEG) ratio is -1.43, which underscores negative earnings and negative earnings growth.
The PEG ratio compares the forward price-to-earnings ratio, based on the next 12 months of expected profits, to the expected growth rate of those profits, again for the next 12 months.
Generally, a PEG ratio less than one means a stock is cheap and attractive. On the other hand, a ratio higher than one means a stock is expensive and on the tipping point of being a sell-off.
Nigeria Breweries has a PEG ratio of -1.48, Guinness -0.25, Flour Mills -3.37, Dangote Sugar -0.45, Nascon Allied Industries -1.17, and Nestle -1.87.
However, Cadbury Nigeria and Vitafoam bucked the trend as they recorded a PEG of 0.25 and 0.8, respectively.
“Consumer goods stocks are not likely to fare better than other sectors under the current economic climate,” said Johnson Chukwu, managing director and CEO, Cowry Asset Management Limited.
“Ordinarily, they are supposed to be doing well in a large population like ours but they are struggling because of low consumer purchasing power, border closure, and hike in excise duties and Value Added Tax (VAT),” said Chukwu.
But Wale Olusi, head of research at United Capital Research Limited, said while valuations are not likely to be attractive due to weak sales, firms could underpin bottom-line (profit) if they refinance their debt so as to reduce cost of debt.
Analysts are less sanguine that the industry will surmount the headwinds in due course and deliver the desired return on investment for shareholders in form of a bumper dividend and share appreciation due to a plethora of challenges on the global and domestic fronts.
Inflation in Nigeria rose to 12.13 percent for the month of January, compared to 11.98 percent in December, caused by spiralling price of staples as border closure continues to bite.
Inflation rate, which has hit 21-month high, has dire consequences for companies as consumer purchasing power will be further eroded in a country where over 50 percent of its population lives on less than $1.98 a day.
The International Monetary Fund (IMF) has cut the estimate for Nigeria’s economic growth to 2 percent from 2.5 percent, citing plunging oil prices stemming from the coronavirus outbreak. The fund said the country needs a policy overhaul to reduce vulnerability including current accounts deficits and budget deficit.
The spread of the coronavirus has curbed demand in China, driving oil prices down 13 percent this year, below the $57 a barrel benchmark for Nigeria’s 2020 budget.
The consumer goods firms are not producing enough net profit for common shareholders as they have been underperforming the broad NSE All Share Index.
The average cumulative earnings per share of the largest entities fell to N6.21 in 2019, from N7.10 the previous year.
Industry price-to-earnings ratio stood at 14.71 times, which is higher than the average price, multiplies of NSE ASI of 7.28 times.
While the local bourse returned negative 14.98 percent in 2019, it began this year on a sound footing as it has a year-to-date return of 2.02 percent.
Another downside risk to the consumer goods industry is a possible devaluation of the currency by the Central Bank of Nigeria (CBN).
Corporates’ balance sheets are susceptible to foreign exchange devaluation risk as the CBN is expected to devalue the currency to $400 by 2021, according to Bloomberg estimates.
What this means is that corporates that have huge debts in their balance sheets will incur additional increase in liability that has to be written off immediately.
“If oil price continues to fall till the second half of the year, the central bank’s power to defend the naira will be weakened, then we can expect devaluation,” said Abimbola Gbemisola, equity research analyst at Chapel Hill Denham Limited.
BALA AUGIE
