Investment sentiments for consumer goods stocks haven’t improved and may continue to be poor as tax increases by Federal Government will squeeze consumer wallets and stoke inflation.
In the last two years, stripping out Nestle and Nigerian Breweries, consumer goods firms have lost considerable amount of value with brewers being the hardest hit from a volatile and unpredictable macroeconomic environment.
While Banks, Agriculture, Insurance, Oil and gas, and industrial goods stocks are relatively cheap and attractive because of their low price to earnings ratios, consumer goods stocks are expensive as investors have lost confidence in the growth potential of the industry.
“Their earnings have been dropping while share price has been dropping faster. The hike in Value Added Tax (VAT) will hurt them. They are also facing a lot of competition from cheaper brands,” said Wale Olusi, head of research at United Capital Limited.
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The average Price to earnings ratio of the Banking, Agriculture, Oil and gas, and Industrial goods sectors are 3.70 times, 3.40 times, 4.30 times, and 11.40 times.
That’s mostly lower than the 7.74 times NSE ASI average, which is an opportunity for investors to buy these shares when economic fundamentals improve.
Consumer goods are however currently trading at a trailing P/E of 24.40x, which is higher than NSE ASI average of 7.74x, which implies that each Naira of their earnings is being overvalued by investors. As such, they represent an over-priced stock.
Nestle and Nigerian Breweries (other most capitalized firm in the industry) trade at a premium because investors are buying them for stable performance in the past.
These firms have been able to keep their value, and Nestle has been producing essential goods that find their way into household kitchens.
Following a bearish run in 2019, with a negative return of -14.6 percent, the local bourse began the year on a positive note and has sustained the upbeat performance for the sixth trading session of the year.
The NSE has gained 9.5 percent year-to-date, thanks to participation of local investors, but analysts are sceptical that the rally will continue given the unpredictability of government policies and harsh operating environment.
Analysts say the hike in VAT rate to 7.5 percent from 5 percent and likely increase in electricity tariff by Federal Government will keep consumer spending in check.
The direction of the headline inflation rate turned northwards, spiking to 11.85 percent in December 2019, thanks to the complete shutdown of all land borders by Federal Government as it continues to check activities of smugglers.
Analysts at United Capital Research said in a recent publication that they expect inflation rate to trend northwards to 12.1 percent due to protracted border closure and increase in minimum wage.
