A disastrous earnings season has compounded the woes of consumer goods firms as their stocks continue go up flame, validating analysts view that the industry is the wiping child of a stuttering economy.
The implosion in stock price and putrid valuation started in early 2018 when lack of transformation policy on the part of the present administration stoked massive sell-off of shares by investors.
To exacerbate the already anaemic situation of consumer goods firms are decrepit infrastructure, multiple taxes, port congestion, and deteriorating consumer purchasing power that prevents them from breaking even.
While they have been able to reduce debt through a rights issue, they are beset by a backlog of receivables, receding sales volumes, deteriorating cash margins, rising cost of production and weak return on capital employ (ROCE).
That means a dividend cut is in the horizon, but a lot companies have been maintaining a steady policy even amid the recession of 2016, and shareholders crave for companies that reward them out of distributable profit.
The cumulative net profit of the 10 largest consumer goods firms that have released third quarter results showed net income fell by 28.92 percent to N54.96 billion, from N77.33 billion as at September 2018, according to data gathered by BusinessDay.
That compares with a 20.17 percent drop in 2018/17 financial year, but the bottom line reached an all-time high of 189.12n percent in 201/2018, when a price hike across product brand help compensate for rising cost of production.
Combined sales followed the same downward trajectory as it increased by 1.0 percent to N1.10 trillion as at September 2019, this compares to 7.51 percent drop in 2018/17, but it increased by 30.71 percent in 2017/2016 financial year.
Over the last six months, Nigeria’s real economic growth though remaining positive has decelerated for consecutive quarters, positing GDP of 2.10 percent in the first quarter (Q1) of 2019, a decline from 2.38 percent recorded in the fourth quarter 9Q4) 2018 and growth of 1.90 percent in the second quarter (Q2) 2019, which marked another decline from Q1 levels.
“Most consumer goods companies are vulnerable to the vagaries of macroeconomic environment,” said Johnson Chukwu managing director/CEO of Cowry Asset Management Limited.
The demand for goods is shrinking on the back of unemployment and weak output,” said Chukwu
Data from the National Bureau of Statistics (NBS) revealed that Nigeria’s consumer inflation rose by 36bps to 11.61 percent in October, representing a 17-month high.
Unemployment rate is at an all-time high of 23 perent as over of a population of 200 million living on less than $1.98 a day. The country overtook India as the poverty capital of the world.
The outlook for consumer goods industry is bleak as the proposed hike in Value added Tax (VAT) to 7.50 from 5 percent will squeeze consumer wallets.
Experts have warned that an increase in excise duties on carbonated drinks will hurt companies’ margins as they will find it difficult to pass on the cost to a beleaguered consumer.
The decision by Federal Government to close the borders (which is responsible for spiralling inflation) has hindered many companies from shipping their products in and out of the country.
They export their products to the West African countries through land borders and prices are going up due to the closure,” said Chukwu.
As a result of these challenges, valuations have been unattractively expensive, while stock prices have been beaten down, signalling investors’ apathy towards the industry.
Unilever Nigeria Plc’s share price, which peaked at N62 in March 2018, has dropped more than half through the start of 2018 to N18.50; it shares are overvalued as it has price to earnings ratio of 40.22 times.
Guinness Nigeria’s share price, which peaked at N159 in April 2015, has dropped more than four times to close at N31 as of 2:00 pm in Lagos. It has a price to earnings ratio of 15.88.
Pz Cussons’ share price, which peaked at N31 in June 2015, has dropped more than six times to close at N5.20 as of 2:00 pm Lagos. Its shares trade at 88.98 times earnings.
Cadbury’s share price, which peaked at N42 on February 2015, has dropped more than four times to close at N9 as of 2:00 pm in Lagos. It has a price to earnings ratio of 13.10 times.
Nigerian Breweries, which peaked at N181.02 on August 2017, hs dropped more than 3.69 times to close at N49 as of 2:00 pm in Lagos. It has a price to earnings ratio of 22.88 times.
International Breweries Plc’s share price, which peaked at N38 on March 2018, has dropped by more than half to close at N49 as of 2:00 pm. It shares trades at 13.65 times earnings.
“While a price increase is positive for Guinnees, but it is losing market share to the other players. So a price increase might be offset by a stepper volume decline,” said Yinka Ademuwagun, analyst at United Capital Limited.
Analysts say government has to formulate policies that will help reinvigorate consumer spending and that removing infrastructure bottleneck will spur investment and create an enabling environment for businesses to thrive.
Ademowagun said that people need to see a recovery in earnings that will make them confident about the sector.
BALA AUGIE
