Friday, June 19, 2020 / 04:35 PM / FBNQuest Research / Header Image Credit: FBNQuest
Evidence from surveys of pandemic's tighter squeeze on incomes
The consumer goods sector is among the hardest hit by the economic crisis brought about by the COVID-19 pandemic. To gain a deeper understanding of how the pandemic is hurting consumption, we turned to data and survey responses supplied by REACH Technologies, a Nigeria-based fintech, and a separate survey by the National Bureau of Statistics. The key takeaway is that consumers have fallen on harder times. Income levels are down by an average of 30% since March, while job opportunities are fast disappearing, marking potential red flags. Another sticking point from the survey responses is that consumption of non-essentials has been cut drastically. Respondents stated that they have reduced spending on higher value category items by c.22% since March.
Vulnerability to shocks driving weaker sentiments
The fragility of household wallets has been laid bare, with statistics now pointing to even weaker consumer sentiments. The knock-on effect of fading demand and weaker oil prices are also stifling earnings of consumer goods companies. The market has responded sharply to these challenges by marking these companies down. Year-to-date, the consumer goods index is down -28% - the worst performing index, behind the broad market index's -7%.
Sector headwinds pressing harder
The consumer companies are also entering an exceptionally tough phase. Following the crude price collapse in March, accessing foreign exchange at higher interbank rates made obtaining raw materials more challenging. The companies are only able to obtain dollars at rates of around N360-390/US$ relative to N330-360/US$ pre-oil collapse. That aside, given that consumer wallets are under pressure, passing on price increases to combat heightened competition comes at a great cost. The other pressure point comes from fx losses booked as a result of the currency depreciation. In Q1 2020, our coverage names booked fx losses amounting to N12.2bn.
Further deterioration in consumption outlook
We anticipate a downturn in spending this year with a fragile recovery going into next year, in line with our GDP growth forecasts of -3.1% and 2.2% for 2020E and 2021E respectively. We also continue to see a greater display of price sensitivity across goods and services.
Major blow to earnings from COVID; we prefer Nestle
For our coverage names, we expect Q2 results to reflect more of the COVID-related challenges, given that the lockdown took effect in late March. Depending on the structure of individual product portfolios, we do not anticipate price increases that will fully absorb fx inflation, given the competitive headwinds and weakening pockets. As such, we project double-digit declines in earnings in Q2 with a slow recovery thereafter. We continue to prefer Nestle Nigeria given its resilience and track record in previous cycles, as well as its relatively attractive upside potential of c.40% (Price Target: N1,537.0).