Consumer Goods Sector Update: Weak Economy Weighs on Growth Prospects

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Tuesday, August 18, 2020 / 08:28 AM / By Afrinvest Research / Header Image Credit: Ecographics

 

Executive Summary

Over the years, strong demographics, the rising middle income class and steady economic growth positions Nigeria as an attractive investment destination for FMCG players globally. However, sluggish economic recovery, tight consumer spending and widening income inequality have slowed the growth in the consumer goods sector since the 2016 recession. This is apparent given that average GDP growth has slowed to 1.7% post-recession compared with the 4.8% recorded pre-recession. Similarly, the harsh operating environment given poor infrastructure, rising inflation, trade and FX restrictions, porous land borders and logistical setbacks have also dampened the performance of industry players. Despite the macroeconomic challenges, regulatory constraints and stiffer competition, corporates under our coverage grew revenue at a 5-year CAGR of 9.8% while earnings expanded at a 5-year CAGR of 5.3% in 2019.

 

Some of the recent developments within the industry include the land border closure, which was primarily aimed at curbing smuggling activities. This led to a reduction in export sales for some corporates while providing opportunities for others to marginally increase local market share. Likewise, the border closure increased local prices of goods and raw materials. Elsewhere, players in the sector have continuously implemented vertical integration strategies to ramp up market share, earnings and ultimately sustain long term growth. FLOURMILLS is exploring opportunities for yield improvement on local wheat production while sugarcane farms have been set up by Sunti Farms, a subsidiary of FLOURMILLS and DANGSUGAR (Savannah Farms) to source local input needed for sugar production.

 

The demand and supply disruptions caused by COVID-19 coupled with weaker oil prices have laid the foundation for a looming economic recession. The slump in global oil prices created FX illiquidity, thus posing a major challenge for players who depend largely on imported raw materials for production. The minimum wage adjustment which was perceived as a major driver of growth in the sector, is unlikely to deliver expected benefits given increasing unemployment, poor fiscal buffers, rising inflation and currency devaluation. Additionally, the lockdown implemented in April to contain COVID-19 disrupted business activities, thus slowing sales during the period. The risk of the consumer goods sector being impacted adversely by the pandemic remains high, although essential goods manufacturers are moderately affected. Looking ahead, we expect the impact of COVID-19 to soften from H2:2020 although consumer spending recovery would remain slow post-COVID-19. We also expect to see a shift in consumer trends to center around digital engagement, healthy living and price sensitivity. We note that demand would be tilted towards basic food items, majorly mass products while premium brands would struggle in terms of volumes.

 

Flour Milling Industry - Revenue expanded by 8.7% in FY:2020 on the back of improved volumes. PAT also surged 195.6% following drop in finance cost (7.6%). We estimate revenue to grow at a 5-year CAGR of 11.8% in FY:2021 as wheat-based products remain a major staple food in Nigeria. Although weak consumer spending would result in volume rationing, there is prospect for revenue accretion as the inelasticity of wheat-based products would support revenue growth.

 

Sugar Refining Industry - Over a 5-year period, revenue growth slowed into the single-digit band at 9.8% (CAGR), far from the 26.5% recorded between 2015 and 2017. The slowdown in growth was as a result of a 21.2% decline in volumes from an average of 742,622MT between 2015 and 2017 to 584,360MT in 2018/19. However, we expect producers to scale up capacity utilization in response to rising local demand as long as the land borders remain shut. We expect a softer global sugar market throughout 2020 given rising inventory levels amid weak consumption, however prices may move in the opposite direction if economic activities pick up faster than expected.

 

Beverage Industry - Given the importance of cocoa as a key raw material input for the beverage sector, players in the segment witnessed a major cost pressure over the 2018-19 period. Cocoa prices, in the last two quarters of 2019 rose by 9.1% from $2,200 per ton in Q3:2019 to $2,400 per ton in December 2019. Nonetheless, PBT and PAT margins remained impressive in the period under review. We maintain a mildly bullish outlook on revenue growth due to weak consumer spending. In 2020, we forecast a deflationary movement in cocoa prices due to weaker economic activities in cocoa-producing countries.

 

Home and Personal Care Industry - The HPC sub-sector (PZ and Unilever) performed woefully compared to other sub-sectors in the consumer goods sector. This is on the back of a 35.8% dip in revenue from ₦173.4bn to ₦127.8bn in 2019 as demand slowed coupled with hefty competition from smaller brands in the market. Also, cost pressures stemming from high factory overhead and production costs, heavy reliance on raw materials import (c.65% of raw materials) as well as the player's unwillingness to pass costs to final consumers due to competition weighed on performance. From a 5-year CAGR of 0.1%, we expect revenue to grow by 5.4% over our forecast period. 


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