Nigerian Consumer Goods Sector update: Subdued trends for a little while longer

Proshare

Tuesday, September 29, 2015 14:41 PM / FBN Capital Research

Difficult trading environment for FMCGs:
For several quarters the results of companies under our coverage universe have shown that sales and earnings have been under pressure.

The last set of H1 2015 results showed that sales growth was flattish, while PBT margin and PAT fell by -315bps y/y and -24% y/y on average respectively. Unilever Nigeria and UACN were the worst hit with PAT declines of -95% y/y and -61% y/y respectively.

Recent GDP data which showed that growth slowed from 6.5% in Q4 2014 to 2.4% in Q2 2015 confirm the trend in the companies’ results.

Subdued trends likely to persist into H2:
We believe that the challenges are likely to remain for the time being. We forecast sales growth of 4% y/y on average and underlying EPS to decline by -2% y/y in H2 2015.

The drivers include weak demand, fx pressures and insecurity in north-east Nigeria. Excluding FMN whose earnings are likely to be boosted by a one-off item of around N14bn, we expect PBT margin to expand by 95bps y/y on average, mainly due to weak comparables in H2 2014.

We expect DSR to standout within the group, with PBT margin expanding by 705bps y/y. in contrast, we expect UACN’s margin to be held back as consumers continue to down-trade in the foods business and the real estate business slows further.    

Avg. EPS growth of 26% y/y over 2015-17E:
Beyond 2015, we expect sales growth of 8% y/y on average over the 2015-17E period, driven by volumes (we expect price increases to be marginal).

At one end, we forecast Guinness Nigeria to grow 11% y/y, while at the other end we see PZ Cussons Nigeria growing sales by just 4% y/y. We see PBT margin and EPS for our coverage increasing by 103bps y/y and 26% y/y due to a tapering off in marketing and finance expenses.

UACN our top pick:
Despite our expectations of a 44% y/y decline in EPS in 2015E, UACN is our only preferred name within the sector. We expect the company to deliver 79% y/y EPS growth in 2016E mainly on the back of base effects and a resurgence in the animal feeds business which suffered a setback in 2015 due to the bird flu epidemic and rising raw material costs.

Having sold off -49% in 2014 and a further -7.4% ytd, (-11.2% ASI) the shares provide an upside potential of 66% from current levels. The shares are trading on a 2015E P/E of 16.4x for EPS growth of 79% y/y in 2016E.

 

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