Consumer Goods Firms to Bounce Back After Devaluation Worries Subside

There is going to be a strong comeback in the bottom-line (profit) of consumer goods firms whose profit have fallen off the cliff as less intense inflation means there won’t be a sharp devaluation of the currency as seen in 2023.

A precipitous depreciation of the Naira following the collapse of all foreign exchange window into the Importers’ and Exporters’ window resulted in firms incurring huge foreign exchange losses in their books that led to most of them posting a loss after tax, leaving some with an option of shoring up capital to stay afloat.

The removal of fuel subsidy and unification of the exchange rate further battered consumer spending amid low volume sales and inflationary environment.

It is not rising inflation that bothers investors. It is the continually hiking of interest rates which suppresses asset prices, makes it difficult to raise fresh capital, and existing debts become expensively problematic to service due to rising cost of capital.

Increases in the Monetary Policy Rate (MPR) to 18.75 percent (+255bps) from 16.50 percent in 2022 increased cost of capital.

The general increase in the prices of food items has pushed Nigeria’s annual inflation to 28.20 per cent in November 2023 from 21.47 per cent in November 2022, the highest in 18 years.

“Though the exchange rate risk still lingers as the Naira weakens with low foreign capital inflow and low crude oil production, we do not anticipate as steep a devaluation as seen in 2023 in 2024, making us anticipate significantly lower FX losses in 2024,’’ said analysts at CSL Stockbrokers Limited in a recent note to client.

With the expectation of higher profit and margin on the back of less aggressive tightening cycle by the central banks, analysts are betting on some consumer goods firms.

Analysts at CSL Stockbrokers have maintained a buy ratings on the stocks of Guinness Nigeria, Nestle Nigeria, and Flour mills of Nigeria.

Analysis by MoneyCentral shows that the largest firms posted a combined N381.78 billion in September 2023, which represents a 40.11 percent increase from 2022’s N271.62 billion.

The industry EBIT margin increased to 13.44 percent in September 2023 from 10.60 percent the previous year, according to MoneyCentral calculations.

They collectively grew sales by 27.38 percent to N3.04 trillion in the first nine months of 2023, from N2.38 trillion the previous year, according to data gathered by MoneyCentral.

“The food, beverage, and sugar divisions of these businesses accounted for the majority of the revenue inflow for FMCG firms. The trickle effect of rising input costs along the value chain of these companies resulted in higher production costs which were passed on to end consumers through increases in prices,” said analysts at CSL Stockbrokers.

“New product launches from Cadbury and Flourmill have expanded their revenue segments and generated additional sales. A diverse production of essential goods has been the strategy keeping the revenue from FMCG companies elevated in 2023,” said analysts at CSL Stockbrokers.

The NGX Consumer goods index remained bullish despite a dwindling net income or profit after tax (PAT) it finished with a year to date (YTD) of 90.39 percent in 2023.

They are part of the bumper start to 2024. BUA Food has a year-t0-date (YTD) of +33.09 percent; Dangote Sugar, +31.58 percent; Flour Mills,+16.64 percent;

International Breweries, +15.24 percent; Nascon Allied,+26.51 percent, and Nigerian Breweries +11.11 percent;

It is important to note that the backward integration policies are expected to underpin food processors’ earnings because it will reduce reliance on foreign exchange to import raw material.

“Moving forward, into 2024, we anticipate more players in the industry to engage in business restructuring, strategic acquisitions, and expansions to sustain profitability and navigate the challenging operating conditions in the Nigerian market,” said analysts at Meristem Securities Limited.

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