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Nestle Favored as Consumer Spending Squeezed by Covid-19

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Nestle is positioned to be a winner among Nigerian consumer goods firms being squeezed by the Covid-19 pandemic and a collapse in consumer spending.

A report on how the pandemic is hurting consumption, by FBNQuest Capital using data and survey responses supplied by REACH Technologies, a Nigeria-based fintech, and a separate survey by the National Bureau of Statistics (NBS) show that consumers have fallen on harder times.

Income levels are down by an average of 30 percent 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,” FBN Quest Capital analysts led by Fola Abimbola, said.

“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 selling off consumer goods companies. Year-to-date, the consumer goods index is down 28%.

Headwinds for the sector are pressing harder, according to FBNQuest Capital.
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 report noted.

The other pressure point comes from fx losses booked as a result of the currency depreciation. In Q1 2020, major listed names booked fx losses amounting to N12.2bn.

“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).”

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