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Consumer Stocks Trade at Hard to Digest Valuations on Recovery Hopes

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Investors expect consumer stocks to grow earnings faster in the future as the gradual economic recovery witnessed last year is sending their price multiples higher.

The NGX consumer goods index has an earnings multiple of 22.40 times, and that compares to the NGXASI market average of 10 times according to data from United Capital Intelligence.

A high price to earnings means investors are paying more for each Naira of earnings of consumer goods firms than other sectors, but a low valuation is an appropriate entry point for stocks that have the potential of rebounding.

The upswing in the P/E ratios of consumer stocks is their ability to grow top line (sales) and bottom line (profit) with rapid pace, and they are also able to magnify operating and net margins, meaning they are showing momentum in converting growth into profit.

Usually, valuations are richer during an economic boom when inflation and interest rates are low and consumer or aggregate demand is high in such a way that encourages firms to seek more expansion.

Of course, the consumer goods firms who were once the hardest hit sectors during the Covid-19 period witnessed rapid sales in 2021 on the back of the relaxation of social distancing measures and reopening of the economy which helped the country exit recession.

The Nigerian economy grew by 3.98 percent year on year (yoy) in the last quarter of 2021, according to the latest data from the National Bureau of Statistics (NBS).

Analysis of the Q4 2021 GDP report showed the manufacturing sector real GDP closed the year positive, rising by 3.35% y/y in 2021 from a contraction of 2.75% y/y in 2020.

This shows investors are responding to these numbers that are driven by gradual economic recovery that we are seeing, and most especially in 2021,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham by phone.

“Some consumer goods firms became more profitable, which is a reflection of gradual economic growth,” said Ibrahim.

The combined revenue of the most liquid capitalised consumer goods firms increased by 32.28 percent to N2.88 trillion in December 2021 from N2.08 trillion as at December 2020, according to data gathered by MoneyCentral.

They collectively grew operating profit by 35.34 percent to N599.29 billion as at December 2021 from N442.79 billion the previous year.

The average industry operating profit margin increased to 10.01 percent in the period under review from 8.70 percent the previous year, according to MoneyCentral calculations.

Unilever Nigeria posted operating profit of N2.31 billion in December 2021 from a loss of N3.06 billion the previous year. It has a forward P/E ratio of 28.22 times and the share price gained 0.55 percent to close at N13.15 as of 2.00pm in Lagos.

Guinness posted net income of N8.82 billion in December 2021 from a loss of N317.15 million the previous year. It has a P/E ratio of 10.66 times and its shares gained 2.34 percent to close at N74 as of 2.00 pm in Lagos.

PZ Cussons posted operating income of N210.90 million in December 2021 from a loss of N668.50 million the previous year. It has a P/E ratio of 16.66 times and its share price gained shed 3.0 percent to close at N205.

Nestle’s net income was up 11.72 percent to N71.96 billion in December 2021 from N64.41 billion the previous year. It has a P/E ratio of 24.82 times and its shares shed 0.02 percent to close at N1383.

Nigerian Breweries net income spiked by 40.16 percent to N41.49 billion in December 2021 from N29.60 billion as at December 2020. It has price multiples of 17.71 times and the shares closed at N44.

There are concerns about rising cost of production stoked by foreign exchange crisis and higher prices of commodities such as sugar, Wheat, Cocoa, Barley, and Palm oil in the international market.

Higher inflation and surging utility bills are expected to deal a great blow on consumer spending, which is likely to affect the revenue of companies.

The National Bureau of Statistics (NBS) has released the Consumer Price Index Report with the inflation index hitting a five-month high of 15.92 per cent in March 2022.

Analysts at CSL Stockbrokers say players in the food processing sub sector are expected to have a good year in 2022.

“We hinge this expectation on the recent turn around that has engulfed the segment, leaving it with decent volume, topline and bottom-line growths,” said the analysts.

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