BY CHARLES ABUEDE
Equity analysts have placed a high value on some of the top stocks within the consumer goods space on the domestic bourse listing the likes of Nigerian Breweries, Flour Mills of Nigeria and Guinness Nigeria as their top picks ahead of the start of trading during the second quarter of 2022.
These stocks stood their ground to have strong and sound fundamentals considering their performance in the previous quarter while looking at the aggressiveness in the face of macro headwinds.
FBN Quest Capital Research consumer goods analysts in their equity research note for the second quarter say “Without considering the impact of management’s actions to offset higher input costs by raising prices, we estimate gross margin compression of 70-100 basis points on average for the group, with a corresponding average EPS reduction of 23 per cent in 2022.
“At this time, our preferred names in the group are Nigerian Breweries (12M Total Profit of N68.3 billion, +70.8% upside), Flour Mill of Nigeria (12M Total Profit of N38.1 billion, +24.7% upside) and Guinness (12M Total Profit of N81.2 billion, +18.5% upside). These stocks are preferred because we believe their fundamentals are strong enough in the face of macro headwinds in 2022.”
It was a varied outing for the consumer goods sector or index on the Nigerian Exchange over the past three months or first quarter (January till March 2022) following the impressive returns on one side and the negative performance from some of the top players in that sector during the review period.
A comparison by analysts against the all-share index of the Nigerian exchange which reported a 9.9 percent quarter on quarter return, the consumer goods index posted a -6 percent quarter on quarter return as of March-end. However, the average price returns of the consumer goods universe were +15.8 percent over the period. This was down to impressive returns in Guinness Nigeria by 82.6 percent on the quarter, with PZ Cussons gaining 73 percent quarter on quarter and UAC of Nigeria advancing by 24.5 percent in the same quarter).
On the flip side, the worst performing stocks were Nigerian Breweries which declined 15.7 percent quarter on quarter, International Breweries losing by 6.4 percent quarter on quarter and Dangote Sugar Refinery declining 3 percent in the quarter.
A look at the performance of some of the top names in the consumer goods sector during the quarter shows that Guinness Nigeria, PZ Cussons, UAC of Nigeria and Flour Mills of Nigeria performances were helped by impressive Q4 ’21 results that showed strong improvements in fundamentals.
Also, the average sales growth for these firms in the fourth quarter of 2021 was 47.5 percent year on year, which was driven by strong price increases through 2021 and a recovery in sales volumes. Flour Mills of Nigeria, Guinness Nigeria and Unilever Nigeria led the way on this, with each company beating analysts’ estimates while the net profit margin for these companies expanded 447 basis points year on year to 6.1 percent, led by Unilever Nigeria, PZ Cussons and Dangote Sugar Refinery.
Furthermore, analysed data revealed that dividend yields for the group averaged four percent, with the highest being Dangote Sugar Refinery printing at 6.4 percent and the lowest, Nestle Nigeria, staying at 1.8 percent. The rally in the share prices obviously limits the yields. Meanwhile, announced dividends are still subject to the respective companies’ shareholder’s approval.
Another point that needs to be looked at as a downside going into the second quarter of 2022, is that consumer goods makers may see their profit margins pressured from the lingering crisis between Russia and Ukraine.
To this, equity analysts at FSDH Capital Research had, prior to now, posited that consumer goods stocks such as Flour Mills of Nigeria, Dangote Sugar, Nestle Nigeria, Unilever Nigeria etc., will be big losers in the long run as the cost of production will rise due to rise in raw materials (Wheat, Maize, Sugar, Cocoa, LAB etc.) cost.
In the same vein, analysts at FBN Quest Capital Research noted that the “Russia-Ukraine conflict is likely to impact the group negatively in 2022. The conflict has pushed commodity prices higher as supply chains adjust. We see two new cost pressure sources for FMCG companies in 2022: raw material costs and abnormally high energy costs. The primary commodities imported by FMCG companies that are impacted include wheat, crude palm oil, maize, and barley.
Also, diesel prices are up by more than 150 percent month-on-month on the back of global shortages and forex scarcity. Diesel is an important fuel for manufacturers not connected to gas distribution lines, as well as important for logistics & distribution.