Equity Analysis /

Nigeria Consumers: Unfavourable operating backdrop drives weak earnings outlook

    Eronmosele Aziba
    Eronmosele Aziba

    Equity Research Analyst, Consumers

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

    Tellimer Research
    18 October 2019
    Published by

    Sector valuation is now closer to fair value. Our coverage of Nigerian consumers stocks is down 21% ytd on aggregate, and currently trades at a median FY 20f PE and EV/EBITDA of 22.8x and 10.3x, respectively (average 30% discount to the 2-year historical median). In our view, the sector historically traded at unjustifiably rich multiples, and is now closer to our fair value estimates (FY 19f PE and EV/EBITDA of 23.9x and 7.9x), hence our broadly neutral stance, despite cuts to our target prices. We anticipate near-term headwinds to earnings, which include weak consumer spending, regulatory pressure and competition.

    Short-term pressure to weigh on earnings. We expect medium-term earnings to largely underwhelm. For FY 19f, we forecast revenues and net income to decline by 2% and 10%, respectively, building on 3% and -23% in H1 19. Over FY 20f-22f, revenues and net income should recover from a weak base, rising at CAGR of by 4% and 5%, respectively. ROEs should, however, weaken considerably over the medium term, averaging 8.3% in FY 19f-22f, from 13.6% in FY 16-18. Our revised earnings estimates, which we cut by 15% lower on average for FY 19f-22f, incorporate weaker volumes, limited price increases and margin contraction. Nestle and Dangote Sugar should be the most resilient; Flour Mills and PZ to lag. 

    Our top pick and only Buy is Nestle. Within our coverage of eight consumer stocks, we have one Buy rating on Nestle, five Holds and one Sell (PZ; we have currently placed Intbrew under review following the announcement of its planned NGN165bn rights issue). We expect an estimated total return of 7.6% for our coverage on aggregate, including a dividend yield of 2.1% for FY 19f. Our positive stance on Nestle stems from its strong operating efficiency, solid brand strength and robust distribution network. These have allowed the company to maintain its strong earnings quality, despite a weak macro environment and weak results from peers.

    Regulatory backdrop presents near-term risks. The Central Bank of Nigeria (CBN) has proposed a restriction on milk importers from accessing the official FX market, and there have been comments from President Buhari signalling an interest in extending this to all food items. The federal government is proposing a 44% hike in VAT to 7.5% from 2020, and the second phase of excise duties was recently implemented in June 2019. Further, an electricity tariff hike of c30% is planned for the coming year. Based on our sensitivity analysis, Nestle and Dangote Sugar should show the greatest resilience to headwinds from the changing regulatory environment. For all others, the potential negative impact on earnings is high, in our view, especially given the current weak profitability levels. 

    Competitive pressure is intensifying. For brewers, the battle for market share has continued into 2019 and is likely to persist in the near term. Additionally, smaller players in other value segments have re-emerged since FX conditions in Nigeria stabilised, and there have been new product launches, particularly in the beer and bouillon cubes categories. We think companies are reacting to this by channel-stuffing, going by the uptrend in receivables and number of payable days for most of the sector.