Despite facing strong headwinds in recent years, some segments of the consumer goods sector have achieved significant growth, a report by Renaissance Capital Research has shown.

“It is clear that in the past couple of years the Nigerian consumer has faced severe headwinds, which have been reflected in the average -3% earnings decline for the consumer sector. However, in this report, we show that certain segments of the consumer sector have experienced continued strong growth,” Renaissance Capital stated.

For instance, it explained that the non-alcoholic beverage sector, where bottled water, juice and carbonates make up the majority of drinks, posted growth of 14-21 per cent for 2013 and Compound Annual Growth Rate for 2008-2013 of 12-20 per cent, according to Euromonitor, compared to -2% for the brewery industry in 2013.

The report observed that statistics by Wateraid, which show that over 112 million people do not have access to adequate sanitised water in Nigeria, which is two-thirds of the population, explained the growth of the bottled water market. It, however, stressed that with the largest player having one per cent market share, there was little competitive advantage.

“However, from a sales-value perspective carbonated soft drinks have 27 per cent, according to Euromonitor, which is where Seven-Up Bottling Company has a 46 per cent market share (2014). 7UP sells both bottled water and CSD, making up 3 per cent and 97 per cent of revenues respectively,” it said.

According to the report, 7UP now has the largest share in the CSD market, outpacing Coke. The company had posted revenue growth of 21.5 per cent for 2014, compared with an average -3 per cent for the rest of the consumer sector. 7UP’s Return on Equity and Return on Invested Capital are 42 per cent and 25 per cent, respectively, for 2014 and rising.

Analysts at Renaissance Capital said they expected a substantial reduction in the company’s debt, allowing for improved cash flow.

“We initiate coverage on 7UP with a BUY rating as we believe that the company has exhibited strong earnings growth despite the tough consumer environment,” they said.

“Furthermore, unlike other consumer companies in Nigeria, which are trading on an average P/E of 28x FY15E on Bloomberg consensus numbers, we think 7UP represents value at 12.7x, based on our estimates.

“We derive our TP using a combination of DCF (60 per cent) and peer valuation on EV/EBITDA (20 per cent) and P/E (20 per cent). From this methodology we derive a TP of NGN262/share, implying 77 per cent upside potential from current levels. Currency movement would be the key risk to our valuation, on which we conduct a sensitivity analysis in this report.”

Punch