Please click to download the H2 2018 Outlook for the Agro Allied Sector

·         We see limited growth in the Agro Allied sector in the near term as we envisage issues such as the challenges from Apapa gridlock, smuggling in the North East region of the country and volatility in the commodities market as downside risks to the performance of companies in the agro allied space. 

·         We highlight that companies in the agro allied space saw a lot of smuggling particularly in the North East region, which took part of their market share. This has caused these companies to cut prices to maintain market share despite the increased cost associated with the issue of Apapa gridlock. This may continue to weigh on earnings in the near term. 

·         However, stability in the FX market has been positive for the cost of sales of import dependent companies in agro allied sector who have to import raw commodities for production. We believe the availability of FX has made it easier for these companies to import raw materials relative to early 2017 before the introduction of IEFX window. This could have supported the gross profit margin of these companies in H1 2018. 

·         Going forward, we expect stability in the FX market to support the cost of sales in agro allied sector with about 56% and 70% of DSR and FMN’s cost respectively dependent on foreign exchange. However, we believe the recent reduction in sugar prices due to stable FX market may continue to weigh on DSR’s gross profit margin. 

·         On the other hand, we believe the administration’s plans for self-sufficiency in Sugar by 2023 may support sugar business of these companies in the long run with government trying to channel efforts to build plantations and cane-crushing mills. It is expected that these plantations and cane-crushing mills will produce about 2million tons of sugar annually in order to meet the annual demand of about 1.5 million metric tons within a decade. 

·         We believe this may support backward integration programmes of companies in the agro allied space, which may reduce their exposure to volatility in the commodities and foreign exchange market in the long run.