September 20, 2018/Cordros Report
Event: In a couple of weeks, Nigerian equities market will be busy with earnings releases. From our consumer goods universe, CADBURY, DANGSUGAR, NB, NESTLE, and UNILEVER are expected to publish Q3 and 9M-18 results for the period ending September. FLOURMILL will publish for Q2 and H1-19 ending September, while PZ and GUINNESS are to publish for Q1-19 ending August and September respectively.
Macro backdrop: Nigeria’s economy remained on an expansionary, but sluggish path since exiting recession. At 1.7% average in H1-18, the annualized growth of 1.8% is short of even the “typically conservative” IMF projection (+2.1% for 2018E), and highlights – amidst high oil prices – unresolved structural shortcomings. Elsewhere, the moderating headline inflation has largely been driven by base effect, hence the resumed uptrend is no surprise. The monetary policy authorities believe that the risk to inflation is now stronger to the upside, with recent commentaries suggesting that cutting interest rates is no longer on the table this year.
Nigerian consumer wallets are still squeezed: Nigerian consumers are yet to recover from the squeeze on purchasing power and spending from the naira devaluation and higher fuel pump price. Meanwhile lending to the private sector remains sluggish. The implication is noteworthy for the corporates we cover from both volume and margin growth perspectives, more so with improved FX liquidity ushering a new wave of competition via increased imports.
Input costs are rising: The input costs of our universe are raw materials intensive, hence it is important to highlight the risk to gross margins from the rising prices of soft commodities, in tandem with other commodity prices. For context, in the quarter ending September, prices of wheat, sorghum, maize, barley, and cocoa were up 13% y/y, 44% y/y, 11% y/y, 2 % y/y, and 17% y/y respectively.
Mixed view of consumer goods earnings: On our estimates, NESTLE (+86% y/y), UNILEVER (+93% y/y), and NB (+843% y/y) are expected to report strong earnings growth in Q3-18E vs. Q3-17. For the same period, we expect CADBURY to report PBT of NGN560 million, from loss in Q2-18. We are less optimistic about DANGSUGAR, with estimate of 19% net profit decline in Q3-18E. For FLOURMILL, Q2-19E is likely to show 17% y/y decline in PAT. PZ’s June trading statement suggests that trading conditions were yet to improve as at Q1-19E (June-August), hence, it is unlikely that earnings performance (except net finance cost is significantly lower) will be impressive relative to recent past quarters. On the other hand, GUINNESS’ Q1-19E earnings is expected to show strong growth, supported by significantly lower finance expenses relative to Q1-18.
The bears still have legs: The risk to Nigerian equities is more to the downside between now and end of the year. September, October, and November are historically bearish months for Nigerian equities and – when combined – often offset the gains in December. Monthly losses thus far this year have exceeded historical averages and the pattern is likely to continue for the rest of the year.
The bears present opportunities: On the bright side, equities are becoming increasingly attractive with continued selloffs. For example, our recommendation for our consumer goods universe has improved from 63% SELL (BUY: 12%; HOLD: 25%) at the beginning of the year to 25% SELL (BUY: 25%; HOLD: 50%) on today’s market prices.