February 21, 2019/InvestmentOne Report

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·         We believe this sector may continue to face the challenge posed by the smugglers of cheap inferior agro allied products in 2019. Therefore, margins may be pressured as many of the companies in this space may be forced to continue to cut price in order to maintain their market share.

·         Similarly, we believe the key players in this sector may continue to benefit from the stable FX market, in the medium run, thus supporting slower increase in their average costs which may be positive for the bottom line performances.

·         We should also see an improvement in Flour Mills of Nigeria and Dangote Sugar’s bottom line performance on the back of the full implementation of their backward integration plan.

·         With this said, we highlight that the weak consumer spending and challenges from Apapa gridlock remain downside risks to our outlook.

·         While the recent rise in global wheat prices may be negative for the earnings of flour producers as it may increase their average cost of production, the fall in global sugar prices may support the earnings of local sugar refiners particularly Dangote Sugar refinery.

·         Nonetheless, our preference in this sector is Dangote Sugar; given its dominance in the domestic market (c.60% market share in Sugar business), which affords the company the ability to dictate price, as well as its massive backward integration plan, which positions the company well above its competitors. We believe it is likely to benefit more from the various opportunities in the sector and the economy over the medium to longer term.

Sources: Company Fillings and Investment-One Research