January 21, 2022/CSL Research
The Food, Beverages, and Tobacco sub-segment of the manufacturing segment of the Nigerian economy has continued to hold the fort in the manufacturing space despite several macro-economic headwinds since 2015. Recovering from the 3.0% dip recorded in Q2 2020, the segment recovered to post an average growth of 5.2% between Q3 2020 and Q3 2021. We attribute this to improved economic conditions, a backdrop of the relaxation of the stringent economic lockdown that permeated the market in early 2020. The segment has continued to outperform the Gross Domestic Product (GDP) In the period, proving its continued relevance in an ailing economy.
In 2021, consumers had to contend with high prices despite the continued decline in headline inflation, which as of November was down to 15.4% y/y. This has resulted in an erosion of purchasing power. Since 2012, the Nigerian consumer has come under severe pressure. From partial fuel subsidy removals to the free fall in naira in recent years, to the imprints left by the border closure and insecurity in food processing regions, all these have contributed to inflationary pressures. In response, the average Nigerian consumer has been trading down on the value chain, switching to cheaper alternatives as living costs rise in the face of generally low-income levels.
There were mixed performances across our coverage universe in 2021, with some recording gains while others reported a decline in price. Honey flour’s significant surge in price was due to the corporate action on the ticker as Flourmills completed plans to acquire the firm in a deal that pushed the ticker’s price towards its book value. For context, whenever such acquisition is about to take place, it is common practice to consider the netbook value of the firm per issued share capital as the base price of the acquisition. Guinness, Flourmills, Unilever and Nestle, rode on improvement in their performances, hence the increase in price in 2021. Conversely, DangSugar, Cadbury, Nigerian Breweries, and International breweries recorded negative YTD performances.
We expect the players in the food processing segment to have a good year in 2022. We hinge this expectation on the recent turnaround in the performances of players in the segment, leaving them with decent volume, topline and bottom-line growths. Our expectation for the segment is particularly based on the essential nature of goods produced, and the reduced level of imported substitutes despite the border re-opening in 2021.
The concern for the brewers remains their inability to drive the required volume. The three prominent players in the space are not reporting sufficient contribution towards the fixed cost. This, we attribute to the myriad of cost concerns that the firms could not manage due to the discretional nature of their products. As the relaxation of lockdown measures continues and the consumption capabilities improve, the FMCGs have begun to show decent performances. The elephant in the room, however, remains the concern around exchange rate and how it impacts the cost structure of players in the segment. Seeing that the players have shown resilience in the past year, we are optimistic that the segment will see improved performance in 2022.
