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Breakfast Report - 20 January 2020

The closure of the land borders by the Federal government in 2019 has impacted the FMCG space in a mixed way. On the positive side, we have seen some improvements in toplines of key food producers (especially sugar and oil palm producers) who had competed with smuggled and imported alternatives. We have also noticed a steady rise in food prices since the border closure as the balance of bargaining power tilts in favor of domestic producers. On the other hand, the border closure has created a largely inconvenient atmosphere for local players, with negative impacts on exports, increased cost of cross-border trade and congestion on the Apapa axis. Although the ratio of exports to local sales for most of the players in the FMCG sector is fairly small, significant increases to logistics costs would negatively impact efficiency. While the 2016/17 currency crisis saw many FMCG players adopt more locally sourced inputs in their production processes – industry average ratio of 60% domestic inputs and 40% foreign inputs – significant amount of imports are still being made through the Apapa ports. With the diverted traffic from the land borders, we foresee an increase in port traffic and consequently, congestion. All in, we see the effects of the closure – both positive and negative – persisting until either the border is reopened, or local supply catches up with demand. We note that the border could be reopened at the end of January, provided that the FGs terms for reopening have been met.

Equity: We expect the attractive dividend yields in the equities space to drive buy-side interest in the market. Also, the low yield environment in the fixed income space is expected to support further interest from the institutional investors in the equities market.

Stock Watch: UACN (+700bps) closed as one of the highest gainers on Friday. The stock has gained over 22% for 2020 after closing at ₦10.70. Last year, the company’s board announced some restructuring plans for the company which spurred renewed investor interest.

Fixed Income: We expect demand for T-bills to remain high, driven by the current healthy system liquidity level. Meanwhile, we expect a quiet start to the week in the bond space, as market participants await the Bond auction scheduled for Wednesday, where the DMO will be offering ₦155 billion across the 5, 10 and 30-year maturities.