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Nigeria Consumer Goods Sector - Earnings Preview

Barraged by slowing demand amidst depressed real consumer disposable income and adverse effects from currency headwinds, earnings from Consumer Goods companies came in dismal in 2016. Whilst revenue growth has been resilient on average – amidst a sector-wide push to mitigate inflationary pressure through price increases (albeit to the detriment of volumes) – bottom line has either shrank significantly or turned negative across our coverage

We highlight the notable moderation recorded in operating expenses (OPEX) to sales ratio during the year despite soaring inflation (2016 average inflation: 15.6%) – OPEX to sales average 16.7% vs. FY’15: 19.3%. This was done in a bid to further protect margins. Whilst some undertook drastic cuts to marketing budgets, others consolidated businesses/operations or trimmed workforces.

Despite these efforts, much weightier impacts of the naira weakness on imported raw material, foreign currency denominated loans and payables to mostly parent companies have pressured earnings. Margins succumbed to pressure as rise in input costs and FX losses outpaced top line growth. Whilst we know increased demand that accompanies the festive season and muted changes in the exchange rate in the fourth quarter would have been positive on earnings (from a quarterly basis), we expect overall earnings in FY’16 will come in depressed.

In spite of the tough operating environment, we have seen a few companies taking advantage of some FX management policies enacted in the year. Particularly, tier one food manufacturers - i.e. suppliers of raw materials for other producers – have increased topline through price hikes and stronger volume roll out as a result of higher domestic demand from food producers who formerly imported their inputs. Such companies include sugar and palm oil manufacturers like Dangote Sugar, Flour Mills of Nigeria and PZ Wilmar.