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Investors in consumer goods firms should brace up for lower margins as shortages of gas in factories, currency risk, and high energy costs will spike production costs throughout 2016.
BusinessDay analysis shows that input costs are rising much faster than official inflation figures.
Economists across a wide spectrum are of the view that in a period of inflation, when costs are rising, the expense-to-sales ratio might increase because it is more expensive to produce a unit for sale.
“This is because cost of raw materials went up due to exchange rates,” said Bismarck Rewane, Managing Director/ Chief Executive Officer of Financial Derivatives Company Limited.
“There were also productivity constrains such as power generation challenges. For instance, the price of diesel increased to N215 in June from N210 as May,” said Rewane.
The cumulative cost of sales of 11 companies in the beverages and consumer goods industry will rise by 32.32 percent to N1.14 trillion in December 2016 from N775.13 billion recorded last year, according to data gathered by BusinessDay.
This is nearly double the inflation figure of 16.50 percent for the month of May, the highest in 11 years, on the back of increases in the prices of electricity, transport and food.
Experts are of the view that the negative impact of dollar shortages, due to restrictions imposed by the Central Bank of Nigeria (CBN), which forced local firms to buy hard currency at a black market premium, pushed up their operating costs and prices.
They also added that industrial strikes, disruptions to gas supply, following the vandalisation of pipelines and a reduction in government revenue, all combined to constrain demand during the quarter.
These factors will most likely lead to a more severe contraction in second the quarter (Q2) GDP compared with Q1.
The economy contracted by 0.4 percent in the first three months through March, the lowest since 2004, according to the Bureau of Statistics (NBS).
The International Monetary Fund (IMF) says there is a high likelihood that the economy will contract by 1.80 percent this year, and curb growth in the entire region.
Tajudeen Ibrahim, Head, Equity Research at Chapel Hill Denham Limited, a Lagos based investment house, said these firms may target cost cuts in billions of naira, while scaling back future expansion plans, in order to survive a high inflationary and interest rate environment.
‘‘Most likely in this current environment, our expectation is that consumer goods firms will be more cost sensitive. We could see a number of them eliminating redundancy in their production levels. In terms of marketing, they will be more cost conscious,” Ibrahim said.
While the peg of N197-N199 has been removed by the apex bank, the adoption of a flexible exchange rate system that led to a 30 percent devaluation of the currency exposed Nigeria Breweries Plc (NB) to currency or finance risk, as dollar denominated debt spiked, hence undermining bottom lines.
For the first six months through June 2016, NB’s net finance costs surged by 188.31 percent to N8.39 billion, resulting in an 11.22 percent drop in net income to N19.06 billion. Sales however increased by 3.57 percent to N157.37 billion.
Analysts are using NB half year results to gauge the earnings expectations of firms in the industry.
“Moving further down the profit and loss, we believe that the spike in net interest expense was most likely due to exchange rate losses, driven by the movement in the naira exchange rate to c.N282.5 per US dollar ,following the adoption of a more flexible exchange rate regime, compared with US$197.0 previously,” said Tunde Abidoye, equity research analyst with FBN Capital Limited, in a July 9 note.
“Being the first major company to report its Q2 2016 results, NB’s results provide a broad read-across for the earnings expectation for the brewers and consumer goods companies as a whole,” said Abidoye.
BALA AUGIE
