Investors are sweating over the likely impact of President Muhammadu Buhari’s unconstitutional directive to the Central Bank to freeze dollar sales to food importers.
Company stocks, already reeling net outflows, are being dumped at an even faster pace as investors price in fresh implications of the directive, with consumer goods firms bearing the brunt more than any other industry.
Since the curious directive became public knowledge last week Tuesday, an index on the Nigerian Stock Exchange which tracks listed consumer goods firms showed a 6 percent decline to 510.63 points from 545 points the week before, the lowest since December 2009, with big multinationals leading the slump. The index was down 5 percent on Friday alone.
Nestle Plc, the largest company on the index, was down 10 percent as at 2:30pm to N1,143 per share Friday from N1,270 the week before the directive.
Unilever Plc and Guinness were also down 10 percent Friday, while UAC fell by as much as 9 percent.
“The FX directive from Buhari, if implemented by the CBN, threatens to dip hands into the already squeezed profit margins of the Consumer goods companies,” said Ayodeji Ebo, the managing director at investment bank, Afrinvest Securities.
“Some of their inputs are imported, so the FX ban would make it more expensive for them to import raw materials, thereby raising production costs for importers of items like wheat, barley, sorghum, and we are not food sufficient in these areas,” Ebo, who advises clients on stocks to buy said.
“Their stocks are selling off because investors are preempting worried over the negative impact of higher production costs on profitability and return on equity, so it may fall further in the coming weeks.”
The downside of an unconstitutional directive by President Buhari is the last thing consumer goods firms need at this time.
The consumer goods sector has had a year to forget in 2019 and was the worst performing index in the first half of the year, with a year to date loss of 16 percent. The broad market is down 13 percent.
The sector’s woes reflect weak company fundamentals on intensifying market competition and weak consumer discretionary income. That has affected revenue growth even as the weak economy looms large over the sector.
Nigeria’s population has grown at an annual average rate of 2.6 percent over the last five years, but this has not translated to similar revenue growth for consumer goods companies, with economic growth also struggling to keep pace with population growth.
Save for Nestle, which recorded an inflation-adjusted revenue growth (CAGR) of 2.3 percent from 2014 till date, the other consumer names have recorded negative inflation adjusted revenue growth over the same period.
Nigerian Breweries’ revenue growth in that period was negative at -9.2 percent, Guinness saw a contraction of 8.8 percent while Unilever and Flour Mills posted revenue contractions of 4 percent and 1.4 percent.
We attribute the revenue pressure to weak consumer spending, occasioned by rising cost of living, pressure on wages due to currency depreciation, increasing unemployment, diminishing middle income and rising low income.
Whilst there is a fast-growing market for consumer goods in line with population growth, the implied price sensitivity of consumers has resulted to an increased preference for more affordable substitute products.
In response to this, some companies have introduced smaller product units at lower retail prices to better cater for the value segment.
Aggressive competition (domestic and imported) have also continued to pressure prices across the brewery, food, and Home and Personal Care (HPC) markets.
LOLADE AKINMURELE
