Nigerian consumer goods companies will get squeezed in 2015 by a combination of factors including the naira devaluation, creeping inflation, lower government spending and restrained consumer confidence.
Consumer sentiment around the world is weak and deteriorating according to Nestle’s CEO, Paul Bulke, and Unilever’s CEO, Jean-Marc Huet believes that the global slowdown has been more pronounced and more prolonged than expected.
According to him the Emerging Markets (EM) weakened further in 3Q14.
The slowdown is seen as cyclical not structural.
Following the fall in the oil price and subsequent devaluation of the naira, the macro outlook in Nigeria is looking less robust.
“It is questionable whether the central bank will continue to defend the currency. The government’s proposal to cut spending in FY15 and the recent tightening of monetary policy by the central bank imply that the consumer will face further headwinds in 2015,” said Robyn Collins, an analyst with Renaissance Capital in a note released on December 02.
“We now expect consumer confidence to deteriorate further and remain negative until YE15,” Collins said.
The Federal Government is proposing to cut down the 2015 budget by 6 percent and reduce the benchmark oil price used for calculating revenues to $73 per barrel from $78.
The naira has lost some 13 percent versus the dollar this year as the central bank devalued the currency to prevent a depletion of its foreign currency reserves.
Inflation for September in Nigeria printed at 8.1 percent although BusinessDay believes it will rise to near double digits next year on the back of the pass through of a lower naira and eventual removal of petroleum subsidies.
Following the fall in oil prices, Rencap says it is questionable whether the central bank will continue to defend the currency and expects a tightening of monetary policy and government spending to result in an even more constrained consumer environment in 2015.
“We have reduced our revenue growth forecasts for FY15 as a result, although lower global commodity prices lead us to believe margins will be sustained despite our assumed naira devaluation to NGN197/$ by YE15E, even in the absence of selling price increases,” said Collins.
“Nestle and GSK (TP: NGN76) continue to offer value, in our view, and we maintain our BUY ratings on both stocks but reduce our Nestle TP to NGN980 (from NGN1,200) on headline earnings per share (HEPS) forecast adjustments. We reduce our TPs on Unilever (TP: NGN25, from NGN39) and Cadbury (TP: NGN43, from NGN53) on limited earnings visibility and retain our SELL ratings.”
BusinessDay believes that other companies that are exposed to general consumer spending such as Dangote Cement, Nigerian Breweries, Dangote Flour and Guinness Nigeria will have earnings and revenues squeezed next year.
Consumer companies are highly exposed to the naira in their input costs.
The MPC last month hiked the policy rate by 1 ppt to 13 percent, the highest it has been since the global financial crisis.
The higher interest rates and contractionary fiscal policy implies the prospects of wage increases for civil servants, in the short term, have dimmed, says Rencap.
“Of the four variables we use to explain the Consumer Confidence Index in our regression model (including oil output and real GDP growth), we find the index to be most sensitive to interest rate movements,” Collins said.
PATRICK ATUANYA
