Investors in consumer goods stock could see increased return on their investments in 2018 as declining inflation, lower debt burden and improved foreign exchange liquidity are expected to underpin firms’ margins.
Analysts say for the sector to thrive this year, the economy has to be consumption driven as the country exited its first recession in 25 years on the back of recovery in oil price and output.
“We opine that 2018 should bode well for companies under the consumer goods umbrella. Consequently, we expect the consumer goods sector to be one of the key drivers of the performance of equities in 2018,” said Kemi Akinde, Chief Economic Adviser at Meristem Securities Limited.
Revenue growth for Fast Moving Consumable Goods Firms (FMCGs) in Africa’s most population was price driven last year as they were forced to make such increases in order to pass on high cost of production to consumers.
The forthcoming general elections with its attendant spending by politicians could however strengthen consumer spending to compensate for higher transportation costs and food price.
Economists have agreed that the stability of foreign exchange and receding inflation are expected to support lower input and operating costs.
Consumer goods firms have been experiencing rising prices due to higher costs of production and costs of raw materials.
“On the cost side, the lower interest rate environment and FX stability is positive for the sector, so also is declining inflation,” said Kayode Tinuoye Portfolio Manager/Head of Research at United Capital.
“More importantly, the players’ efforts to reduce debts on their books in 2017 should begin to bear fruits from 2018,” said Tinuoye.
The cumulative cost of sales of 13 biggest consumer goods firms that have released Third quarter results spiked by 33.33 percent to N948.87 billion as against N711.93 billion as at September 2016.
There firms are spending more on input costs to produce each unit of product as cost of sales ratio increased to 80.94 percent in the period under review as against 77.94 percent as at September 2016.
Drilling down the figures shows Dangote Flour Mills Plc, Honeywell Flour Mills and Nascon recorded 115.5 percent, 67.32 percent and 53.39 percent increases in cost of sales.
The cumulative total debt- both short and long term- of Unilever, Nestle, Seven UP, Flour Mills, NB, Guinness, International Breweries, Dangote Sugar, and Dangote Flour Mills stood at N341.44 billion as at September 2017, based on data compiled by BusinessDay.
There are positive prognoses for the economy as the World Bank forecasts 2.50 percent growth for Nigeria in 2018 as the country benefits from improved commodity prices.
The Food and Beverage sector GDP grew by a meagre 0.6 percent in Q3-17 compared to around 7 percent in recent history, according to an NBS report.
At 59.3 and 62.1 points, the Composite Manufacturing PMI and Composite Non-manufacturing PMI respectively attained the highest levels since January 2015.
Analysts at FSDH Merchant Bank Limited, based on the recent data from the Central Bank of Nigeria (CBN), said that expectations of higher profit and expectation of consumer income growth will boost the equity market this year.
BALA AUGIE
