Investors are paying a higher premium multiples for Nestle Nigeria Plc and International Breweries Plc compared to peers even as growth outlook for consumer goods names fade on the back of a barely growing economy.
Nestle and International Breweries are trading at price to earnings ratio (P/E) ratio of 30.80 and 32.20 times earnings, this compares with Dangote Sugar; (4.4), Guinness; (14.10), Flour Mills; (4.90), P Z; Cussons (10.10), UACN; (17.60), Unilever; (21.80), and Nigerian Breweries; (23.40).
A higher valuation or P/E ratio means investors are willing to pay a higher share price today because of growth expectation in the future. It also means that they expects growth from the consumer goods names compared to overall market.
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The trend in the last two to three years may justify the high multiples.
International Breweries full year 2016 and 2017 net income grew by 36.28 percent and 38.10 percent while it surged by 592.95 percent at nine months September 2018.
Nestle Nigeria’s full year profit fell 66.61 percent in 2016, but it rose 85.23 percent and 35.41 percent in full year 2017 and third quarter of 2018.
“Investors are attracted to Nestle because it is in the foods industry and it produces essential goods that have been dominating the market for over 5 decades,” said Kayode Tinuoye, Fund Manager at United Capital Asset.
“Because over time investors choice are limited, a lot of them concentrated on the firm at a point,” Tinuoye said.
“Investors are attracted to the stock of International Breweries because of beer makers’ aggressive mergers. They see growth prospects going forward. I think price to earnings of 31 times is justified fundamentally more than Nestle,” said Tinuoye.
Indeed the firms have been embarking on aggressive expansion with a view to increasing market share and magnifying shareholders earnings.
International Breweries- indirectly owed by the largest world’s largest brewer AB Abser- merged with INTAFACT and PABOD Ltd to form a stronger entity to give rivals a run for their money.
The beer maker’s flagship brand Hero has dominated the South East market while beer lovers in the South West are enamoured to Trophy, another premium brand. These two region forms the large chuck of drinkers in the country.
International Breweries has commissioned a $250 million plant in Otta, Ogun State.
Similarly, in February, Nestlé Nigeria launched a new beverage production plant in Ogun state, Nigeria, following an N 4.1 billion ($11.4 million) investment.
The new plant is an extension of the brand’s existing Agbara facility and will expand production of the brand’s Milo ready-to-drink (RTD) range, as demand for the product has risen in the country.
“Nestle has the strongest nine months results among consumer goods peers. In this period of massive selloff by investors, it is expected that they place more premium on Nestle,” said Christian Orajekwe, equity research analyst at Cordros Capital Ltd.
“International Breweries seem to be the poster child of the sector because they are the one disrupting the market with new products. Which is why investors are more biased towards the beer maker,” said Orajekwe.
Johnson Chukwu, managing director and CEO of Cowry Assets Management Ltd is of the view that both firms have an excellent efficiency level even amid foreign exchange loss.
Consumer goods firms in Africa’s largest economy capitulated to a myriad challenges such as dwindling purchasing power among consumers, insecurity in the north of the country, decrepit infrastructure, high incidence of smuggling, counterfeiting locally manufactured products, and the menacing grid lock at the Apapa and TinCan Ports.
BALA AUGIE
