The brewery space, food segment and home and personal care are top sub-sectors to invest in 2022 within the fast-moving consumer goods sector, according to analysts at FBNQuest.
The consumer goods industry saw a recovery in performance in 2021 on the back of increased demand after a resilient performance in 2020.
According to a 2021 report by FBNQuest, Nigeria’s real household consumption as a proportion of Gross Domestic Product (GDP) has risen to 76 percent in 2021, the highest level since 2010.
“Across our coverage, 9M ’21 cumulative sales rose by 35 percent year-on-year (y/y), aided by strong consumer demand and price increases. Guinness Nigeria, PZ Cussons and Flour Mills of Nigeria recorded the highest growth rates: 105.1 percent, 40.4 percent, and 37.2 percent, respectively,” the analysts note in a report titled ‘FBNQuest Capital Nigeria Outlook 2022.’
Despite the increase in sales, the report reveals that high-cost inflation compressed the gross margins of these companies by an average of 101bps to 23.1 percent in 9M’21 compared with 24.1 percent in the same period of 2020.
“Nestle Nigeria, UAC of Nigeria, and Nigerian Breweries (NB) suffered the most reduction in gross margin over the period. Nestle reduced 360bps to 38.7 percent. For UACN and NB, commodity price increases led to margin reductions of 320bps and 269bps to 35.7 percent and 17.3 percent, respectively,” the report states.
In 2022, FBNQuest expects the growth momentum to slow in 2022 as a result of the coming 2023 elections.
“We expect growth to bolster earnings in the first half but forecast a slowdown in the second half due to the upcoming 2023 elections. We believe inflation, unemployment, and weakness in real income remain a challenge for the consumer. We do not expect any change to economic management that could improve general living conditions in Nigeria,” the report notes.
On where investors can put their money, Abiola Gbemisola, a consumer good analyst at FBNQuest during a webinar on Thursday, said the brewery space, food segment and home and personal care segment would do well in 2022.
According to the report, the brewery sub-sector (NB, International Breweries and Guinness) saw revenues jump 44.8 percent while their combined profit hit N313 million in the nine-month period of 2021 compared to a loss in 2020.
The brewery sector’s shares were up 23.3 percent in 2021, pushed by Guinness whose stock jumped 105 percent while International Breweries and NB saw their shares plunge 21 percent and 14.3 percent, respectively.
The analysts also state that the imposition of the new sugar tax of N10 per litre on non-alcoholic beverages is a concern, as it will add to the cost base of non-alcoholic beverage manufacturers.
Also, the recent ban on sales of alcohol in sachets, small volume PET and glass bottles below 200ml by the National Agency for Food and Drug Administration and Control (NAFDAC) is a concern for brewers, especially Guinness.
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“However, management is well-positioned and has anticipated the ban. In our view, the policy is likely to affect unlisted distilleries in Nigeria whose products are available in small packs and sachets, widely distributed in bus parks and garages, and represent the bottom of the pyramid segment of the alcohol market,” the authors note.
The home and personal care sub-sectors are also poised to perform well in 2022. Unilever and PZ, the sub-sector leaders saw their combined revenue jump by 36.1 percent to N128.4 billion while their profit increased to N4.34 billion versus a loss of N4.96 billion in 9M ’20. Their growth was driven by internal restructuring such as halting credit sales, writing off bad debts and investing in focus groups and consumer research.
Food companies such as UACN and Flour Mills of Nigeria are also good investment options in 2022, according to the analysts. Flour Mills saw its share rise 37.2 percent in 2021 while UACN’s share jumped 50 percent, one of the best performing stocks under the coverage of the analysts among food companies.
Gbemisola also stated that they expect inflation to be high in 2022, which could be positive for the companies, but these companies would need to watch their cost management.
“Given the condition of Nigeria’s balance of payments, a further devaluation of the naira is possible, increasing Capex and raw material costs. Two major events could also raise the overall operating cost for FMCGs, which are new electricity tariffs, and an increase in fuel prices,” they note.
