27 January 2014

Nigeria: Gloomy Forecast for Nigeria's Consumer Industry in 2014

Operators of the Fast Moving Consumer Goods (FCMG) industry in the country may have to be on the alert, as the sector has been predicted to record barely marginal improvements in in 2014. A Renaissance Capital report released yesterday pointed out that following a challenging years like 2012 and 2013, consumer companies are not expected to advance into full recovery in 2014, with just a minimal improvement possible in the year ahead.

This poor outlook comes on the heels of a rigorous business environment reforms, being embarked upon by the Federal Ministry of Industry Trade and Investment, with the primary objective of promoting industrial sector growth, through the enhancement of the businesses of operators such as those in the FCMG sector, who have now been predicted to face relatively blighted prospects in 2014. According to Renaissance Capital, the Nigerian consumer companies faced challenging conditions in 2012 and 2013 and as a result have reported slowing growth.

"Our outlook for 2014 is for only a marginal recovery in the consumer environment," it said. The report however noted that the longer-term outlook for Nigeria remained extremely positive, citing the country's population size and strong Gross Domestic Product (GDP) growth forecasts, as well as the current low penetration of packaged food and beverages.

Stressing that there were significant opportunities for consumer players in the Nigerian market in the long run, the analysts explained that Nigeria still appeared to be on the cusp of the 'hot zone', with many years of growth ahead.

"While competition has already increased, we believe this will intensify as the country develops. In our view, companies that are building solid bases today, including infrastructure and brands, will be ahead of the competition and stand to benefit for many years."

Renaissance Capital identified Nestlé as its top pick among the Nigerian consumer companies, stating that its choice of Nestle was due to its stronger and more consistent earnings track record and its superior access to foreign management practices. "We understand that Nestlé SA plays an active role in the strategy and management of the company, as it does with all its global subsidiaries. In addition, Nestlé has invested the most in infrastructure to date among its peers and is ahead of the others in transforming its distribution model and penetrating new regions in Nigeria," the analysts said. According to the forecasts, Nestlé, Unilever Nigeria and Cadbury Nigeria are currently trading on very similar Price-Earning ratios (P/E ratios), with Unilever at a premium to Nestlé.

"We use a forward exit P/E of 30x to derive a TP for Nestlé of NGN1,320 (previously NGN1,100). We value Unilever at a 10 percent discount to Nestlé. On an exit P/E of 27x, we derive a TP for Unilever of NGN55 (previously NGN64)," it said.

" We value Cadbury at a further 10% discount to Unilever, given the lack of access to management and visibility around earnings. We are concerned that the current margins are unsustainable. On a forward exit P/E of 24x, we derive a TP of for Cadbury of NGN91 (after the consolidation of shares), vs NGN48 previously (NGN80, adjusted for the consolidation of shares)," it said.

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