under-perform major stock market index
By Nkiruka Nnorom
THE downturn that has been sweeping through the equities market this year has left two major sectors in the market – the industrial goods and consumer goods sectors – in a very bad shape.
Though the entire market is currently battered as a result of the jitters around the upcoming 2019 election and general unfavourable business environment in the country, both sectors year-to-date, YtD, are hugely under-performing the major equities index, the All Share Index, ASI, which has slumped by over 19 percent as at the close of trading on Friday, December 7, 2018.
Financial Vanguard’s analysis of the performance of the various sectors on the Nigerian Stock Exchange, NSE, shows decline of -38.31 percent and -24.5 percent in the industrial and consumer goods sectors, under-performing the ASI by 17.7 percent and 6.09 percent respectively.
Operators in the market blamed the performance of the sectors partly on poor quarter three, Q3’18, earnings report of some of the companies, which triggered sell-off in the shares by investors. They also attributed it to weak purchasing power among the populace.
Industrial, consumer goods vs other sectors’
Financial Vanguard’s analysis of the activities of the five major sectors in the market shows that the industrial goods sector recorded the worst performance YtD closing at -38.31 percent on Friday. This was followed by the consumer goods sector, which recorded a steep decline of -24.5 percent.
The oil and gas sector trailed them, declining by -14.88 percent, while the banking and insurance sectors depreciated by -15.44 percent and -12.10 percent respectively.
9-month bad result
A look into the nine month earnings report to September 31, 2018, of some of the major companies in the consumer and industrial goods sectors showed a bad performance. For instance, Four Mill of Nigeria Plc, recorded revenue growth of 9.67 percent to N269.7 billion, while its Profit After Tax, PAT, for the nine month period fell by 45.8 percent to N5 billion. For Dangote Sugar Refinery Plc, both revenue and bottom-line went down. The company recorded 28.4 percent decline in revenue to N116.8 billion, while its profit after tax fell by 37 percent to N16.7 billion.
Dangote Flour Mills Plc, another company from the stable of Dangote Group Plc, also suffered setback in its finances during the period, recording 16.9 percent and 75 percent decline in revenue and post tax profit respectively.
UAC of Nigeria Plc, as well, recorded negative revenue and profit. The company’s revenue went down by 18.3 percent to N55.7 billion, while the post tax profit nose-dived by 84.4 percent to N0.3 billion following the crisis in Plateau State which disrupted the operation of Grand Cereals Ltd, a major subsidiary of the company.
Some good news
However, driven by brand loyalty, cost-saving measures and balance sheet optimisation, Nestle Nigeria Plc and Unilever Nigeria Plc posted strong top and bottom-line numbers, despite the pressure on consumer spending. For Nestle Nigeria, revenue grew by 9.7 percent to N203.1 billion, while post tax profit saw a 44.1 percent increase to N33.1 billion. Unilever Nigeria achieved 10.7 percent y/y increase in revenue to N72.3 billion, while PAT jumped by 105.2 percent to N9.4 billion.
In the industrial goods space, two major companies, Dangote Cement Plc and Lafarge Africa Plc stand out with the later posting a very dismal financial performance for the nine month period.
Larfage Africa posted N10.373 billion loss after tax, a steep decline 1,206 percent compared to the profit position in the nine month in 2017, even though its revenue grew by 4.8 percent during the period. Dangote Cement Plc, on on the hand, recorded both revenue and profit growth within the period. The revenue rose by 13.5 percent to N685.3 billion, while the profit rose by 2.7 percent to N158.23 billion.
In their reaction, capital market operators fingered weak demand occasioned by liquidity problem in the economy among others as the contributing factor.
According to Mustapha Wabah, a research analyst at Cordros Capital, a Lagos-based investment banking firm, ‘still pressured consumer wallet is tinning out margin for most players in both sectors.’
“Year-to-date losses for both the consumer goods and industrial indices are at 25.5 percent and 37.1 percent, effectively under-performing the broader index (-18.5 percent). For consumer goods, we believe the impact of the still pressured consumer wallet is tinning out margin for most players in that space. As at Q3’18, most consumer names posted disappointing earnings save for Nestle whose innovations have come in handy to effectively preserve margins for the company.
“Also, for the brewery players, it was the case of biting competition in the sector, with International Breweries, IB Plc, flooding the market with cheaper beers, the impact of which enabled the company gain market share. Since overall volume growth of the sector is largely compressed on the back of weaker demand, the entire sector had to contend with lower volume,” he said.
On the performance of the industrial goods sector, Tola Odukoya, Chief Executive Officer, FSL Asset Management, said that the industrial goods sector to a large extent is not doing well, even within the economy due to liquidity issues.
He said that though the sector is a very good investment outlet, but for the fact that there is no liquidity generally within the system, investors are shying away from the sector.
He said: “Industrial goods sector is a sector that has a strong positive correlation with the performance of the economy; so when the economy was doing well, this sector was also doing well.
We just came out from recession and there is the likelihood of the economy sliding back into recession. So, in a situation like this, in terms of scale of preference building news houses or patronising companies associated building and construction is not the first thing people think of. They will, first of all, think of the basic needs of feeding and clothing. Once the economy picks up significantly, you will see activity in the sector will also picking up.”
In a report titled, “Consumer goods players: How they square-up as at 9Month 2018”, analysis at United Capital said that the nine month earnings of consumer goods players were divergent.
According to them, the performance of flour millers and sugar refiners were underwhelming, pressured by the protracted gridlock at the Apapa Port and the activities of smugglers in the case of sugar. This, they said, weakened top and bottom line numbers for some of the companies in the sector.
“In all, our best picks in the sector are Nestle Nigeria Plc and Unilever Nigeria Plc, buttressed by their solid balance sheet position, product and brand durability. While we maintain a buy rating on Flour Mills of Nigeria and Dangote Sugar Refinery, our short-term expectation is dampened by the feedback effect of the Apapa gridlock and smugglers on volume growth. We are neutral on UAC of Nigeria as our rating on the conglomerate remains under review,” the analysts said.
Also contributing, Mr. Ambrose Omordion, Chief Research Officer, Investdata Consulting Limited, attributed the lacklustre performance in both sectors to lack of purchasing power among Nigerians, saying that the food and beverages sector has suffered the most in the lull.
The consumer goods sector is the most hit because of lack purchasing power. You can see people are not really patronising the sector even though they deal in essentials, he said.
Continuing, he said: “For the industrial goods sector (which comprised majorly of the cement giants, construction and paint manufacturing companies) most people are putting off their projects because they are finding it difficult to finance those projects. So, there is dryness of liquidity in the system that is affecting the performance of companies within that space.”