…The companies under our coverage — OKOMUOIL (+71.4% y/y in 9M-24)and PRESCO (+67.3% y/y in 9M-24) delivered impressive revenue growth.
…Despite the challenging operating landscape, we believe the lingering FX liquidity challenges and long-term sector growth prospects remain favourable for sector players
THUR JAN 02 2025-theGBJournal| In 2025E, we expect industry players to maintain sub-inflationary price increases to protect margins.
Thus, revenue growth across the sector is expected to remain strong. Our outlook is further supported by the industry-wide nature of these price increments, reducing the likelihood of significant volume declines.
Consequently, we project a combined revenue growth of 70.4% y/y for Food and HPC companies. However, the heavy reliance on imported raw materials like wheat, sugar, and salt exposes companies to fluctuations in the foreign exchange market, contributing to elevated costs.
Persistent inflationary pressures on operating expenses are also expected to keep margins under strain in the coming year.
Overall, our forecast points to an EPS of NGN10.69 for FLOURMILL in 2025E (2024FY: NGN0.06), NASCON (NGN5.06 | 2024E: 4.90), DANGSUGAR (NGN0.11 | 2024E loss per share: NGN17.78), UNILEVER (NGN3.92 |2024E: NGN2.97) and NESTLE (NGN16.68 | 2024E loss per share: NGN232.14).
Agricultural Producers
Nigerian CPO planters recorded stellar topline performance in 2024 on account of a surge in global CPO prices and the lingering naira depreciation, which translated to higher prices in the domestic market.
As a result, the companies under our coverage — OKOMUOIL (+71.4% y/y in 9M-24) and PRESCO (+67.3% y/y in 9M-24) delivered impressive revenue growth.
Despite the challenging operating landscape, we believe the lingering FX liquidity challenges and long-term sector growth prospects remain favourable for sector players.
However, both companies (OKOMUOIL: 135.5% y/y | PRESCO: 29.2% y/y) continue to grapple with elevated cost pressures, driven by the impact of currency depreciation on fertiliser costs amidst a highly inflationary environment.
On margins, OKOMUOIL’s gross margin (-11.68 ppts y/y to 57.1%) contracted, while PRESCO’s gross margin improved (+827bps y/y to 71.9%) due to a slower
increase in the cost of sales relative to revenue.
The two companies also diverged in EBITDA margin performance. OKOMUOIL’s EBITDA margin (-649bps y/y to 43.1%)contracted following a 21.9% y/y increase in operating expenses, while PRESCO’SEBITDA margin (+797bps y/y to 60.9%) expanded amid a 44.7% y/y increase in operating expenses.
Overall, the strong revenue growth helped both companies offset cost pressures, leading to significant EPS growth – OKOMUOIL (+35.5% y/y) and PRESCO (+120.5% y/y).
For OKOMUOIL, though we do not expect a significant increase in its maturities, we believe the upgrade of the milling capacity at the Okomu II plantation will cause an improvement in its production efficiency and, in turn, its volumes. For PRESCO, we expect the producer to deliver revenue expansion supported by improved volumes.
Nonetheless, we remain concerned about rising costs, including increased fertiliser expenses, which have an FX passthrough and could potentially pressure margins. Thus, we are neutral on the sector – OKOMUOIL (HOLD, TP: NGN362.92/s) and PRESCO (HOLD TP: NGN474.72/s).
Consumer staples: Our outlook for the consumer goods sector is neutral, driven by macroeconomic challenges, including high inflation, cost and currency pressures, inadequate infrastructure, and weak consumer spending.
Volume growth will remain under pressure due to increased price sensitivity. Companies with significant foreign currency loan exposure, such as NESTLE and DANGSUGAR, remain at a disadvantage due to ongoing naira depreciation.
However, food companies like NASCON (BUY; TP: NGN39.48/s) are expected to outperform, benefiting from strong product demand and their ability to raise prices.
In contrast, the performance of beer makers (NB, GUINNESS, and INTBREW) will be influenced by price hikes, improved product mix, and gains from recent rights issues, although inflation, currency pressures, and excise duties may increase cost burdens, pressuring margins and earnings.-Analysis is provided by Cordros Research Analysts
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