TUE, 6 AUGUST 2016-We update our views on Nigerian consumer stocks following meetings with listed and unlisted companies, product price checks and 1H16 results. Most companies said they intend to increase product prices by 10-20% in 2H16 to offset the impact of naira devaluation on imported CoGS and higher inflation. They have not seen an improvement in FX availability in the interbank market since the devaluation in June 2016, which has resulted in capex deferral and rising FX-related trade payables. On our new estimates, we increase our TP for Nestlé Nigeria by 26% but cut our other TPs in the sector by c. 25%. Outside of the brewers, which operate in a more favourable oligopolistic market, we prefer Nestlé Nigeria, which we upgrade to HOLD (from Sell), given strong brand equity and a proven track record that we think leaves it better-positioned to deal with macro challenges. We downgrade GlaxoSmithKline Consumer Nigeria (GSK Nigeria) to HOLD (from Buy) and Flour Mills of Nigeria to SELL (from Hold). We maintain our SELL rating on Unilever Nigeria.
Majority of companies intend to increase prices in 2H16
Most of the companies we met said they intend to increase prices by 10-20% in 2H16. We do not think this will be enough to offset the negative impact of the naira devaluation on imported costs and generally higher inflation; however, management feedback is that this is likely the maximum range consumers can absorb without a significant negative impact on volumes.
FX availability affecting working capital and capex
Our meeting feedback is that access to FX in the interbank market has become more challenging since the devaluation of the naira in June 2016 although some companies have increased the number of banks they use or ramped up exports in order to diversify sources of FX. Companies are therefore taking longer to pay international suppliers, as evidenced by higher trade payables days (including to offshore parent companies), and deferring capex other than stay-in-business capex.
We remain cautious, but prefer Nestlé Nigeria’s track record
We think it premature to call the bottom in sector profit margins during 1H16 and advise investors to remain cautious on the sector. We prefer Nestlé Nigeria given the brand loyalty of its key products Maggi and Milo, consistent track record of positive top-line growth, returns above the cost of capital and reasonable valuation.
Key risk – impact of higher prices on volumes
Despite what we view as cost-push inflation prompting consumer companies to increase product selling prices, we remain uncertain about the impact on volumes resulting from planned product price increases. Our view remains that staple products at traditionally low pricing points will fare relatively better than discretionary products should companies, on average, adopt a strategy of blanket price increases.
