FMCG firms’ sales beat expectations amid harsh macroeconomic environment

Fast Moving Consumable Goods Firms (FMCG) have navigated the storms caused by a harsh macroeconomic environment and rising inflation that pressured consumer spending as they recorded growth in sales.

The recent earnings results of Vitafoam Nigeria Plc, Flour Mills Nigeria Plc, Seven Up bottling Plc, Guinness Nigeria Plc, International Breweries Plc and PZ Cussons Nigeria Plc showed sales increased by 37.92 percent to N586.66 billion from N425.33 billion the previous year.

The impressive leap forward at the top lines has exceeded analysts’ expectations.

“Flour Mills of Nigeria’s (FMN) 9M 2017 top line has exceeded our previous expectation by a wide margin,” said analysts at CSL Limited in a recent note to BusinessDay.

The investment house raised the price target for the largest miller in the country to N24.90/s from N15.8/s, on the back of stronger sales outlook in forecast years.

“We upgrade our rating on the stock to a Buy. Our new Price Target implies 38% upside from today’s closing price of N18.0/s),” said analysts at CSL Limited.

Guinness Nigeria stronger sales and reduced cost of sales and the company’s ability to stream line product portfolio helped buoy gross profit, according to analysts at FSDH Limited, in a recent note to BuisnessDay.

“We maintain our BUY rating on the shares of PZ Cussons Nigeria Plc at the current price of N14.25,” said analysts at FSDH.

Analysts at FBNQuest said International Breweries’ third quarter ended December 2017-Q3 2017 (end-Dec) results were stronger than they had expected, mainly due to positive surprises in sales.

“Following the recent sell-off, the shares show a potential upside of +11.6% to our price target. As such, we have upgraded our recommendation on the stock from Underperform to Neutral,” said analysts at FBNQuest.

Experts have attributed the impressive performance at the top lines to firms’ pricing strategy, the relative calm in the North East part of the country that enabled them push their products across the borders.

For instance, analysts at CSL Limited are of the view that Guinness’s price competitiveness in economy brands Satzenbrau Pilsner, Harp Lager, and Dubic, together with new product offerings of low-priced spirits brands are supporting sales volumes.

Flour Mills is in a growth spurt as a shortage of dollars forced cash starve peer rivals to turn to the company for raw materials.
“Everyone is trying to see how to source locally and that is good’’ for Nigerian farmers and processors, said Paul Gbededo managing director of the company.

“We have almost tripled production in refinery of palm oil, palm kernel and soy bean. Prices have risen alongside demand. Fifteen months ago, one ton of corn was sold for N60,000 ($190). Today it is N125,000 ’’ said Gbededo.

Consumer goods firms have been struggling with a severe dollar shortage caused by a sharp drop in oil price since 2014. These firms were unable to source dollars to import raw materials and machinery for the purpose of meeting production demands.
These woes showed face in the country’s GDP as the economy contracted by 2.2 percent in the third quarter of the 2016, its worst recession in 25 years.

Inflation for the month of December accelerated to 18.55 percent, the highest in 11 years, stoked by higher price of gasoline and food stuff. This rising inflation eroded consumer’s purchasing power.
The adoption of a flexible exchange rate policy last year by the central bank saw the naira lose 40 percent of its value against the U.S dollars.

A weak naira impacted negatively on the cost of production of firms that import raw materials to meet production hence input costs spiked. Also, currency volatility spiraled debt in the capital structure of firms while foreign exchange losses were recorded.
The cumulative cost of sales of the 6 firms under analysis increased by 47.12 percent to N482 billion in the period under review as against N340.17 billion the previous year.

Combined finance costs were up 35.41 percent to N30.36 billion in the period under review as against N22.42 billion the previous year. Cumulative loans in the balance sheet stood at N291.73 billion, representing a 321.15 percent surge from N69.12 billion recorded last year.

Some firms are intensifying efforts to reduce the debt in the balance with the introduction equity capital or rights issue.

Flour Mills plans to issue N40 billion rights issue for the purpose of reducing the huge debt in its capital structure.Cost of capital will increase to 20.02 percent, post right issue, as against 17.75 percent previously held,data gathered by BusinessDay shows.

Guinness plans to raise N40bn via a rights issue this year as it seeks to reduce foreign exchange liabilities.The company’s debt-to-equity ratio for FY2016 was 120%, according to analysts at FBNQuest.