Focus for the week: Consumer Goods Sector 9M’24 Earnings Preview

The Nigerian economy continues to grapple with significant headwinds. At the forefront are currency depreciation and rising inflation, both of which have put immense pressure on consumer goods companies. Inflation has averaged 32.77% so far in 2024, a sharp increase from 22.63% a year ago, with food inflation climbing even higher due to global commodity price pressures and persistent supply chain disruptions. Beyond production costs, the sustained depreciation of the Naira and the hike in benchmark interest rates locally, coupled with still elevated rates on the global front have further impacted profitability.

Following the release of Q2 GDP report, the NBS stated that the manufacturing sector grew by 1.28% y/y, the lowest in the past four quarters. The Food, Beverage & Tobacco segment, which is the largest sub-sector expanded a little faster, by 2.29% y/y, but also its lowest gain in the last four quarters. Despite the generally inelastic demand for staple foods and beverages, economic challenges have caused a decline in overall consumer demand. As consumers tighten their belts, even essential items are becoming more sensitive to price fluctuations.

In Q2’24, supported by price increases, topline growth across the sector remained resilient, with most companies reporting revenue increases of over 50% y/y. However, bottom-line performance was mixed, depending on product type and company structure. Brewers and other commodity-heavy importers experienced faster growth in their cost of goods sold, compounded by foreign exchange losses on payables. Companies with foreign loans, particularly those with foreign parent firms, also faced rising interest costs. Among publicly listed firms, Flour Mills of Nigeria (PAT margin: 0.9%) and Unilever Nigeria (PAT margin: 6.9%) stood out amongst its peers, posting net profits at the end of the quarter.

What shaped the past week? 

Equities: In the week, the local equity market traded in a bullish manner, gaining 0.47% w/w to settle at 98,070.23 pts. This was majorly driven by gains in the Consumer Goods sector, as the index inched up 1.42% w/w. Stocks such as DANGSUGAR (+13.06% w/w), and INTBREW (+6.91% w/w) were among the top gainers. Similarly, the Oil and Gas sector rose by 1.08% w/w, due to gains observed in ETERNA (+8.10% w/w) and CONOIL (+5.33% w/w). Meanwhile, the Insurance sector closed lower, losing 1.23% w/w. Finally, the Banking sector contracted by 0.51% w/w, due to losses recorded in JAIZBANK (-6.64% w/w) and FIDELITYBK (-4.76 w/w).

Fixed Income: This week, system liquidity was further constrained due to increased borrowings at the SLF window, and OMO sales. It opened on Monday at c.₦2.3 trillion negative and closed on Friday at c.₦872 billion negative. As a result, OPR increased marginally by 3bps to 32.33% w/w. At the end of the week, the secondary market closed on a mixed note with a bearish bias, especially on short-term instruments, with the most notable change being a yield increase of 855bps on the 182-day T-bill to 26.26%.

Currency: At the NAFEM, the Naira appreciated by ₦40.49 w/w to close the week at ₦1,600.78 per dollar.

Domestic Economy:

Annual headline inflation increased by 55bps to 32.70% y/y in September (Aug’24: 32.15% y/y). This outturn was higher than Bloomberg Consensus’ estimate of 32.4% (Vetiva: 32.27% y/y). On a month-on-month basis, headline inflation increased by 30bps to 2.52% (Aug’24: 2.22% m/m). The uptick can be attributed to the passthrough of higher transport costs to food prices. Given the successive increase in PMS prices amid hitches associated with the naira-for-crude deal, we now expect inflation to rise to 34% y/y in October and remain elevated for the remaining months of the year. Thus, we raise our average annual inflation forecast for 2024 to 33.21% y/y (2023: 24.52% y/y). We believe this inflation outturn could cause the apex bank to maintain its rate-hiking cycle.

Global: The S&P 500 and the Nasdaq closed higher on Friday, boosted by an earnings-driven jump in Netflix shares and broader gains across technology stocks. All three major Wall Street benchmarks comfortably secured a sixth straight weekly gain, with the Dow Jones Industrial Average closing largely unchanged a day after posting a record closing high. The Dow Jones Industrial Average rose by 0.1%, to finish at 43,275.91 ppts. The S&P 500 increased by 0.4%, to close at 5,864.67 ppts, while the Nasdaq Composite climbed 0.6%, to end at 18,489.55 ppts.  U.S. Treasury yields fell on Friday as investors weighed the latest economic data and its potential effect on U.S. monetary policy. The 10-year Treasury yield fell 2bps to 4.075%. The yield on the 2-year Treasury ticked lower by 2bps to 3.965%. In the Asia-Pacific region, Chinese stocks rallied on Friday for the first time in four days as the central bank rolled out promised support for the stock market. China’s CSI 300 jumped 3.6% to 3925.23 ppts, the index is now 22% above levels from late September when the Chinese government first announced a stimulus plan. The Hang Seng also closed3.6% higher. Meanwhile, European equities closed mostly higher on Friday, as the Stoxx Europe 600 gained 0.19%, the Swiss Market Index was up 0.18%, France’s CAC rose 0.39%, Germany’s increased 0.38%, while the FTSE in London declined 0.32%.

What will shape markets in the coming week?

Equity market:  We expect the market to trade in a cautious manner in the coming week, as more Q3’24 earnings trickle in; that said, we expect to see investors take a “wait-and-see” stance on the market.

Fixed Income: In next week’s trading session, we expect system liquidity levels to determine the direction of the NTBs space. In the Bonds market, we expect trading activities to remain calm as investors await the Bond auction scheduled for the week.