F&B stocks lose traction; shed 70 percent value

Okey Onyenweaku

Despite employing 1.5 million people or just over five per cent of the Nigerian labour work force, the country’s food and beverages sector has swooned into a minor crisis as falling consumer disposal income, increased energy costs and higher cost of foreign exchange conspired to chock the business into a coma.

The sectors difficulties has in some sense been reflected in the fragile results posted by some of its largest members, with companies like Cadbury Nigeria Plc advertising staggering losses. Cadbury’s operating lost before tax in 2016 was a worrying N562.9million Naira down from a profit of N1.6 billion posted in 2015, or what represented a 135.7 per cent fall in earnings before tax, depreciation and amortization. The consequence of a collapse in the value of the naira in the course of the year had direct impact on the company’s operating earnings as gross margin contracted by 990 basis points or slightly lower than 10 per cent year on year to 27.5 per cent.

Cadbury’s operating woes reflected a trend prevalent in the sector and played up in terms of the sectors overall market performance for the year. Indeed the sterling performances of companies like Nestle Nigeria, Cadbury, Flour Mills among others is fast becoming a fading memory. Investors only thinly remember how they paid school fees and medical bills because they bought into stocks in the sector. Most of the stocks including Flour Mills of Nigeria Plc, Northern Nigeria Flour Mills Plc, Cadbury Nigeria Plc, Dangote Flour Plc, Dangote Sugar Refinery Plc traded at impressive values.

The companies rode on strong corporate fundamentals to drive prices in the stock market. It was a good time for investors and the F&B sector.

But the euphoria appears to have disappeared. The perception of some investors today is that the F&B sector has lost vigour and become glaringly disappointing.  Business Hallmark research reveals that almost all F&B stocks are now bearish except save for 7 up Bottling Company Plc and Nestle Nigeria Plc. The failure of the F&B stocks has been linked to weak fundamentals induced by the harsh macro-economic environment.

The economic recession in Nigeria has stifled businesses especially the ones that have to import raw materials from the international market. In fact, lack of foreign exchange is killing manufacturing firms’’, Nebolisa Okeke, a soap manufacturer in Anambra State said.

A critical observation of the stock prices of the F&B shows they have lost huge value compared with their performance the previous years. For instance; F&B stocks have lost an average of 70 per cent in the last 6 years from May 19, 2010 to April 19, 2017. This also means that those who invested in F&B companies have lost more than a third of their investment.

A cursory assessment of  Cadbury stock shows that its investors have lost 73.3 per cent (or N25.54) from 2010 to April 2017, Dangote flour has dropped 82 per cent or (-N19.64) in six years from N34.84 per share in May 14, 2010 to N9.30 per share in April 19, 2017.

Similarly, Flour Mills of Nigeria plunged by 74 per cent or (-N50.9) from N68.90 per share in 2010 to N18.00 per share. Northern Nigeria Flour Mills Plc has also shed a significant 82 per cent (-N27.57) in six from N33.58 in 2010 to N6.01 per share in 2017.

BH research shows that those who speculated on Dangote Sugar Refinery have lost 69.95 per cent in six years, while investors in Honey Well have also lost 88.8 per cent or (-N7.82) from N8.80 per share in 2010 to N0.98 per share in 2017.

For U T C Nigeria Plc, has also lost substantial weight by 70.05 per cent or (-N1.17) from N1.67 per share in May 14, 2010 to Nominal value of N0.50 in April 19, 2017. In F&B sub-sector of the market only Nestle Nigeria and 7 up Nigeria remained resilient and recorded significant gains.  Interestingly, while Nestle Nigeria’s stock gained 138 percent (N436) from N314.00 to N750.00 per share, 7 up Nigeria’s stock also appreciated 133 per cent (N60) from N44.90 to N104.90 per share in the review period.

Investors have expressed concern over the falling trend in the equities business where one of the strongest sectors, the F & B has tipped over. Investors are agitated that if nothing is done about the economy and its impact on the stock market challenges in share-owning families will magnify.

Industry experts have heaped the blame of the challenges being faced by the F&B sub-sector of the market to the stifling macro-economic environment.

First, some of them argue that such companies will find it difficult to thrive in a deep recession adding that recession comes with shrinking output, low profit margins and high unemployment caused by massive layoffs by firm whose priority is to survive first before considering other things.

The Nigerian Economy slipped into recession in the second quarter of 2016. The Gross Domestic product of the Country had plunged into the negative of 0.36 per cent in the first quarter 2016, – It further declined to -2.06% in the second quarter and contracted further to -2.24% in the third quarter before closing the year that is quarter, recording a negative GDP growth rate of -1.5%.

These deteriorating economic indices including high inflation, high unemployment, weak local currency value, high interest rates, increasing prices of goods and services and general drop in the standard of living are reflecting on the poor Book value of the F&B companies. These have deeply depleted disposable income in the hands of consumers and demand has dropped. Unfortunately, the level of activity in the capital market is weakening by the day as investors are weary. Many industry analysts believe that what has in fact, finished off the manufacturing sector is the plunge in the Naira from about N197 to about N315 in the official market and N520 in the parallel before settling at N410 in the black market. All these industry observers believe have conspired to deal a fatal blow on the F&B sub-sector as well as ward off potential investors from the capital market including foreign investors.

Market observers believe the tight regulatory policies of the fiscal and monetary authorities such as the Treasury Single Account, stopping of COT charges before it was changed and restriction of access to forex on importation of 41 items among others are capable of causing hiccups in performance of companies and shrink their profit margins.

These many believe would hardly encourage economic growth as well as affect negatively the progress of the capital market.

‘’The fundamental of the sector has been declining over the time. The last straw that broke the Camel’s back was the heavy depreciation of the naira which they have charged to their P&L. Investors are leaving the sector for better investment options’’, said Managing Director of HIGHCAP Securities limited, David Adonri.

Adonri further explained that the insecurity in the Northern Part of Nigeria (Nefarious activities of the Boko Haram Sect) has also taken a huge toll on the level sales.

Results of F&B Companies

Cadbury Nigeria

The performances of some of these Companies appear to reflect their stock value. Cadbury Nigeria Plc, the Bournvita maker reported its full year results for the 2016 financial year, ending the year with a net loss of N296m, compared to N1.2bn profit in 2015.

Cadbury, now a subsidiary of Kraft has been experiencing declining sales and low profitability in the last few years. Its revenue grew 8% in the year ended to nearly N30bn.

In 2015, the company recorded N28bn in sales. The sales growth in addition to a tax credit of N266m helped narrow the company’s losses from N842m in the 9-months to December.

Dangote Flour Mills

Dangote Flour Mills posted a profit before tax of N11.82 billion for its financial year ended December 31, 2016. The results show the company has returned to profitability after four years of losses.

Details reveal the group’s operating profit went up to N16 billion compared to a loss of N8.6 billion posted at the preceding year. Profit after tax went up to N10.6 billion in contrast to a loss of N12.5 billion in 2015. At the close of business year, Dangote Flour Mills revenues increased by 120 percent from N48 billion to N105 billion, while gross profit went up by 556.8 percent to N29 billion compared to N4 billion in 2016.

Dangote Flour Mills consist of Dangote Flour, Dangote Pasta, and Dangote Noodles. It was sold to Tiger Branded Consumer Goods, but later reacquired and re-positioned for good results.

Flour mills of Nigeria

On the top-line, revenue surged 47.9 per cent to N389.9 billion from N263.7 billion in the corresponding period 2015/16. It also recorded huge surge in gross profit while Cost of Sales at N336.4 billion, had risen sharply by 42.6 per cent. The company’s gross Profit had also surged massively by 93 per cent to N53.5 billion from N27.7 billion.

The company’s performance came with a huge 270 per cent jump in tax burden. This reduced its pre-tax profit by – 48 per cent to N10.3 billion while post-tax profit slumped – 61 per cent to N7.4 billion. The net operating loss figure of N11.8 billion was recorded against a 2015/16 net operating profit of N23.7 billion.

Northern Nigeria Flour Mills

Northern Nigeria Flour Mills Plc Financial Result for the 9 Months Ended 31st December, 2016 shows that revenue decreased by 39 per cent from N759.7million to N461.1million as it recorded loss N38.8million.

Unilever Nigeria Plc

Unilever Nigeria Plc posted turnover of N69 billion in its audited results for the year ended 31st December 2016.  The Company recorded impressive PAT from its 2015 position of N1.19bn to close the year with PAT of N3.07bn.

The equity market has closed in the negative again at year end in 2017. But at the negative performance of 6.17%, the market proved to be better than its previous year 2015 when the negative performance ended the year at -17%.

Interestingly, since 2014 when the market closed 16 percent negative, investors have been disappointed three consecutive times as expectations for good returns were dashed. Whereas 2016 performance of the market appears to be narrowing the negative disposition of the market, uncertainty continues to prevail as the government has not fully got a good grasp on how to navigate the depressed economy out of recession. This has remained a source of concern to investors who cannot see any light at the end of the tunnel.

Fred Nwaogazi believes the market has ceased to be a good investment option for small investors.

‘’ I no longer put my money there because there are no returns any more. Not even the F&B sub-sector which used to oil our pockets can offer anything good again. In fact, I have lost hope and many others like me feel same way’’, Nwaogazi said.

Many Discerning investors believe that the government of APC has not been favourably disposed to the economy. Others argue that the private sector is on the verge of collapse given the unfavourable policies of the government.

Former Managing Director of Diamond Bank, Dr. Alex Otti captures here how deep the challenge has become. ‘’It is not in dispute that the country is going through some economic challenges which has had severe impact on people and businesses. As individuals, our personal finances and lives have felt the negative impact of the downturn. These impacts can be felt in the following areas: High unemployment, Decline in GDP, Weak local currency value, High interest rates, Increasing prices of goods and services, Weakening Stock market, Soft real estate market and General drop in the standard of living’’.

‘’My contention would be that the issue of stagflation popularly called recession is a short term problem that even if we solve, will not resolve the deeper structural political and economic problems that have separated us from becoming the giant we hope to be. Until we address those problems, development will remain a mirage’’, he added.