2 July 2018 ( Lagos ) :The Food sub-sector is made up of the food and non-alcoholic beverage manufacturers under their coverage; these companies include Dangote Sugar Refinery (DANGSUGAR), Flour Mills of Nigeria (FLOURMILL), Nestle Nigeria (NESTLE) and Unilever Nigeria (UNILEVER). 

Analysts are positive about revenue performance of the food sector in the second half of the year - primarily supported by their expectation of electioneering boost for staple food products and the usual festive demand closer to year end. Though Analysts maintain their stance that sector revenue growth will be predominantly volume based, Analysts anticipate an average of mid-single digit price hike for the year. 

Whilst Analysts had expected the segment to be an outperformer in the first half of the year, the HPC and beverages sub-sectors have actually outperformed food on average so far in H1’18. The major drivers for this deviation have been higher than anticipated price cuts and/or sluggish volume roll-out. That said, revenue growth across this space has come in largely in line with their expectation – averaging -5% y/y in Q1’18 vs their -6% y/y estimate.

Among producers impacted by lower pricing was DANGSUGAR. The company reported a 31% y/y decline in revenue in Q1’18 following a 22% y/y and 20% q/q decrease in prices. This rollback was necessitated by intense competition from illegally imported refined sugar products which also partly impacted volumes sold (down 12% y/y). The impact on margin was however cushioned due to moderating global raw sugar prices (down 21% ytd). 

Though Analysts forecast a boost from the company’s stronger selling seasons (Q2 and Q4), Analysts expect this trend to persist and culminate in a 14% moderation in FY’18 revenue. Analysts expect the need to stay competitive with pricing and a high base to drive more modest sales growth for FLOURMILL. Thus, Analysts forecast a modest 7% y/y revenue growth for FY’18/19, supported by expected rise in demand in H2 given its wide offerings of staple Nigerian food. 

For Nestle Nigeria, Analysts expect FY’18 revenue to grow 15% y/y, finishing as the top performer in the sector. Analysts believe this will be largely driven by further volume gains from the company’s ?4.1 billion investment in a beverage production plant for its newly released Milo Ready-To-Drink variant, even as the beverage segment outperformed with a 17% y/y turnover growth in Q1’18. 

Furthermore, recent launch of other well-positioned food products is also expected to supplement demand for the company’s household brand names despite intense competition (Q1’18: +7% y/y revenue growth). Furthermore, UNILEVER is expected to maintain notable sales momentum in its Food segment in H2’18 as the company’s efforts to increase distribution capacity and also aggressively push its key brand (Knorr) continue to bear fruits. 

Analysts expect the company’s food segment to consolidate on the 16% y/y revenue rise recorded in Q1’18. However, they highlight that at the company’s AGM in May 2018, shareholders reportedly approved UNILEVER’s plans to divest its Spread’s business (Blue Band). While the company had initially stated its parent company’s intention to divest the business in April 2017, Analysts were surprised by an announcement of a $12 million investment in a manufacturing line for Blue Band in November 2017. 

Whilst Analysts await clarity from the company on details surrounding the deal, Analysts believe that UNILEVER’s margarine business makes up about c.7% of its total revenue – Analysts only expect the company’s financials to reflect the effect of this divestiture upon completion of the transaction. 

Reporting for EasyKobo on Monday , 2 July 2018 2018 in Lagos, Nigeria

Source: Analysts at Vetiva Capital Management Limited