After delivering a solid return of 42% in 2017 and gaining a further 16% in January 2018, Nigerian equities have exited their positive run and moved into negative territory. On August 16, 2018 the All-Share Index (ASI) declined by 8.3% year-to-date, compared to a gain of 35.6% in the same period of 2017. The index was still up 8.5%, until the end of the first quarter of 2018. However, the following quarter, in particular, saw significantly weaker numbers as the market sold off by around 7.1%, mirroring the performance of emerging market equities. At the start of 2018 we were bullish on equities and had forecast a market gain of 25% for the year on the back of improved macroeconomic conditions and enhanced foreign exchange liquidity. However, given the absence of near-term catalysts and waning investor sentiment following the kick-off of the presidential election cycle, we do not see a dramatic turnaround in the current fortunes of the market.
The strengthening of the US dollar following rising US interest rates – due to the tightening stance of the Federal Reserve – has been the largest single driver of the emerging and frontier market retreat. By comparison, DXY, a US-dollar index, appreciated by 4.3% in the first eight months of 2018 and around 7.1% between February and August that year. For US dollar-based investors, the year-to-date loss on the ASI is amplified by the impact of currency conversion.
Similar to the ASI, stocks in the fast-moving consumer goods segment declined by an average of 19.7% year-to-date. Broadly speaking, earnings have been mixed. Multinational companies like Nestlé Nigeria and Unilever Nigeria have seen double-digit earnings growth on the back of significant expansion in gross margins, which was driven by subdued prices of grains and easier access to foreign exchange. According to the US Agency for International Development’s Famine Early Warning Systems Network, prices of local grain, a key raw material, softened in the second quarter of 2018. On average, wholesale prices for maize, millet and sorghum were down 25%, 18% and 14%, respectively, over 2017. Meanwhile, other firms, like Flour Mills of Nigeria (FMN) and Dangote Sugar, have seen their earnings decline year-on-year (y-o-y) because of pressures arising from smuggled products, such as sugar; slightly weaker pricing; and some non-performing business lines, such as FMN’s agro-allied businesses. A common feature that was found in the results is that demand and growth is still fragile and has yet to recover from its pre-2016 levels. As such, although we believe that improving macroeconomic conditions and pre-election spending may help boost demand, we are still cautious about demand growth going forward.
Conversely, data for the cement segment shows that it is up around 60% year-to-date. The sector is positively skewed by activity of an outlier, the Cement Company of Northern Nigeria, which rallied strongly on the back of positive news regarding its capacity expansion and merger and acquisition announcement.
In actual terms, Dangote Cement and Lafarge Africa, two cement companies we cover, posted negative returns of 7% and 37.6%, respectively. Earnings wise, these companies’ performance could not have been more divergent. While Dangote Cement’s profit before tax in the first half of 2018 was up by 19% y-o-y, on the back of sales growth of 19% and a gross 207-basis-point margin improvement to 59%, Lafarge delivered a pre-tax loss of N6.3bn ($20.4m) over the same period.
Improving macroeconomic conditions underpinned the unit volume growth delivered by the sector. The total cement consumed in Nigeria in the first half of 2018 stood at 11.2m tonnes, 10% higher than the estimated 10.2m tonnes sold in the first half of 2017. Even in terms of unit volume growth, Dangote Cement outperformed its competitor, with growth of 13.9% in the first six months of 2018, compared to the 5.4% recorded by Lafarge. As a result, Dangote Cement’s market share increased by 253 basis points to 69.7%.
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