PMI reading no 64: again below neutral
Our manufacturing Purchasing Managers’ Index (PMI), the first in Nigeria, declined gently in July from 49.8 to 48.9. Our partner, NOI Polls, has gathered and compiled the data. The index is found in developed markets (such as the ISM’s in the US), larger emerging markets such as China, India and Brazil, and a few frontiers. It is based upon manufacturers’ responses to set questions on core variables in their businesses. In our case, it is not seasonally adjusted.
- PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets in developed economies.
- In the unweighted model of our choice (the ISM’s), respondents are asked whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A headline reading of 50 is neutral. We have now posted twelve negative readings since our launch in April 2013 including the last three.
- Our sample is an accurate blend of large, medium-sized and small companies, based across the country.
- Two of the five sub-indices declined in July, with three again in negative territory (output, employment and stocks of purchases).
- The proportion of unchanged responses increased for four of the five sub-indices, and exceeded 80% of all responses for delivery times.
- Manufacturing appears to have settled on a plateau, and respondents to have adopted a wait-and-see mode. It has access to freely available fx but is unsure of demand growth. An interesting trend this time is that the large companies give better readings than the two other segments, which could indicate that they are able to take a longer view.
- The exercise includes questions triggered when a respondent has given the same answer for a sub-index for two successive quarters and then changes it for the third. In this latest report, explanations given for declines in readings include: weak demand, the rainy season, poor electricity supplies, high rates of duty on imports of raw materials and stiff competition from China.
- The report sits well with most of the results reported by listed non-bank companies. Even Nestle Nigeria reported sales growth of just 12% y/y for Q2 2018, ie in line with inflation. The report is also consistent with the economy’s emergence from recession, which has been largely driven by the recovery in oil output. The non-oil economy expanded by just 0.8% y/y in Q1 2018.
Event: UAC of Nigeria (UACN) reports Q2 2018 results
Implications: On an annualised basis, H1 2018 PBT of N2.1bn is tracking slightly behind consensus full year 2018E estimate of N4.5bn. Therefore, we expect slight downward adjustments to consensus 2018E EPS forecast. UACN’s Q2 PBT grew 28% y/y to N1.1bn, driven primarily by a +500bs y/y gross margin expansion to 21.4% and a -51% y/y decline in net finance expenses. To a lesser extent, an 89% y/y growth in share of profit from associates helped. The Q2 PBT figure is the strongest the firm has posted since 2016. However, losses from discontinued businesses, such as UPDC Hotels, UNICO CPFA’s pension business and Warm Spring Nigeria Ltd of –N223m ultimately led to a PAT decline of -10% y/y to N392m. Compared with our estimates, both sales and PAT were in line. Therefore, we expect a muted response by the market to these results.
Positives: Gross margin expanded by +500bps y/y to 21.4% while net interest charges declined by c.51% y/y to –N630m. The decline in net finance charges was due to lower finance costs of N2.4bn (down -31% y/y). Sequentially, all key line items improved.
Negatives: Continued weakness in the Food & Beverage segment, driven primarily by a Q2 sales decline of -33% y/y to N10.3bn for the Animal Feeds business. Similar to Q1, the Animal Feeds business posted losses before tax of –N46m in Q2 and now accounts for c.51% of UACN’s topline. Y/y growth in the share of profit from associates was driven mainly by the recognition of reduced losses from UPDC’s investments in First Festival Mall.
We rate the stock Outperform. Our estimates are under review.
UACN Q2 2018 results vs. FBNQuest Capital Research estimates (N millions)
Event: International Breweries (IBL) reports Q2 2018 results. Similar to its Q1 2018 results, the company did not provide comparable numbers for prior year. As such, we are unable to do y/y comparisons.
Implications: IBL’s pre-tax loss of –N.2.6bn in Q2 came in worse than our –N1.7bn forecast. Following the disappointing results, we expect the market’s reaction to be negative.
Negatives: IBL reported pretax and after-tax losses of –N2.7bn and -N606m respectively. These losses compare with pre-tax and post-tax losses of –N2.4bn and –N2.2bn that the company reported in Q1 2018. Compared with our forecasts, sales missed by 7%. IBL’s pre-tax loss missed our forecast. Sequentially, the weak earnings were underpinned by a -32% q/q reduction in other operating income and a 59% q/q rise in other losses.
We rate International Breweries shares Neutral. Our estimates are under review.
Event: Nigerian Breweries reports Q2 2018 results
Implications: Q2 PBT and PAT of N12.3bn and N8.2bn both declined -26% y/y and -33% y/y respectively. Notwithstanding, we expect a slightly negative-to-neutral reaction by the market because on an annualised basis, H1 PBT of N27.6bn is broadly in line with consensus estimate of N54.6bn.
Positives: Q2 sales of N89.7bn grew 8% q/q and beat our estimate by 5%. Net interest expense declined by -53% y/y.
Negatives: Q2 PBT declined y/y and q/q by -26% y/y and -19% q/q respectively. Additionally, PAT declined by -33% y/y and -19% q/q respectively. According to Heineken’s (NB’s parent) trading statement, unit volumes for Nigeria declined by mid-single digits during the period. This suggests that NB raised prices to offset unit volume weakness. Nonetheless, Q2 gross margin contracted by c.-341bps y/y to 42.4%.
We rate the shares Neutral. Our estimates are under review.
Nigerian Breweries Q2 2018 results: actual vs. FBNQuest Capital Research estimates (N millions)
Event: Nestle Nigeria (Nestle) reports better-than-expected Q2 2018 results
Implications: On an annualised basis, Nestle’s H1 PBT of N31.8bn is tracking well ahead of consensus 2018E PBT estimate of N58.2bn. Therefore, we expect upward adjustments to consensus estimates on average. Y/y, Nestle’s Q2 PBT of N18.2bn grew 79% y/y and 34% q/q respectively. The positive surprises on the gross margin line (as gross margin expanded by +305bps y/y to 44%) and a net finance income of N598m are commendable. We believe the market will react positively to these numbers.
Positives: Q2 sales of N67.8bn were up 12% y/y, while PBT and PAT grew 79% y/y and 57% y/y respectively. As stated above, the gross margin expansion and net finance income helped. Unlike recent quarters, Nestle posted an fx-related income of N588m. Compared with our estimates, while Q2 sales were in line, PBT beat by 33%.
Negatives: No obvious negatives
We rate the stock Underperform. Our estimates are under review.
Nestle Nigeria Q2 2018 results: actual vs. FBNQuest Capital Research estimates (N millions)
Maintaining Neutral rating
- Rolling over to 2019E: FCMB Group’s (FCMB) Q2 2018 PBT missed our forecast by a considerable margin. Although weakness in both revenue lines contributed, a negative surprise in opex was the primary driver behind the weakness. On its earnings conference call, management stated that opex growth was underpinned by a N1.0bn increase in the AMCON levy for the quarter. However, excluding the AMCON charge, opex still came in close to N1.0bn (or +5%) higher than our forecast. Consequently, we have increased our opex forecast by around 4.0% on average over the 2018-19E period. In contrast to opex, loan loss provisions surprised positively. As such, we have lowered our 2018E cost-of-risk forecast to 2.4% (from 2.5% previously), but still close to the high end of guidance. These revisions underpin the average cut of c.20% to our 2018-19E EPS forecasts. Despite the cut, our new price target of N3.01 is only 8% lower than our previous target because we have rolled over our valuation to 2019E. At current levels, our new price target implies a potential upside of around 51% from current levels. Despite the sizable upside potential implied by our price target, we are retaining our Neutral recommendation on the shares because we would like to see evidence of a sustained improvement in earnings over the next few quarters first
- Q2 PBT up 109% y/y, but below expectations: FCMB’s Q2 2018 PBT grew by 109% y/y to N3.8bn. The strong earnings growth was driven by a 59% y/y growth in non-interest income and a -51% y/y reduction in loan loss provisions. The y/y growth in non-interest income was underpinned by strong growth in income from tbills, fx trading income and fees generated from card services. Further down the P&L, PAT grew by 75% y/y. The slower growth in PAT relative to PBT was due to a combination of a 76% y/y spike in income tax expense and a negative result of –N677m in other comprehensive income (OCI) vs. -N46 in Q2 2017. Compared with our forecasts, PBT and PAT missed by 27% and 45% respectively because of negative surprises on both revenues lines and opex. The Q2 PBT is tracking behind consensus 2018 PBT forecast of N15.3bn.
Event: FCMB Group reports Q2 2018 results
Implications: FCMB’s Q2 PBT missed our forecast by 27% due to negative surprises from both revenues lines and opex. When annualised, FCMB’s H1 2018 PBT also tracks behind consensus 2018 PBT forecast of N15.3bn. Consequently, we expect to see a subdued reaction from the market.
Positives: Q2 2018 PBT grew by 109% y/y to N3.8bn. The strong earnings growth was driven by a 59% y/y growth in non-interest income and a -51% y/y reduction in loan loss provisions. The y/y growth in non-interest income was underpinned by strong y/y growth in fx trading income and fees generated from card services. Further down the P&L, PAT grew by 75% y/y. The slower growth in PAT relative to PBT was due to a combination of a 76% y/y spike in income tax expense and a negative result of –N677m in other comprehensive income (OCI) vs.-46% Q2 2017.
Negatives: PAT declined by 12% q/q mainly because of the negative result on the OCI line.
We rate FCMB shares Neutral. Our estimates are under review.
Conference call details:
Date: Tuesday, July 31, 2018. Time 1500 Lagos., London, 1000 New York, 1600 Johannesburg.
Dial in: Lagos (+234 1 277 2430); UK (+44 (0) 330 336 9126); USA (+1 929 477 0324); South Africa (+27 11 844 6054)
Access code: 7974201
FCMB Group Q2 2018 results: actual vs. FBNQuest Capital Research estimates (N millions)
FBNQuest FI-FX Daily Watch 14 May 2018
Opening market liquidity on Thursday was N146bn (positive). Interbank rates closed within a higher range of 13% to 19% due to OMO sales. At an OMO auction yesterday, the CBN offered N250bn and raised N454bn from the sale of 119-day and 231-day paper at stop rates of 11.05% and 12.15% (a little higher than the previous week). On the secondary market, yields picked up for selected maturities.
The FGN bond market was active, and yields showed no clear direction. On the Eurobond market, there was a general dip in yields for maturities under our coverage.
The CBN’s daily fx intervention was again US$0.5m, at N305.25. Turnover at the NAFEX plunged from US$500m on Wednesday to US$182m. Indicative rates ranged from N326 to N363. The US inflation report for April was released yesterday. Headline inflation in April was 2.5% y/y while core inflation stood at 2.1% y/y. Both were a little lower than consensus. We are unlikely to see any change in the FOMC’s hawkish stance in the near future.