Unilever to Nestle Raise Nigeria Bubble Concern on Valuation
Investors are valuing shares of Nestle SA (NESN) and Unilever’s Nigerian units at about twice the level of their European parents as faster growth in Africa’s most populous nation lifts consumer stocks to record highs.
The 53 percent surge in Nestle Nigeria Plc (NESTLE) this year pushed shares to 33 times estimated profit, almost double the ratio for Zurich-listed Nestle and up from a discount last year. Guinness Nigeria Plc (GUINNESS) is trading at a 53 percent premium relative to its parent, Diageo Plc. (DGE) Unilever Nigeria Plc (UNILEVER) has a price-to-earnings multiple of 38, compared with 18 for Unilever, which is based in London and Rotterdam.
While bulls say the gains in Nigeria are justified by the economic expansion in Africa’s largest oil-producing nation, Hermes Fund Managers Ltd. and Renaissance Asset Management see the valuation gaps as a signal shares are too expensive. All three units reported profit declines in the period ended March as accelerating inflation and an Islamist insurgency in the north curbed spending by the nation’s 170 million citizens.
“There may be a correction,” Lanre Buluro, the head of research at Lagos-based Primera Africa Securities Ltd., said by phone on May 23. “People will start looking to re-evaluate and move this money somewhere else.”
The Nigerian Stock Exchange All-Share Index (NGSEINDX) is valued at 13 times estimated earnings, the highest level since December 2010, after rallying 42 percent this year. The MSCI Frontier Markets Index, the benchmark gauge for nations with an average market capitalization of $34 billion, has a multiple of 11 after gaining 14 percent in 2013.
Local investors have piled into Nigeria’s stock market, accounting for 57 percent of trades in March, compared with 39 percent in all of 2012. Growth in the $269 billion economy, Africa’s largest outside South Africa, will quicken to 7.2 percent this year from 6.3 percent in 2012, International Monetary Fund projections show. That compares with an estimated 5.6 percent growth rate for Sub-Saharan Africa. The euro area’s economy will probably contract 0.6 percent this year, according to the European Central Bank.
“Many asset managers around the world, who are not experts on Africa or on frontier markets, want to get into these markets at any cost and they’re just choosing a name which is familiar and which they perceive to be safe,” Sven Richter, who oversees about $260 million as managing director of frontier markets at Renaissance Asset Management, said by phone from Johannesburg May 13.
Net foreign inflows into Nigerian equities amounted to 29.3 billion naira ($184 million) in March, compared with 93.8 billion naira in 2012, according to the Nigerian Stock Exchange.
Richter, whose Renaissance African Sub-Saharan Fund has outperformed 95 percent of peers tracked by Bloomberg during the past 12 months, said he doesn’t own shares of Guinness Nigeria, Unilever Nigeria or Nestle Nigeria. Most multinational companies listed on the Nigerian bourse are majority-owned by their parents, according to data compiled by Bloomberg.
“We can’t figure out how they should be valued so highly,” said Gary Greenberg, who has invested in developing nations since 1989 and runs the $320 million Hermes Global Emerging Markets Fund, which has outperformed 91 percent of peers so far this year.
Greenberg favors Nigerian lenders such as Zenith Bank Plc (ZENITHBA), which trades at 8 times estimated 2013 earnings. That compares with a multiple of 29 for Guinness Nigeria, according to data compiled by Bloomberg. The first Guinness brewery outside of Ireland and Britain was started in Lagos in 1963 and listed its stock on the bourse in 1965, according to the company’s website.
Adeola Adejokun, a spokesman for Guinness Nigeria, declined to comment on valuations. The increase in Unilever Nigeria’s shares reflects the return investors expect they can get, Yemi Adeboye, a spokesman for the company, said in a May 22 e-mailed response to questions. Unilever’s roots in the country date back to 1923, when it started as a soap manufacturing company, according to its website.
Nestle Nigeria’s valuation is “well balanced in relation to the fast-moving consumer goods sector,” Martin Woolnough, the company’s outgoing Lagos-based managing director, said in an e-mailed response to questions May 23. Nestle has been importing products into Nigeria since at least the 1920s and started a local unit in 1961, according to its website.
Nigeria’s consumer market is still in its infancy, giving investors an opportunity to benefit from long-term growth, said Hans-Henrik Skov, who oversees about $330 million in frontier markets at BankInvest in Copenhagen, including the BI SICAV New Emerging Markets Equities (BINEMEI) fund, which outperformed 99 percent of peers tracked by Bloomberg in the past 12 months.
“You have growth in your existing products, plus growth from new products they introduce,” said Skov, whose firm holds shares of Nestle Nigeria. “If you take into account that these companies are not going ex-growth in at least 10 years time, that deserves a high multiple.”
Nestle Nigeria will probably increase profit at an average annual pace of 21 percent in the three years through 2016, versus 9 percent for Nestle, the world’s biggest food company, according to analyst estimates compiled by Bloomberg. Unilever (UNA) Nigeria’s 24 percent projected growth rate compares with 8 percent for Unilever, the seller of Lipton tea and Dove shampoo.
Stocks in Nigeria, Africa’s top oil producer by capacity, will sustain gains provided Bonny Light crude prices remain above $100 a barrel and central banks worldwide maintain monetary stimulus, Pabina Yinkere, an equity analyst at Vetiva Capital Management Ltd., said in a May 31 interview in Lagos.
Nigeria’s currency, which strengthened 3.9 percent against the dollar last year for the continent’s best performance, has retreated 2.1 percent this year to 159.45 per dollar as of 4:51 p.m. in Lagos.
Consumer spending will be constrained for the rest of this year by rising prices and military action against the Islamist insurgency, Nestle Nigeria’s Woolnough said in May 29 phone interview, two days before he retired.
Inflation (NGCPIYOY) in Nigeria, where the World Bank estimates almost 63 percent of the population lives in poverty, accelerated to 9.1 percent in April from 8.6 percent a month earlier, data from the nation’s statistics bureau show. The militant group Boko Haram has carried out gun and bomb attacks that killed thousands since 2009 in the mainly Muslim north and the capital, Abuja, to establish Islamic rule.
Conditions for consumers will start improving next year as the government ramps up spending for elections, Guinness Nigeria Chief Executive Officer Seni Adetu said by phone from Lagos June 7. Nigeria is the biggest market globally for Guinness stout by net sales, he said.
Nestle Nigeria’s first-quarter net income fell about 3 percent from a year earlier, the company said May 3. Unilever Nigeria’s first-quarter earnings slid 10 percent, data compiled by Bloomberg show. Guinness Nigeria’s nine-month profit through March declined 18 percent, according to a statement distributed by the Nigerian bourse.
“Inflationary pressure in Nigeria is holding back consumer spending,” Rene Hooft Graafland, the chief financial officer of Amsterdam-based brewer Heineken NV (HEIA), said on an April 24 conference call with analysts. “You’ll hear that from our competitors, but also other consumer goods industries, all had a very slow start in that market.”
Heineken is the biggest shareholder in Lagos-based Nigerian Breweries Plc (NB), which is valued at 30 times estimated earnings after surging 20 percent this year. That compares with a multiple of 17 for Heineken.
Paris-based Lafarge SA (LG), the world’s biggest cement maker, is valued at 16 times estimated profit, compared with a multiple of 12 for its unit in Lagos. The Nigerian business of London-based GlaxoSmithKline Plc trades at 24 times trailing earnings versus 19 for the parent. PZ Cussons Plc (PZC)’s Nigerian business, which makes consumer products such as soap and home appliances, has a multiple of 87, versus 46 for its parent.
Nigeria’s status as a frontier market makes it difficult to justify valuations on consumer stocks above 20 times earnings, Hermes Fund Managers’ Greenberg said. Nigeria ranked 131st out of 185 countries in the World Bank’s Ease of Doing Business Index. In Transparency International’s Corruption Perceptions Index, it has a rating of 139 out of 174. Lower scores signal increased corruption.
“The reason a lot of countries are called frontier is they haven’t made it to the point of a sustainable growth path,” Greenberg said. “Nigeria falls into that camp. It’s a wonderful opportunity with a huge population and blessed with oil riches, but it’s still at the fairly nascent stage of developing.”
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