Nigerian conglomerates, positive prognosis buoyed by consumer boom

This morning, we beam our headlights on listed Nigerian conglomerates and assess them based on certain financial parameters.

These firms are UACN plc, AG Leventis, John Holt and SCAO, with well diversified investments in the areas of food, real estate, paints, manufacturing, and automobile.

Is the sum of the parts greater than the whole?

Conglomerates or firms engaged in disparate businesses are sometimes valued at a discount as investors seem unwilling or unable to properly value each part of the firm.

However, we believe with due diligence investors can begin to nibble on some of these companies that are well positioned as the country’s population of 170 million will drive the demand for consumer goods and also spur growth of conglomerates in Africa largest economy.

Additionally, the surging demand for building material such as cement, and the 17 million housing deficits shows the innumerable opportunities awaiting conglomerates to exploit.

Analyses of full year 2013 financial performance of the conglomerates show their strength, weaknesses and opportunity for growth.

For the year ended December 2013, the cumulative revenue of the four conglomerates shrank by 2 percent to N86.5 billion from N88.23 billion the preceding year.

We attribute the slow-down in bottom-line to stiff competition from other companies such as Dangote Flour Mills, Flour Mills of Nigeria, and Honeywell, which are cannibalising sales with the production of noodles, with the worst hit being UACN.

There was bottom-line growth as Nigerian conglomerates profits rose by 16.51 percent to N14.50 billion, from N12.45 billion in the preceding year, thanks to a 30.1 percent surge in UACN sales.

But for UACN’s 3206 percent increase in other income, cumulative profits would have shrunk.

Cumulative net margin, a measure of efficiency and profitability for the four conglomerates, increased to 11.68 percent for the year ended December 2013, as against 7.56 percent in the preceding period.

Nigerian coys 2013 margins and returns; Source: BusinessDay Research

Based on BusinessDay analysis, cost-of-sales margin, which measures the relationship between sales and cost of sales, remained flat at 84 percent.

The high input cost could have arisen due to increase in the price of raw material and huge energy costs caused by erratic power supply as many firms seek alternative and expensive source of energy such as diesel to run plant for the purpose of production.

Despite the militant attacks in the North East part of the country, investors are increasingly showing interest in the Nigeria foods and real estate business, a positive prognosis for the country’s conglomerates as they are well diversified.

According to the Africa Development Bank, there are over 350 million people in the middle-class in Africa, which further highlights the need for these firms to spread the market for their products outside Nigeria to West Africa and beyond to boost growth.

The rise in the purchasing power of the consumer will increasingly drive demand for the product of these firms.