Industrial goods sector booms despite depleting purchasing power

…Earnings in the sector surge 29.6% to N1.12trn
As pre-tax profit expands by 25.2% 
Analysts give clue to main drivers
By Nkiruka Nnorom
industrial goods sector has shown an unprecedented resilience in the face of the inflationary pressure and its attendant impact on the purchasing power with the sector’s quoted companies reporting significant rises in earnings in the first quarter 2022 (Q1’22).
The eight leading companies in the sector cumulatively recorded 29.6 per cent and 25.2 per cent increases in revenue and profit before tax (PBT) respectively, beating both inflation and the economic growth rate in the review period.   
Inflation had risen steadily over the first three months of the year to hit 15.9 per cent as at March 2022, while the economic growth rate for the first quarter stood at 3.11 per cent.
Meanwhile, inflation has continued to surge, rising to 17.71 per cent in May from 16.8 per cent April, according to the latest inflation figure by the National Bureau of Statistics (NBS), thus straining consumer wallets.
In 2021, Nigeria was ranked the 11th most miserable country in the world with the misery index score of 59.4 behind countries like Cuba, Venezuela, Sudan, Lebanon, Zimbabwe and Argentina among others, even as the number of poor people in Nigeria is projected to grow to 95.1 million (World Bank) from 90.1 million in 2021.
The companies, which include, Dangote Cement Plc, BUA Cement Plc, Lafarge Africa Plc, Meyer Plc, Berger Paints Plc, Chemical and Allied Products (CAP) Plc, Arbico Plc and UPDC Plc, posted a combined revenue of N1.17 trillion, a 29.6 per cent increase over N939.32 billion recorded in the corresponding period in 2021. 
Their pre-tax profit for the period jumped to N423.26 billion from N338.11 billion in Q1’21, indicating a 25.2 per cent growth.    Meanwhile, investment experts have attributed the positive earnings report by the companies to increased government spending on infrastructure and the various Public, Private Partnership (PPP) projects on infrastructure, which they argued may have overshadowed the effect inflation has on individual consumer’s purse. 
Additionally, they opined that real estate has been quite effective in hedging inflation, adding that Nigerians consider real estate a safer investment asset class. They stated that activities within the space is expected to witness further surge as the 2023 election approaches and the politicians rally to make a last minute impressive mark on the electorates through infrastructure development.
UPDC, BUA Cement drive revenue 
Financial Vanguard’s findings from the financial statements of the companies made available to the Nigerian Exchange Limited (NGX) shows that revenue was driven by a construction and real estate company – UPDC Plc, which posted a 978 per cent increase in revenue to N781 million from N72 million in the corresponding period in Q1’21. 
This was followed by a cement manufacturing giant – BUA Cement, with a 58.5 per cent revenue growth to N96.99 billion from N61.19 billion. Meyer Plc ranked third, posting a 53.4 per cent increase to N342 million from N223 million in Q1’21, while Arbico Plc and Lafarge Africa Plc recorded 28.6 per cent and 26.8 per cent growth to N1.15 billion and N90.61 billion respectively. However, Dangote Cement Plc remained the leader in value terms, delivering N413.18 billion in revenue, a 24.2 per cent increase from N332.65 billion in Q1, 2021. 
Real estate/construction coys lead profitability
Further analysis showed that the real estate and construction companies boosted profitability with the two entities reviewed recording more than one hundred per cent increase in their pre-tax profit. Only Meyer Plc recorded a decline in profitability.
Breakdown showed that CAP Plc, a subsidiary of UAC of Nigeria, posted the highest pre-tax profit growth of 161 per cent to N781 million from N299 million, followed by Arbico Plc with 151.7 per cent increase to N15 million from N29 million loss before tax in Q1, 2021. UPDC Plc, another subsidiary of UAC of Nigeria Plc, achieved 136 per cent pre-tax profit growth to N146 million from N409 million loss before tax in the same period in 2021. Berger Paints Plc was the next with 102 per cent increase to N134 million from N66 million in Q1’21, while Lafarge Africa Plc ranked fifth, rising by 65.4 per cent to N21.12 billion from N12.77 billion. 
Analysts take
According to investment experts who spoke to Financial Vanguard, the financial performance of the companies highlights the continuous recovery of the economy and improved investment in the sector.
Emmanuel Onoja, Head, Research at GTI Group, explained that growth in the companies’ finances was mostly driven by the government’s infrastructure drive, improved appetite for real estate investments given its perception as a safe haven in Nigeria, and improved access to financing. 
“The government’s investment into the real estate sector through the Federal Mortgage Bank of Nigeria (FMBN) enables construction and mortgage loans disbursed to beneficiaries through the National Housing Fund Scheme. Other initiatives continue to draw attention to the sector. 
Real estate compared to other local asset classes has been most effective in tracking inflation. “The growing risk to government debit, risk level inequities, and the risk averseness of many Nigerians has made real estate the preferred investment in recent times. So far, it has been the only local asset class that has tracked inflation in the country, hence growth in activity,”   he said.
Agreeing with Onoja, Rotimi Olubi, Managing Director, ARM Securities, stated that the cement, industrial and the real estate sector has been one sector that has the price making power to a reasonable extent. He noted that companies in the sector have been able to increase prices to an extent that it is almost at par with the inflation level (the cement sector to be specific). This is one of the reasons why they have been able to post good performances despite inflationary pressures.
He said: “Also, Nigeria/Africa is a developing nation which requires a lot of capital expenditure coupled with an increasing population that requires infrastructures like roads, schools, hospitals and housing and government capital expenditure spur building and construction activities (more than private spending in this case). 
“These factors have led to an increasing demand for building materials and for the real estate sector. Also, government spending on infrastructure may have   overshadowed the effect that inflation has on the purse of the   individual consumer.”
David Adonri, Vice Chairman, highcap Securities, said: “Increase in their revenue and profit is based on the post Covid-19 surge in construction. The companies in this sector like Dangote Cement, BUA Cement   and Lafarge Africa are big forces in the economy. 
In his words: “Compared to last year, the Nigerian economy has recovered more from the disruptions of Covid-19. More public works enhanced by Public Private Partnership (PPP) and private constructions are proceeding with intensity now thus, increasing demand for construction materials manufactured by these companies. 
“The building materials industry, especially cement manufacturing,   is driven largely by local raw materials hence, sustenance of their production despite disruptions to international commerce because of the Ukraine war and resurgence of Covid-19 in China. The cement manufacturing companies are also active in the export market thus, enhancing their revenue base.” 
The investment experts are projecting a bright outlook for the sector going into the second half of the year and the full year to December 31, 2022.
Olubi of ARM securities stated that the implementation of the 2022 budget may be a driving force for more demand for the building materials and real estate sector. Also, the current public and private projects that are ongoing will keep the demands in the space.
Adonri of Highcap securities, who also projected a positive outlook, opined that construction activities through public works will increase as politicians make last ditch efforts to impress the electorate before the 2023 general election. He explained that with the Africa Continental Free Trade Area (AfCFTA) gathering momentum, the African market has become a big arena for made in Nigeria goods. 
In his views, Onoja of GTI Group said: “With currency fluctuations and interest rates on the rise, it is a slippery slope for real estate. Further, weakening currencies are set to continue to impact consumer demand and institutional financing progress in the market in addition to inflation. Inflation may affect the affordability of houses for interested parties as prices of major building materials such as cement and rods are pushed to unimaginable levels. This will translate into rent increases for different categories of apartments and buildings listed for sale. 
“However, the construction industry is forecast to grow by 5.7 per cent in 2022 supported by the gradual recovery in overall economic conditions and investments in the infrastructure, healthcare, and energy sectors.”



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