Power to the

price point
2019 Nigeria Consumer Report
2 2019 Nigeria Consumer Report | Power to the Price Point

Nigerian Consumer Industry

Power to the Price Point

More consumers, so where is the sales growth?

Nigeria’s urban population is expanding at 4.6% per annum. A growing

number of Nigerians participate in the cash economy and have become
consumers. We might expect listed food and home & personal care (HPC)
companies (below) to enjoy steadily rising sales. But they aren’t. Two years
after the end of Nigeria’s recession we took to the streets to find out why.

Lessons from the street markets

Two of our researchers set up a model household on a modest income, and

went shopping in outer Lagos. On their budget – typical of tens of millions
of Nigerians – they became acutely price-sensitive. The contents of their
shopping basket surprised us. Most of their branded purchases came from
unlisted companies: Boulos, Daraju, Limex, Olam*, Sankin, and Tolaram. The
listed companies, covered here, did not feature as strongly.

Consumers under pressure, price points are key

Our macro-economic research suggests that upper middle-class earnings

are falling in real terms and that there is downward pressure on private
sector wages generally. Price is the key battle ground and companies with
the lowest price points are prospering.

Inflation-
adjusted
quarterly
sales**,
rebased
2011=100

Source: Companies, National Bureau of Statistics (NBS), Bloomberg, Coronation Research. **Quarterly sales
of FMN (March year-end) & PZ Cussons (May year-end) adjusted to fit calendar quarters. See individual
company charts for details. *Olam is listed in Singapore.
2019 Nigeria Consumer Report | Power to the Price Point 3

Key Contact

Guy Czartoryski

Head of Research

[email protected]
4 2019 Nigeria Consumer Report | Power to the Price Point

Contents

Executive summary 5

Long-term growth trends 9

Meet the Ajayis 16

Price points and competition 23

Where the middle class went 31

Company financing 37

Recent results 41

Valuations and recommendations 45

Risks 64

Appendices 69

Disclosures & Disclaimers 97

2019 Nigeria Consumer Report | Power to the Price Point 5

Executive
Summary
6 2019 Nigeria Consumer Report | Power to the Price Point

Executive summary

Growth Trends

Many years ago a number of international funds bought significant positions in listed food and
HPC companies in Nigeria. Their aim was to profit from the rise of the Nigerian consumer, the
biggest single sub-set of the African consumer.

By and large, the funds lost money and are much smaller now than they were seven or
eight years ago. The listed food and HPC companies featured in this report, with the possible
exception of Nestle Nigeria (Nestle), did not grow at the rates once forecast.

One early confusion was to equate nominal growth rates with US dollar growth rates. The key
to sorting out this confusion is to adjust reported sales for inflation. Over the long term the
Naira/US dollar exchange rate tends to adjust for inflation differentials, so an inflation-adjusted
sales record gives a reasonable reflection of equivalent US dollar sales. In inflation-adjusted
terms, again with the exception of Nestle, there has not been much growth. In fact, most
companies have seen inflation-adjusted sales fall.

Where the middle class went

The above conclusion would have seemed illogical, if not impossible, eight years ago. The
African middle class was rising, particularly in populous Nigeria, and would supply the
consumption for these companies to take off.

We do not deny that Nigeria’s population is growing. As important, urbanisation has swelled
the cities creating consumer concentration. But, as we will show, the masses are not getting
richer and unemployment has risen. There is a mass market but, critically, its price points have
shifted downwards.

Quarterly* sales
translated into US
dollars**, rebased
2011=100

Source: : Companies, Coronation Research. *Quarterly sales, sales of FMN (March year-end) and PZ Cussons (May year-end)
have been adjusted to fit calendar quarters. See individual company charts for details. **Translated at the average NGN/USD
interbank rate for each quarter
2019 Nigeria Consumer Report | Power to the Price Point 7

Meet the Ajayi's - a working couple's monthly budget

What do Nigerian consumers buy, and where? To answer this question we conducted primary
research. Mr. and Mrs. Ajayi are a young couple earning salaries which we frequently see
advertised in Lagos. They spend 40% of their disposable income on transport and 10% on rent.
This leaves less than N30,000 (US$83) per month for groceries. They eat well but are picky when
they shop. They do not visit supermarkets but buy exclusively from market vendors. What they
bring home (via our office) includes just a few products from the listed companies featured in
this report.

Competition price points and market share

What we found in the Ajayis’ shopping basket surprised us. Most of the branded goods (only
30% of their shopping basket by value are branded goods) are made by unlisted Nigerian
manufacturers whose products are highly competitive on quality and price. Some of these goods
are made by long-established companies like Boulos, Olam and Tolaram, none of them listed
in Nigeria. But some of the goods are made by companies founded in Nigeria within the last 20
years, like Limex and Daraju.
8 2019 Nigeria Consumer Report | Power to the Price Point

Add to the above list products in their shopping basket made by another unlisted company,
Royal Salt, and there is a lot of competition for the established listed companies. The Ajayis did
bring back some products from Nestle Nigeria, Flour Mills of Nigeria, Unilever Nigeria and PZ
Cussons Nigeria, but not many.

The energy and momentum in the food and HPC industry appears to have shifted away from
the large listed players towards a number of low-cost, low-price point competitors and entrants.
One of these unlisted groups reported nominal sales growth of 30% in 2018 – far higher than any
of the listed companies featured here – and guides to 16% growth for 2019. It is only logical to
conclude that established market shares of the principal listed companies are being eroded.

Growth in inflation-
adjusted sales*, y/y
(lhs), and oil prices
(Brent), US$/bbl (rhs)

Source: Company, Coronation Research. *Quarterly sales, sales of FMN (March year-end) and PZ Cussons
(May year-end) have been adjusted to fit calendar quarters. See individual company charts for details
2019 Nigeria Consumer Report | Power to the Price Point 9

Long-term
Sales Trends
10 2019 Nigeria Consumer Report | Power to the Price Point

Long-term Sales trends

Nestle Nigeria, 2011-18

Nestle Nigeria (Nestle) is an integrated food producer with products at many different price
points. Products include the Maggi range of seasoning cubes, dairy products, beverages,
chocolates, cereals, coffee, baby food and water. The food segment (which includes culinary,
chocolate, confectionary and baby food) contributes 63% of revenues, while sales from the
beverage segment, featuring Milo chocolate, Nido milk and Nescafe, account for the rest.

Nestle Sales* in Naira, inflation- Nestle Sales in US$**, 2011=100

adjusted, 2011=100

Source: Company, Coronation Research. *Quarterly sales (31 Dec year-end). **At the inter-bank FX rate
quoted on Bloomberg for each quarter

Nestle has achieved an inflation-adjusted sales compound annual growth rate (CAGR) of 6.3% over
the period, starting with calendar Q1 2011. CAGRs are strongly influenced by their starting points,
but if we take the four CAGR series (one each quarter) beginning in 2011, their average inflation-
adjusted CAGR through to 2018 was 3.5%. This makes it not only the best-performing listed
company in this report, but arguably the only listed company with worthwhile inflation-adjusted
growth.

When we translate Nestle’s nominal sales into US dollars, we find much the same pattern. (In
many ways, and as we argue in Coronation Research: Naira Exchange Rate Outlook, 5 November
2018, long-term NGN/US$ inflation differentials and long-term NGN/US$ exchange rates amount
to much the same thing.) The US$ sales CAGR (using all four quarters) 2011-18 is 2.4%.

In common with its peers, Nestle has been through many shocks during the studied period. Taking
the period as a whole, Nigeria has shifted from being a high-growth, consumption-led market
benefitting from high oil prices (above US$100.00/bbl 2011-14) to a low-growth economy with oil
prices generally under US$75.00/bbl. What is striking about this pattern is that the CAGRs get
better towards the end of the period. In other words, Nestle is growing better in an environment of
low economic growth and low oil prices than it did during the boom years of GDP.
2019 Nigeria Consumer Report | Power to the Price Point 11

Flour Mills of Nigeria, 2011-18

Flour Mills of Nigeria (FMN) is a producer of flour and several integrated lines of food. Its food
business accounts for approximately 80% of the company's revenues and includes the following
food brands: Golden Penny Pasta, Golden Penny Instant Noodles, Golden Penny Semovita and
Golden Penny and Goldenvita.

Historically FMN was principally a flour milling company but in the early part of this decade
expanded into several business streams simultaneously. FMN today has four operating
segments: flour milling; agro-allied; logistics & support services; sugar value chain.

FMN Sales* in Naira, inflation- FMN Sales in US$**, 2011=100

adjusted, 2011=100

Source: Company, Coronation Research. *Quarterly sales adjusted for FMN's March year-end, e.g. reported
Q4 2012 is presented as calendar Q1 2012 here. **At the inter-bank FX rate quoted on Bloomberg.

FMN has experienced an inflation-adjusted sales CAGR of negative 0.6% over the period
2011-18, starting with calendar Q1 2011. When we take the four CAGR series (one each quarter)
beginning in calendar 2011, their average inflation-adjusted CAGR (using the average of all
quarters) through to 2018 was negative 1.0%. To the nearest approximation, therefore, it makes
sense to talk of FMN’s inflation-adjusted sales as being essentially flat, or flat-to-negative, 2011-
18.

However, it is important when considering CAGRs to think about what one year’s data can
mean because, in this case, the influence of 2018 is very strong. If we had done the same
exercise last year, and taken the data set for 2011-17, the inflation-adjusted sales CAGR would
have been 4.2%, beginning in calendar Q1 2011, and the average CAGR (using the average of all
quarters) would have been 2.2%, 2011-17, a much better result which is comparable with Nestle.

When we translate FMN’s nominal sales into US dollars, we also find a flat-to-negative trend
over the period 2011-18. Beginning in calendar Q1 2011 the CAGR 2011-18 is negative 1.9% and using
the average of all calendar quarters in 2011, the average CAGR 2011-18 is negative 2.0%.
12 2019 Nigeria Consumer Report | Power to the Price Point

Unilever Nigeria, 2011-18

Unilever Nigeria (Unilever) is an integrated food and home and personal care (HPC)
manufacturer in Nigeria with sales split approximately 48%/52% between food and HPC. Its
leading food brands include Knorr seasoning cubes and its HPC brands include Pears soap,
Vaseline and one of the biggest toothpaste brands Close Up, as well as Pepsodent toothpaste.

Unilever Sales* in Naira, inflation- Unilever Nigeria Sales in US$**,

adjusted, 2011=100 2011=100

Source: Company, Coronation Research. *Quarterly sales (31 Dec year-end) **At the inter-bank FX rate quoted on Bloomberg
for each quarter

Unilever’s inflation-adjusted sales have undergone a negative CAGR of 1.1% over the period 2011-18,
starting with calendar Q1 2011. Again, we need to caution that CAGRs are strongly influenced by
their starting points, and so we also calculate the average of the four quarters (in 2011) through to
their respective quarters in 2018. This method yields an average negative CAGR of 3.4%.

Translating Unilever’s sales into US dollars, we find a similar pattern. The US$ sales CAGR (using all
four quarters) 2011-18 is negative 4.4%. However, the early period, 2011-14, was one of growing sales
in US dollar terms. Later growth went into reverse, no doubt influenced first by the oil price shock
of Q1 2015 and the recession that followed in 2016. A rights issue took place in 2017 to de-lever the
balance sheet. A sudden spurt of growth took place in Q3 2017, but overall sales performance in
2017 and 2018 was poor.

The obvious question to ask about Unilever’s data is whether its food or its HPC business has
brought it long-term negative inflation-adjusted sales development, or both. Figuring out the
answer is made a little difficult by the fact that we do not have quarterly sales data for the period
2011-18 broken down into the two business streams.
2019 Nigeria Consumer Report | Power to the Price Point 13

Unilever Nigeria, segment trends 2008-18 and 2014-18

However, we do have annual sales data by business stream for the period 2008-18 which can be
adjusted for inflation. This data shows that the food business contracted by a 10-year inflation-
adjusted CAGR of 1.0% while the HPC business contracted by a 10-year inflation-adjusted
negative CAGR of 3.0%.

We also have quarterly sales data for both segments from 2014 onwards, definitely not a very
long sample period but useful for corroborating, or adjusting, the impression generated by the
longer annual data series. When inflation-adjusted, this shows that the HPC businesses grew
slightly (when using the average CAGRs from all four quarters of the first and last years in the
study), while the food business got slightly smaller. The four-year inflation-adjusted CAGR for
the HPC business was 1.4% while for the food business it was negative 0.6%.

Unilever Nigeria, food and HPC Unilever Nigeria, food and

segment annual sales, inflation- HPC segment quarterly sales*,
adjusted 2008-18, 2008=100 inflation-adjusted 2014-18,
2014=100

Source: Company, Coronation Research. *Quarterly sales (31 Dec year-end)

This recent (2014-18) pattern fits in with what we have seen elsewhere, namely that the recent
years have been kinder to consumer-facing industrial companies than the earlier years (2011-14).

However, as we shall see later, 2018 was a tough year when taken in isolation, and the first
calendar quarter of 2019, for Nestle and Unilever was no better.
14 2019 Nigeria Consumer Report | Power to the Price Point

PZ Cussons Nigeria, 2011-18

PZ Cussons Nigeria (PZ Cussons) is a manufacturer of home and personal care (HPC) products
and seller of electrical products under the Haier Thermocool brand. Sales of HPC represent
approximately 73% of sales (at calendar 2018) while electrical products account for the balance
of 27%.

PZ Cussons’ HPC’s brands include Imperial Leather soap, Carex hand wash, Joy soap and Venus
shampoo, among many others. Under the Haier Thermocool brand it sells air conditioning units,
refrigerators and freezers, among other products.

PZ Cussons Sales* in Naira, PZ Cussons Sales in US$**,

inflation-adjusted, 2011=100 2011=100

Source: Company, Coronation Research. *Quarterly sales adjusted for PZ Cussons' May year-end and advanced by one month
to fit quarter, e.g. reported Q3 2012, ending 29 Feb 2012, is presented as calendar Q1 2012 here. **At the inter-bank FX rate
quoted on Bloomberg.

PZ Cussons’ inflation-adjusted sales have undergone a negative CAGR of 7.8% over the period
2011-18, starting with calendar Q1 2011. When we take the four CAGR series beginning in calendar
2011, their average inflation-adjusted CAGR through to 2018 was negative 9.8%. Again, we need
to caution that CAGRs are strongly influenced by their starting points. But, taking a look at
PZ Cussons’ inflation-adjusted sales data, there has been a significant decline in the inflation-
adjusted revenues of the business over time.
2019 Nigeria Consumer Report | Power to the Price Point 15

Translating PZ Cussons’ sales into US dollars, we find a similar pattern. Beginning in calendar Q1
2011, the CAGR 2011-18 is negative 9.0% and using the average of all the calendar quarters in 2011,
the average CAGR 2011-18 is negative 10.8%.

The reason behind this steep decline in sales may be attributed to the poor performance in the
home and personal care (HPC) business over time. This has also been highlighted in the case
of Unilever Nigeria’s HPC business that had negative inflation-adjusted sales data over 2011-18
(using annual data).
16 2019 Nigeria Consumer Report | Power to the Price Point

Meet the
Ajayis
2019 Nigeria Consumer Report | Power to the Price Point 17

Meet the Ajayis

To understand what working Nigerians buy we have modelled a small Nigerian household –
the Ajayis – based on research by two members of the Coronation Research team. Our analysts
(a man and a woman) set themselves the task of living off a modest budget which includes
accommodating themselves in Lagos and travelling to and from work every day. For food and
HPC they ply the street markets of outer Lagos. They have no brand preferences: what interests
them is quality and price. What ends up in their shopping basket is the focus of this report.

Mrs. Ajayi is a waitress on a monthly gross salary of N33,000 (US$92) with a further N20,000
(US$56) in tips while her husband Mr. Ajayi is a porter employed in Lagos on a monthly
gross salary of N37,000 (US$103). We frequently see such salaries advertised in Lagos and we
know what tips bar staff and waitresses receive monthly. After tax, their combined monthly
disposable income is N84,300 (US$234).
18 2019 Nigeria Consumer Report | Power to the Price Point

Description Details Budget (₦) The Ajayis’ monthly

Age Mr. Ajayi 28 budget
Mrs. Ajayi 23
Occupation Mr. Ajayi Porter
Mrs. Ajayi Waitress
Work Location Mr. Ajayi Lagos Island
Mrs. Ajayi Ikeja
Monthly Income Mr. Ajayi 37,000
Mrs. Ajayi 33,000
Combined tax (5,700)
Post-tax monthly income Couple 64,300
Additional monthly income Tips for Mrs. Ajayi 20,000
Disposable monthly income 84,300

Transport (to work and back) Mrs. Ajayi (20,000)

Mrs. Ajayi (10,000)

Monthly Rent Self contained apartment* at Orile (8,000)

Iganmu

Monthly Bills Cleaning (200)

Seurity Fee (500)
Bathroom Water (500)
Electricity (300)

Mobile Telephone bill Combined (3,000)

Kerosene 3 liters (1,000)
Monthly groceries budget (25,950)
Miscellaneous spend** (4,215)
Monthly outings (73,665)
Monthly balance 10,635

Source: Coronation Research. *Self-contained apartment: one bedroom, small kitchen, with small bathroom/ toilet,
occasional electricity. ** Includes services/maintenance costs e.g. hair salon, electrical services
2019 Nigeria Consumer Report | Power to the Price Point 19

In common with many people in Lagos the Ajayis spend almost 40% of their disposable income
on transport and fuel. Mr. Ajayi takes a bus and motor tricycle (keke maruwa) to work on Lagos
Island and back each day; Mrs. Ajayi works fairly close to the family home and spends half
what her husband does on transport. Their combined monthly transport bill comes to N30,000
(US$83), 36% of their combined disposable income.

The Ajayis have no children and live in a self-contained apartment in Orile, Lagos which consists
of one bedroom, a small kitchen and a parlour with a small bathroom/toilet. This costs them
N8,000 (US$22) per month, 9% of their disposable income.

After paying for kerosene (for cooking), mobile phone charges (pre-pay), and a few other items,
they have approximately N26,000 (US$72) per month to spend on food and home & personal
care (HPC).

s/n Item Unit Cost (₦) Monthly food and HPC

1 Tissue paper 1 250 purchases, for two, on
2 Toothpaste 1 150 N26,000 per month
3 Sanitary pads 1 320 budget
4 Bath soap 3 450
5 Wash soap 3 450
6 Body Lotion 1 400
7 Shaving Stick/Blade 0.2 120
8 Cooking oil 2.0 1,300
9 Salt 0.5 80
10 Seasoning cube/powder 0.5 210
11 Drinking water 12 1,440
12 Sugar 1 300
13 Milk 1 700
14 Tomato puree 2 500
15 Pepper 1 500
16 Onions 3 600
17 Tomato 2 1,500
18 Beans 2 1,600
19 Garri 2 800
20 Vegetables (Efo) 4 800
21 Rice 3 1,950
22 Egusi 1 250
23 Yam 2 1,400
24 Carrot 2 400
25 Plantain 2 1,000
20 2019 Nigeria Consumer Report | Power to the Price Point

s/n Item Unit Cost (₦)

26 Noodles 16 960
27 Spaghetti 2 320
28 Eggs 1.0 1,000
29 Fish 1 600
30 Beef 1 2,000
31 Palm Oil 1.0 800
32 Pap 2 400
33 Bread 24 2,400
Total 25,950

Source: Coronation Research. See Appendices III and IV for the Ajayis’ diet.

What is in the shopping basket

From the Ajayis' food and HPC purchases several things stand out. First, 70% of the Ajayis’
shopping basket by value is unbranded. Rice, beans, plantain and sugar are unpackaged and are
sold by weight.

The largest portion of their food and HPC budget goes on fresh starch, at 42%. Fresh protein-
based food accounts for 16%. A group of items including oils, drinking water, puree, sugar and
salt make up 18%. Fresh vegetables account for 16%. HPC only makes up 8% of their shopping
basket by value.

Household items
composition
18%
8%

Fresh Protein
16%
16% Oils, water, sugar, salt, etc.
HPC
Fresh Vegetables
Fresh Starch-based food

42%

Source: Coronation Research.

2019 Nigeria Consumer Report | Power to the Price Point 21

Already there is bad news for the listed manufacturers of branded food and HPC featured in this
report as their products appear infrequently in the basket.

Nestle appears with Maggi Star seasoning cubes. Mr. and Mrs. Ajayi found that Maggi’s price
point worked out at N1.05/gram, which compared favourably with Onga (from Promasidor,
not listed) at N1.30/gram, Unilever’s Knorr at N1.66/gram and Winstar’s (not listed) Alubadiya at
N2.5/gram.

FMN very likely appears in the unbranded flour used in bread and in the unbranded sugar
the Ajayis purchased. Branded FMN pasta and noodles do not appear, and instead the Ajayis
bought Indomie Noodles made by its competitor Dufil Prima (an unlisted company trading on
the NASD and part of the Tolaram Group). They also bought branded spaghetti from Dangote
Industries.

Unilever features in the shopping list with Pears Petroleum Jelly. However, the Ajayis bought
My My toothpaste from Daraju (unlisted) rather than Unilever’s Close Up or Pepsodent. They
bought Miss Bimbo wash soap from Limex Global Industries (unlisted) rather than Unilever’s
Omo or Sunlight.

PZ Cussons features in the shopping basket with Canoe Soap, and with its Mamador vegetable
oil. However, the Ajayis preferred Miss Bimbo wash soap (above) to Zip from PZ Cussons. When
the Ajayis bought Dano milk from TG Arla (unlisted, which in Nigeria is a joint venture with
the Tolaram Group) they shunned PZ Cussons’ Olympic, Coast and Nunu brands as well as
Nestle Nigeria’s Nido brand. Note that Mamador (PZ Wilmar) and the Olympic, Coast and Nunu
(Nutricima) brands sit outside the PZ Cussons Nigeria plc structure.
22 2019 Nigeria Consumer Report | Power to the Price Point

Sources of items of N26,000 per month budget – market sourced

Item Brand Manufacturers Volume Cost per Item (₦)

Tissue paper Softwave Tissue Boulos 1 pack of 6 rolls 250
Toothpaste My My Daraju 1 pack of 145 grams 150
Sanitary pads Lady care Sankin Nigeria 1 pack with 10 pads 320
Bath soap Canoe Soap PZ Cussons 1 stick weighing 120 60
grams
Wash soap Miss Bimbo Limex Global 1 pack of 900 grams 320
Industries
Body Lotion Pears Petroleum Unilever Nigeria 1 pack of 300 grams 400
jelly
Shaving Stick/Blade Bic Bic World 1 pack with 10 600
pieces
Cooking oil Mamador PZ Cussons* 1 pack of 900ml 650
Salt Mr Chef Royal Salt Limited 1 pack of 1kg 160
Seasoning cube/powder Maggi star Nestle 1 pack of 50 cubes 420
Drinking water Sachet water a variety 1 bag of 20 120
Sugar Sachet sugar a variety** 1 cupof 800 grams 300
Milk Brandless Dano Dano (TG Arla) 1 cup of 500 grams 700
Tomato puree Tasty Tom Olam 6 sachets of 70 200
grams
Pepper Unbranded n/a 1 cup / 800 grams 500
de rica tin
Onions Unbranded n/a 1 small paint bucket 200
(1kg)
Tomato Unbranded n/a 1 small paint bucket 750
(1.8kg)
Beans Unbranded n/a 1 de rica tin (2,200 800
grams) (6cups)
Garri Unbranded n/a 1 small paint bucket 400
(2.2kg)
Vegetables (Efo) Unbranded n/a 1 bunch 200
Rice Unbranded n/a 1 de rica tin (2200 650
grams) (6cups)
Egusi Unbranded n/a 1 de rica tin (800 250
grams)
Yam Unbranded n/a 1 tuber 700
Carrot Unbranded n/a 2 small bunches 200
Plantain Unbranded n/a 1 bunch 500
Noodles Indomie Dufil Prima Foods 1 pack of 120 grams 70
Spaghetti Dangote Dangote Industries 1 pack of 500 grams 160
Eggs Unbranded n/a 1 crate (24) 1,000
Fish Unbranded n/a Smoked Titus, 3 600
pieces
Beef Unbranded n/a 1.5 kg 2,000
Palm Oil Unbranded n/a one big eva bottle 800
(1.5 liters)
Pap Unbranded n/a 1 small cup 200
Bread Agege (type) a variety *** 1 loaf 100

Source: Coronation Research. *Mamador products sit outside the structure of PZ Cussons Nigeria plc. **sourced from either FMN, Dangote Sugar
or BUA Group. *** with flour from FMN or Dangote Flour or Honeywell Flour or Olam.
2019 Nigeria Consumer Report | Power to the Price Point 23

Price points
and competition
24 2019 Nigeria Consumer Report | Power to the Price Point

Price points and competition

The unlisted manufacturers of branded goods, and their products, in the shopping basket are of
great interest to us. They hit the price points suitable to a large number of ordinary Nigerians.

Dano milk is made by TG Arla which in Nigeria operates as a joint venture with the Tolaram
Group (unlisted). Dano Milk comes in small sachets and different forms, namely liquid,
concentrate and powdered. It is also sold in bulk for onward (unbranded) resale. Our
researchers formed the strong impression that the Dano Milk brand dominates the markets
they visited. Yet Dano Milk, though it has a long history in Nigeria, was re-launched in Nigeria
2015, just when the consumer was under considerable pressure (during the oil price crash of
that year).

Indomie noodles are made by Dufil Prima Foods, which is part of the Tolaram Group (unlisted -
see above).

Softwave tissue paper is made by Belimpex, part of Boulos Enterprises Limited (unlisted), a
Lebanese-owned manufacturer with a long history in Nigeria. Under the Belimpex brand there
is also Belle, Rose Carla, Rose Plus and Rose Family tissue paper.

My My toothpaste is made by Daraju (unlisted), a Nigerian HPC manufacturer founded by

Peeyush Garg, an entrepreneur with Kenyan and Indian roots who established Daraju in Nigeria
in 2008. In addition to My My toothpaste other Daraju products include: detergent (under
the Rana, My My, Soft 'n' Clean and Green Antibacterial brands); handwash (under the Liby
brand); soap (under the Fressia and Farha brands); and skin care (under the Fressia brand). Our
researchers found these products, especially the Rana, My My, Fressia and Liby brands, common
in the market.

Lady Care sanitary towels are made by Sankin Nigeria (unlisted). The product was launched in
Nigeria in 2001.

Miss Bimbo detergent is made by Limex Global (unlisted), a Nigerian manufacturer founded in
2002.
2019 Nigeria Consumer Report | Power to the Price Point 25

Tasty Tom tomato paste - is made by the Olam Group (unlisted). Olam has been present in
Nigeria since 1989 and it is part of the large (with some 35,000 employees in 50 countries around
the world) Singapore-listed Olam Group. In Nigeria Olam employs some 3,000 people and is
involved in farming, production of animal feeds, milling, production of biscuits, noodles and dairy
products.

Mr Chef salt is made by Royal Salt (unlisted) which produces a range of sachet-packed seasoning
products tailored to the West African market, including flavours branded as Goat Meat, Pepper
Soup, Jollof Rice and Crayfish.

Although the Ajayis chose Maggi Star seasoning cubes from Nestle, it was noticeable that market
traders made a point of offering them Alubadiya seasoning powder which is made by Winstar
Food Holdings (unlisted), a Chinese company. As stated above, Alubadiya seasoning powder does
not win on price alone but is attractive because it performs two jobs at once. It flavours rice and
colours it red, making it appear like traditional West African jollof rice without the expense of
adding tomato paste. At the time of their visit our researchers state that it is very common in the
markets where it is sold in a small sachet size in order to reach a low price point.
26 2019 Nigeria Consumer Report | Power to the Price Point

Price comparisons between purchased items and covered companies’ alternatives*

s/n Item Brand Manufacturer Quantity Price (₦) Covered companies' Manufacturer Quantity Price (₦)
brands (alternatives)
1 Toothpaste My My Daraju 1 pack of 150 Close-up Unilever 1 pack of 250
145 grams 150 grams
Pepsodent Unilever 1 pack of 350
150 grams
2 Detergent Miss Bimbo Limex Global 1 pack 320 OMO Unilever 1 Pack of 750
Industries of 900 900g
grams
Sunlight Unilever 2 Pack of 550
900g
ZIP PZ Cussons
3 Seasoning Maggi star Nestle 1 pack of 420 Knorr Unilever 1 pack of 550
cube/ 50 cubes 40 cubes
powder
Marvina Nestle 12 sachets 300
of 10
grams
Royco Unilever
4 Drinking Sachet water a variety 1 bag of 120 Pure life Nestle 1 pack of 1,400
water 20 20 bottles
(12 liters)
5 Sugar Sachet sugar Dangote Industries 1 cup 300 Golden Penny Flour Mills of 1 pack 360
of 800 Sugar** Nigeria of 500
grams grams
6 Milk Brandless Dano (Arla/ 1 cup 700 Olympic PZ Cussons 1 pack 330
from Dano Tolaram) of 500 of 350
grams grams
Coast PZ Cussons 1 pack 1,089
of 400
grams
Nunu PZ Cussons 1 pack 740
of 400
grams
Nido*** Nestle
Ideal Milk*** Nestle
7 Rice Unbranded n/a 1 de rica 650 Golden Penny Flour Mills of
tin (2200 Rice**** Nigeria
grams)
(6cups)
8 Noodles Indomie Dufil Prima Foods 1 pack of 70 Golden Penny Flour Mills of 1 pack of 75
120 grams Noodles Nigeria 120 grams
9 Spaghetti Dangote Dangote Industries 1 pack 160 Golden Penny Pasta Flour Mills of 1 pack 200
of 500 Nigeria of 500
grams grams
10 Garri Unbranded n/a 1 small 400 Golden Penny Garri Flour Mills of 1 pack of 570
paint Nigeria 1 kg
bucket
(2.2kg)

Source: Coronation Research. *On one day, 21 February 2019 at street markets in Lagos. **Note that unbranded sugar could come from FMN,
Dangote Sugar or BUA Group ***Not found on street markets on the day. ****Withdrawn from the market at the time of going to press.
Unbranded rice can come from a variety of different producers, including FMN.
2019 Nigeria Consumer Report | Power to the Price Point 27

Toothpaste - We purchased My My toothpaste (145 grams) produced by Daraju on 21 February

2018 for N150. At the time, Unilever's toothpaste brand Close-up (150 grams) cost N250.
Pepsodent (150 grams), also a Unilever brand, retailed for N350 at the time. My My toothpaste
was chosen because it is a cheaper alternative and also a new but fast-moving item in the open-
street markets. It is worth noting that this product was scarce in supermarkets.

Wash Soap - The Miss Bimbo detergent brand (900 grams), produced by Limex Global Industries,
was a popular find in the market and a bargain at N300 compared with our covered alternatives.
Unilever’s OMO (900 grams) was rare in the open-street market and it retailed for N750 on the
day. Unilever’s Sunlight (900 grams) retailed for N550.

Seasoning Cube/Powder - Nestle’s Maggi was chosen. Maggi retailed for N420 and Unilever’s
Knorr for N550.

Drinking water - A bag of 20 sachets of water (50cl each), popularly known as 'pure water’ was
purchased for N120. Compared with our covered alternatives, there is a notable price difference.
Nestle’s Pure Life water retails for N60 (60cl each) and a pack of 20 bottles for N1,400.

Sugar - We opted to purchase brand-less granulated sugar (800 grams) from the open-street
markets for N300. This sugar is produced by Dangote Sugar Refinery, a subsidiary of Dangote
Industries, displayed in sacks and measured in small cups. Branded sugar cubes like FMN’s
Golden Penny sugar cubes (500 grams) retailed for N360 on the day, and were not selected.
However, FMN also makes brand-less sugar.

Milk - We purchased brand-less milk (500 grams) for N700 which, like the brand-less sugar,
were displayed in sacks and measured in small cups. The brand-less milk is produced by Arla
(and sold out of its large Dano sacks), which in Nigeria is joint venture with the Tolaram Group
(unlisted). Nutricima’s (Nutricima is part of PZ Cussons sitting outside PZ Cussons Nigeria plc)
Olympic milk (350 grams) retails for N330, Coast milk (400 grams) retails for N1,089 and its NuNu
milk (400 grams) retails for N740. Nestle’s Nido and Ideal milk were unavailable in the open-
street market and at nearby supermarkets on the day.

Rice - Rice sold in the market is usually unbranded, displayed in basins and measured in empty
canned tomato puree tins. We purchased 2,200 grams of rice for N650.

Noodles - Indomie noodles (120 grams) was purchased for N70 on the day. This compares
very closely with FMN's Golden Penny noodles (120 grams) which retails for N75. Golden Penny
noodles were not as common in open-street markets as in supermarkets, compared with
Indomie noodles which were available in both outlets.
28 2019 Nigeria Consumer Report | Power to the Price Point

Spaghetti - Dangote pasta (500 grams), which we purchased for N165, was chosen over FMN's
Golden Penny Pasta (500 grams), which retails for N200.

Garri - Like rice, garri purchased in open-street markets is typically unbranded, except when
purchased in large quantities (25kg or 50kg). We purchased garri (2.2kg) which was on open
display from a stall for N400. In the course of our search, we did not come across FMN’s Golden
Penny Garri (1.0kg) which retails for N570 though it appears in supermarkets.

Caveat – this is not market research

This section of our report deals with a model household which we believe is
representative of millions of households in Lagos State and across the country. The
research was conducted at a market in urban (rather than central) Lagos.

This is, emphatically, not market research, but research designed to gain an impression of
what a working couple can buy on a regular basis in Lagos. Products were purchased and
prices recorded on 21 February 2019. We compared these prices with prices available in
three nearby supermarkets.

However, we did not conduct a comprehensive survey of street market prices versus those
in local supermarkets, only the prices of items purchased. While we formed the overall
impression that street market prices are cheaper than those in nearby supermarkets, we
understood that this is not true of all items purchased. Some items at some supermarkets,
and at some points in time, are priced more keenly than what is available in street
markets. 

In addition, we only looked at a street market, and nearby supermarkets, in one district of
urban Lagos which we understand to be where the working couple in our study can afford
to live. We did not compare prices at different street markets in Lagos. This is important
because, given the complicated geography of Lagos and the high transport component in
market traders’ costs, prices vary from district to district. However, the district we selected
is one where many working households are located.

Therefore, we do not claim that the prices given for products in the above tables are
prices that are replicated throughout Lagos, or at other sites in Lagos, nor that the prices
we paid will be consistent over time in the same place. Seasonality affects prices of most
unbranded food products and some branded ones. Such inconsistency is inevitable in
Lagos and we would expect this to be true across the country as a whole.
2019 Nigeria Consumer Report | Power to the Price Point 29

Further, we do not guarantee that we paid the cheapest price, per unit, for each item
purchased. Different package sizes, different measures, and differences in quality make
exact comparisons very difficult, added to which is the persuasiveness and influence on
our purchases of store holders themselves.

In addition, although some manufacturers print a recommended retail price (RRP) on

their packages, these are seldom adhered to, in our view, so that the prices we paid were
generally not RRP.

A note on company sources

While on the subject of data, it is also important to comment on the data which listed food and
HPC companies in Nigeria supply. What they publish does not include information on volumes,
nor like-for-like sales. For all the segmental reporting which we have (e.g. for Unilever and
FMN), we do not know volumes of products sold. Disclosure, and therefore our knowledge, are
limited.

Therefore, we cannot tell whether a change in sales reflects an adjustment in volumes or

in prices, or some combination of the two. On the other hand, sharp changes in sales (for
example, those observed in 2016 and 2017) are much more likely to be price-related than
volume-related as rates of consumption and production tend not be very volatile.
30 2019 Nigeria Consumer Report | Power to the Price Point
2019 Nigeria Consumer Report | Power to the Price Point 31

Where the
middle class went
32 2019 Nigeria Consumer Report | Power to the Price Point

Where the middle class went

More people, not more money

From the above, it seems clear to us that there are numerous unlisted Nigerian food and home
& personal care (HPC) companies that supply the Nigerian mass market with products at low
price points. What, then, happened to the Nigerian middle class, the people who were going to
buy relatively expensive branded products from the listed companies in this report?

It is not an easy question to answer, but there is evidence pointing to the erosion of salary
earners’ incomes over the past few years. Rather than attempt to settle the tricky question
of what constitutes the middle class we give a profile of various categories of salary earners,
which we believe is instructive as to the fortunes of the food and HPC sector.

Profession Annual Gross salaries (₦) Annual Gross salaries (US$) Typical Annual Gross
Porter 500,000 1,389 Salaries
Driver 1,000,000 2,778
Manufacturer 2,000,000 - 3,000,000 5,556 -8,333
Mid-level Administrative Staff 4,000,000 - 5,000,000 11,111 - 13,889
Banker 6,000,000 - 8,000,000 16,667 - 22,222

Source: Coronation Research.

We do not know how many people to put into each category. Because we live and work in
Lagos State, which is the richest state in the federation, whatever numerical values we put on
categories for Lagos State will not apply to other states. Even outside of Lagos State, the south-
west and the so-called south-south regions are much richer than the middle belt which in turn
is richer than the north-west and north-east.

However, Mr. and Mrs. Ajayi, with a combined gross annual income of N1,080,000 (US$3,000)
per annum (pa), are probably a good place to start. As individual salary earners they likely
represent a large and central slice of the distribution of salary earners in Lagos and in the
relatively wealthy states of the south-west and the south-south; therefore, tens of millions of
Nigerians. They are likely wealthier than most people living in the middle belt, the north-west
and the north-east. People move to Lagos State for a reason.

Note that the combined incomes of the Ajayis are equivalent to a single salary in our next
bracket, represented by a driver in Lagos. It is likely that this bracket represents at least several
million Nigerians. This level, people earning N1,000,000 pa (US$2,778 pa), is where we observe a
degree of saving and capital formation.
2019 Nigeria Consumer Report | Power to the Price Point 33

This is also true of the next level up, workers in manufacturing (at least in Lagos), with N2.0m-
3.0m pa, and of the next level, administrative grade workers with salaries of N4.0m-N5.0m.
The next level up, workers in professional service industries, have salaries of N6.0m-N8.0m pa.
This is, in all likelihood, a small group, though their earnings make them powerful consumers.
Fortunately we have a proprietary database of the salaries of approximately 50,000 of these
employees.

Tough times for high earners

Unfortunately for them, our proprietary database of 50,000 employees in the professional
services sector shows their fortunes waning over the past few years.

Changes in salary for

professional service
sector employees with
salaries in the range
of N6.0m-N8.0m per
annum

Source: Companies, Coronation Research.

The last time these employees, in aggregate, received an inflation-adjusted pay increase was
in 2014 when inflation-adjusted pay rose by 5.8% y/y. In 2015 it fell by 1.2%. During the recession
year of 2016 it fell by 9.3%. But even after the recession (from Q2 2017 onwards) it continued to
fall: by 7.5% in 2017 and by 7.8% in 2018.
34 2019 Nigeria Consumer Report | Power to the Price Point

GDP growth y/y

Source: National Bureau of Statistics (NBS), Coronation Research

And, probably, tough times for other groups of earners

What was true of the employees in the professional service sector was, in all probability, true of
the lower tiers of salary earners. The combined effects of: a) the oil price shock of 2015 (see the
dip in the long-term sales charts in the first section of this report); b) the currency devaluations
of 2016 and 2017; and c) the recession of 2016/2017 were to erode both company and public
finances and lead to salary falls in real terms, in our view.

Naira/US dollar
exchange rates, 2015 -
present

Source: CBN, Bloomberg, Aboki FX, Coronation Research.

Needless to say, inflation rose when the Naira devalued and has proved difficult to bring under
control. Unemployment also rose.
2019 Nigeria Consumer Report | Power to the Price Point 35

Nigerian Unemployment Nigeria's inflation rate y/y

Source: NBS, Coronation Research

Yet the candidates for the middle class keep on expanding

However, while earnings in all probability have not been rising in real terms, the population
has been rising. And, more significantly, the urban population has been growing more quickly
than the overall population. So there is a growing number of people entering the cash economy
who, like Mr. and Mrs. Ajayi, require food and HPC.

Nigeria’s population
and urbanisation

Source: World Bank, Coronation Research

36 2019 Nigeria Consumer Report | Power to the Price Point

Although the above chart clearly involves a degree of extrapolation and application of trend
growth rates (hence its smooth, progressive lines), various studies have confirmed that the
population of Nigeria is growing at some 2.6% per annum and that the population today is
around 197 million.

Conclusion

Nigeria is generating more people, more households and more consumers. On the other hand,
it does not look like they are getting any richer. The last recession almost certainly left many
people poorer than before. And the current economic recovery is so slow that we doubt that
incomes, in inflation-adjusted terms, are rebounding, although the upcoming implementation of
the N30,000 per month (US$83) minimum wage at the national level is likely to have a positive
effect.

Therefore, the best growth is being experienced by food and HPC manufacturers that are able to
supply goods to the most people at the lowest price points. By contrast, the prospects are poor
for a manufacturer whose business plan requires the population to migrate upward through the
income strata.

This, perhaps, is the best explanation for the relatively poor fortunes of the listed food and home
& personal care companies featured in this report and the prominence of the unlisted ones in the
shopping basket of a working couple.
2019 Nigeria Consumer Report | Power to the Price Point 37

Company
Financing
38 2019 Nigeria Consumer Report | Power to the Price Point

Company Financing

Financing through the currency dislocation of 2016-17

The listed companies featured in this report suffered extreme stress during the currency
devaluations and dislocations of 2016 and 2017. In 2016 the Naira/US dollar exchange rate fell
from N199.21/US$1 to N315.33/US$1, and again in 2017 fell to N359.99/US$1. Yet these figures are
merely for the interbank foreign exchange rate, which for long periods was unavailable to many
participants. The dislocation, therefore, forced many businesses to access foreign exchange
from the parallel market in order to import essential materials.

Naira / US dollar on
interbank and parallel
market exchanges

Source: Aboki FX, Bloomberg, Coronation Research.

The principal problems faced by manufacturing companies during this period were: build-up of
receivables; build-up of inventories; shortage of foreign exchange; and curtailment of letters of
credit in foreign exchange (hence the emergence of cash-backed letters of credit). The result was
that businesses were faced with a combination of rising gearing as working capital expanded
and a desperate need to borrow in foreign currency.

Having a deep-pocketed foreign parent - the fortunate situation of Unilever Nigeria, for example
- helped some companies in this position. A company without a deep-pocketed foreign parent
- like Flour Mills of Nigeria - might still borrow but then end up with an unsustainable level of
debt. Both Unilever Nigeria (Unilever) and Flour Mills of Nigeria (FMN) subsequently held rights
issues in order to pay down debt.
2019 Nigeria Consumer Report | Power to the Price Point 39

This arrangement had the significant advantage of supplying liquidity to Unilever and FMN when
their competitors were, for the most part, short of it. They continued to trade without some of
the difficulties imposed by currency dislocation. By contrast, PZ Cussons Nigeria (PZ Cussons),
which traditionally eschews high gearing and does not have, in our view, a deep-pocketed
parent in PZ Cussons plc of the UK, traded under stressed conditions during the crisis. This is one
explanation, in our view, why FMN’s and Unilever’s trend growth did not suffer more during the
period 2016-17.

Nestle Nigeria

Nestle Nigeria (Nestle) achieved the remarkable feat of increasing its cash generation during the
early phase of currency dislocation, with operating cash flow rising 54% in 2016. Cash generation
fell in 2017 but remained positive (pre-capex) which helped keep the lid on its net debt/equity
ratio. This rose from a negative 2% position at the end of 2016 to a modest 20% at the end of
2017. It can be argued that Nestle’s high level of domestic sourcing played a critical role in its
performance during this period.

Flour Mills of Nigeria

The net debt/equity ratio of FMN rose to 192% by the end if its financial year 2017 (March 2017)
with negative free cash flow (operational cash flow minus capex) that year and a doubling
of net working capital. In November 2017 it held a rights issue at N27.0/share to raise N39.9bn
(US$110.0m at the time), and net debt/equity fell to 90% by March 2018.

Rights issue Share issued Equity Price ₦/ Amount Maximum net Rights issues and
(millions) Dilution Share raised (₦ debt/ equity
millions) 2016- 17
dilution
Nestle Nigeria No n/a n/a n/a n/a 20.2%

Flour Mills of Nigeria Yes - Q4 2017 1,476.14 36% 27 39,855.85 191.7%

Unilever Nigeria Yes - Q3 2017 1,961.71 34% 30 58,851.28 72.2%
PZ Cussons Nigeria No n/a n/a n/a n/a -17.8%

Source: Companies, Coronation Research.

Long-term portfolio investors in FMN might recall that in December 2011 the company held a
rights issue to raise N27.9bn (US$172.2m at the time) at a price of N61.0/share.
40 2019 Nigeria Consumer Report | Power to the Price Point

Unilever Nigeria

Unilever signed an intercompany loan with Unilever Finance International AG for US$59.7m
in 2016 of which approximately US$49.0m was drawn down. The picture for Unilever was
complicated by the fact that it was in the middle of restructuring a very high debt position that
had emerged by FY 2015 which had earlier resulted from significant working capital expansion.

Unilever was able to trade very successfully in early 2017 as a result of its improved liquidity
position. It was in the process of restoring its financial ratios. It nevertheless held a rights issue in
Q3 2017 to raise N58.9bn (US$163.6m at the time) at a share price of N30.0/share.

Conclusion – navigating the storm of 2016-17

The four companies steered their way through the period of currency dislocation in very different
ways. Nestle was able to continue trading without the need for significant extra borrowing.
FMN borrowed from banks and later held a rights issue to reduce debt. Unilever borrowed from
its parent and later held a rights issue to reduce debt. PZ Cussons was careful not to borrow
excessively during the crisis but likely suffered a competitive disadvantage as a result.
2019 Nigeria Consumer Report | Power to the Price Point 41

Recent
Results
42 2019 Nigeria Consumer Report | Power to the Price Point

Nestle Nigeria (Nestle)

Nestle’s FY 2018 sales were up 9.1% in nominal terms versus average inflation at 12.2% y/y, thus
contracting by 2.7% year-on-year when adjusted for inflation.

₦ Millions FY 17 FY 18 Y/Y % Nestle Nigeria full-year

Revenue 244,151 266,275 9.1% 2018 results
Cost of Sales -143,280 -152,354 6.3%
Gross Profit 100,871 113,921 12.9%
Selling and Distribution expenses -35,157 -43,490 23.7%
Administrative expenses -10,016 -9,790 -2.3%
Operating Income 55,698 60,641 8.9%
Foreign Exchange gain / (losses) -11,169 -96 -99.1%
Net Finance cost 2,299 -794 -134.5%
Profit before tax 46,828 59,751 27.6%
Tax -13,105 -16,743 27.8%
Net Profits 33,724 43,008 27.5%

Source: Company, Coronation Research. NB Nestle Nigeria has a December year-end.

In the first quarter of 2019 Nestle Nigeria grew its revenues by 5.2% y/y in nominal terms but
on an inflation-adjusted year-on-year basis, this meant a decline in revenues by 5.6% when
accounting for average inflation in Q1 2019 at 11.3% y/y.

₦ Millions Q1 18 Q1 19 Y/Y % Nestle Nigeria Q1 2019

Revenue 67,464 70,967 5.2% results
Cost of Sales -41,706 -39,498 -5.3%
Gross Profit 25,758 31,469 22.2%
Selling and Distribution expenses -9,030 -10,371 14.9%
Administrative expenses -2,209 -2,011 -9.0%
Operating Income 14,519 19,087 31.5%
Foreign Exchange gain / (losses) -639 19 103.0%
Net Finance cost -240 16 106.7%
Profit before tax 13,640 19,121 40.2%
Tax -5,035 -6,275 24.6%
Net Profits 8,605 12,846 49.3%

Source: Company, Coronation Research. NB Nestle Nigeria has a December year-end.

2019 Nigeria Consumer Report | Power to the Price Point 43

Flour Mills of Nigeria (FMN)

FMN’s total revenues in the period 9M 2019, which measures nine months to December 2018,
were down 6.3% y/y in nominal terms versus average inflation during the period of 11.4% y/y.
Thus, in inflation-adjusted terms, the decline in sales was 15.9% y/y.

₦ Millions 9M 18 9M 19 Y/Y % Flour Mills of Nigeria

Revenue 427,509 400,642 -6.3% 9M 2019 financial year
Cost of Sales -371,473 -354,047 -4.7% results
Gross Profit 56,036 46,595 -16.8% (March year-end).
Selling and Distribution expenses -4,037 -5,933 46.9%
Administrative expenses -13,311 -14,937 12.2%
Net operating gains /(losses) 2,707 2,378 -12.2%
Operating Income 41,394 28,103 -32.1%
Foreign Exchange gains/ (losses) 2,800 -810 -128.9%
Net finance cost -24,692 -16,014 -35.1%
Profit before tax 19,502 11,278 -42.2%
Tax -6,255 -3,383 -45.9%
Net Profits 13,247 7,896 -40.4%

Source: Company, Coronation Research. NB Flour Mills of Nigeria has a March year-end.

Unilever Nigeria (Unilever)

Unilever’s FY 2018 sales were up 9.0% in nominal terms versus average inflation at 12.15%, thus
contracting by 2.8% year-on-year in inflation-adjusted terms.

₦ Millions FY 17 FY 18 Y/Y % Unilever Nigeria full-

Revenue 85,193 92,900 9.0% year 2018 results
Cost of Sales -57,679 -64,675 12.1%
Gross Profit 27,514 28,225 2.6%
Selling and Distribution expenses -3,791 -4,239 11.8%
Administrative expenses -11,476 -14,713 28.2%
(Impairment loss)/ writeback 1 -311 n/a
Operating Income 12,248 8,962 -26.8%
Other Income -17 236 1495.9%
Net Finance cost -1,635 3,424 309.4%
Profit before tax 10,596 12,622 19.1%
Tax -3,526 -3,490 -1.0%
Net Profits 7,070 9,132 29.2%

Source: Company, Coronation Research. NB Nestle Nigeria has a December year-end.

44 2019 Nigeria Consumer Report | Power to the Price Point

On the other hand, Unilever’s Q1 2019 revenues contracted by 20.8% y/y in nominal terms and
on an inflation-adjusted basis there was shrinkage in Unilever’s sales - by 28.9% y/y.

₦ Millions Q1 18 Q1 19 Y/Y % Unilever Nigeria Q1 2019

Revenue 24,298 19,236 -20.8% results
Cost of Sales -17,573 -15,367 -12.6%
Gross Profit 6,725 3,869 -42.5%
Selling and Distribution expenses -1,090 -859 -21.1%
Administrative expenses -2,307 -1,518 -34.2%
Operating Income 3,328 1,292 -61.2%
Net Finance cost 372 710 90.6%
Profit before tax 3,700 2,027 -45.2%
Tax -964 -507 -47.4%
Net Profits 2,737 1,521 -44.4%

Source: Company, Coronation Research. NB Unilever Nigeria has a December year-end.

PZ Cussons Nigeria (PZ Cussons)

PZ Cussons’ 9M 2019 (9M to calendar February 2019) revenues from its reporting segments were
down 12.9% y/y in nominal terms versus average inflation during the period of 11.28% y/y. Thus in
inflation-adjusted terms, the decline in sales was 21.7% y/y.

₦ Millions 9M 18 9M 19 Y/Y % PZ Cussons 9M 2019

Revenue 63,260 55,070 -12.90% results
Cost of Sales -45,024 -42,433 -5.80%
Gross Profit 18,236 12,637 -30.70%
Selling and Distribution expenses -6,931 -7,959 14.80%
Administrative expenses -5,575 -3,357 -39.80%
Operating Profit 5,730 1,322 -76.90%
Other income 82 91 11.40%
Foreign Exchange gains/ (losses) -3,278 -492 -85.00%
Net Finance costs -567 16 -102.70%
Profit before tax 1,967 936 -52.40%
Tax -629 -129 -79.50%
Net Profits 1,337 807 -39.60%

Source: Company, Coronation Research. NB PZ Cussons Nigeria has a May year-end.

2019 Nigeria Consumer Report | Power to the Price Point 45

Valuation and
Recommendations
46 2019 Nigeria Consumer Report | Power to the Price Point

Valuation and
Recommendations

Three-pronged approach to valuation

As readers thus far will understand, owning most of the listed companies featured in this report
has not been a happy experience for portfolio investors over the past eight years, particularly
not for US dollar-based investors. Expectations of high growth have not been met and
consequently the growth ratings attached to these stocks have, for the most part (Nestle is the
exception), been discarded.

Moreover, it is not only in Nigeria that growth projections for consumer-facing manufacturers
of food and HPC have fallen short. In India, for example, the same problem has been
encountered. The problem of putting valuations on companies whose growth has failed to
match expectations is widespread.

All the more reason, therefore, to adopt three different methods to value the listed companies
in this report, as a means of cross-checking the valuations implied by each one. We use the
following methods and use an average of the target prices reached:

• Valuation histories, for series of one-year forward EV/EBITDA and PE ratings;

• Spot multiple comparisons with the EV/EBITDA, EV/Sales and PE ratings of international
peer group companies;

• Discounted Cash Flow valuations.

Having arrived at an average of the potential price targets reached by each valuation method,
we then discount each one for the risk that future sales will not match the trend in inflation-
adjusted sales seen over the period 2011-18. None of the companies achieved inflation-adjusted
growth in sales during 2018 and without applying steep discounts we fear falling prey to value
traps. While we are confident that a company like Nestle, for example, will return to its long-
term trend growth, we still discount our price targets to reflect the risk that this may not
happen.
2019 Nigeria Consumer Report | Power to the Price Point 47

Price targets (₦/share) reached by: Nestle

Nigeria
Flour Mills
of Nigeria
Unilever
Nigeria
PZ Cussons
Nigeria
Summary of valuations
Valuation History 1,345.00 28.90 50.90 12.41
and recommendations
Spot multiple comparison 811.70 68.80 60.70 35.50
Discounted Cash Flow 1,477.21 42.61 38.84 17.16
Weighted Average* 1,277.78 45.73 47.32 20.56
Discount for future growth** 5% 60% 40% 60%
Target price 1,213.89 18.29 28.39 8.22
Current price 1,520.00 16.00 31.00 9.00
Potential upside/downside -20% 14% -8% -9%
Recommendation Hold Hold Hold Hold

Source: Companies, Coronation Research. Priced at close of business 15 May 2019 *Weighted average based on 50%
allocation to Discounted Cash Flow and 25% allocation to Valuation History and 25% to Spot Multiple comparison
**additional risk factor in the light of long-term growth trends, calendar 2018 FY results and other recent results (e.g.
calendar Q1 2019 results)

Mean reversion - we still need growth

To use a valuation history is to believe that the spot multiple valuation of a share will return
to the average at which the market has rated it over time. This is a basic method of value
investing. It has many things to recommend it (for example, plenty of market-related data) but
many pitfalls.

One pitfall is that it does not work well with high-growth stocks (spot-multiples tend not to
work at all when valuing growth, anyway). On the other hand, listed Nigerian consumer-facing
industrial stocks cannot be called high-growth, so this does not present a problem.

Another pitfall is that valuation histories do not work well when a company’s business is
experiencing medium-term or long-term decline. The stock may appear cheap relative to its
valuation history, but it will only get cheaper as investors shy away from a business which is
getting smaller. Essentially this describes a value trap. We have attempted to avoid this by
applying steep discounts to target prices in our summary valuations.

This is why we have covered the ground, in the Long-term growth trends section, on inflation-
adjusted sales development. The valuations of shares of companies which in the long term are
growing moderately, such as Nestle Nigeria (Nestle) and, arguably, Flour Mills of Nigeria (FMN)
and Unilever Nigeria (Unilever), are susceptible to mean reversion, in our view. The potential for
mean reversion in the valuation of the shares of PZ Cussons Nigeria (PZ Cussons), on the other
hand, is open to question given its negative long-term inflation-adjusted sales trend.
48 2019 Nigeria Consumer Report | Power to the Price Point

Therefore, we have one strong candidate for the mean reversion method, Nestle Nigeria,
and arguably another two: Flour Mills of Nigeria and Unilever Nigeria, depending on how we
interpret their recent sales development. The valuation history method suggests the following
potential target prices: Nestle Nigeria: N1,345/s; Flour Mills of Nigeria: N28.90/s; Unilever Nigeria:
N50.90/s and PZ Cussons, albeit a weak candidate for this method, N12.41/s.

Nestle Nigeria

The market rating of Nestle shares has increased since 2016. (We use the period 2016-18 rather
than 2014-18 as the EBITDA and net profits for 2015 were weak, resulting in very high ratings for
that year.) It has been possible to buy Nestle Nigeria shares at quite high ratings (for example,
a forward PE of 20.0x) and still make money as: a) earnings growth came through; and b) the
forward PE rating went up.

Nestle Nigeria, Forward EV/ Nestle Nigeria, Forward P/E

EBITDA

Source: Company, Coronation Research, Bloomberg (for share prices).

Long-term growth is key to this investment narrative and, as we describe in the Long-term
growth trends section, Nestle has demonstrated long-term positive inflation-adjusted sales
growth. This assertion needs to be qualified in several ways:

• A long-term inflation-adjusted track record of positive growth in sales, 2011-18, is not

necessarily a guide to the future;

• Indeed, 2018 itself was not a good year, with full-year sales rising 9.1% in nominal terms
against average inflation of 12.15%;

• Competition in the seasoning market is tough. Unilever’s Knorr, Promasidor’s Onga and
Winstar’s Alubadiya all feature prominently in street markets.
2019 Nigeria Consumer Report | Power to the Price Point 49

However, Nestle’s Maggi product remains competitive in terms of price in the view of our
analysts (posing as Mr. and Mrs. Ajayi) and Nestle has broadened the Maggi range with different
products to suit different tastes. In other words, Nestle appears to be reacting positively to the
competitive challenge. And its long-term track record in inflation-adjusted sales is good.

For these reasons we give credence to the idea that shares in Nestle tend to return to their long-
term average spot multiple valuations.

It is unfortunate, therefore, that at the moment Nestle shares are trading well above the average
of their forward EV/EBTIDA multiples over time, and above the average of their forward PE
multiples over time. Over the history which we have examined Nestle has traded in a range
of 6.2x – 17.6x forward EV/EBITDA and 10.5x – 28.7x forward PE. The middle of this range is
12.4x forward EV/EBITDA and 20.5x forward PE. At these levels Nestle shares would be priced
at N1,320/share (mid-range forward EV/EBITDA) and N1,370/share (mid-range forward PE). The
average of these two potential price targets is N1,345/share.

Flour Mills of Nigeria (FMN)

The shares of FMN have de-rated since 2014. Investors once valued the shares as worth 9.0x
forward EV/EBITDA and 18.0x forward PE, rather like a consumer growth stock. Today FMN
shares are rated 3.1x forward EV/EBITDA and 4.9x forward PE.

FMN, Forward EV/EBITDA FMN, Forward P/E

Source: Company, Coronation Research, Bloomberg (for share prices).

50 2019 Nigeria Consumer Report | Power to the Price Point

This kind of investor behaviour normally describes a situation in which the underlying business of
the company is in medium-term or long-term decline. Yet FMN’s business, as we have described
in the Long-term growth trends section, has been essentially flat, or flat-to-slightly-declining,
in inflation-adjusted terms over the period 2011-18. It was also growing at an inflation-adjusted
CAGR of 2.2% 2011-17, which is respectable in our opinion.

So, if we look at the long-term growth trend, rather than the calendar year 2018’s poor results,
then we would call FMN a stable business rather than a declining business. And we would look
for specific reasons why things did not go well in the calendar year 2018.

One reason could be the situation in the pasta market in 2018 which was characterised, in our
view, by unusually strong competition from Dangote Flour (not covered). The sales of the three
main listed flour businesses in Nigeria: Dangote Flour; Honeywell Flour; and FMN, all showed
unusual volatility during the calendar year 2018, in our view. By contrast, the recently-announced
sale of Dangote Flour to Olam International may herald a period of calm in the pasta market, we
believe, although there is a risk that Olam may prove a formidable competitor.

In setting a spot multiple valuation range for FMN we believe a range of 3.0x – 9.1x forward EV/
EBITDA and 2.7x – 18.2x forward PE is consistent with recent valuation history and therefore
realistic. The middle of this range is 4.8x forward EV/EBITDA and 7.9x forward PE. At these levels
FMN shares would be priced at N34.1/share (mid-range forward EV/EBITDA) and N23.7/share
(mid-range forward PE). The average of these two potential price targets is N28.90/share..
2019 Nigeria Consumer Report | Power to the Price Point 51

Unilever Nigeria

The shares of Unilever have de-rated since 2015. As with FMN, investors once valued the shares
as a high-growth stock, with a forward EV/EBITDA of close to 20.0x and a forward PE of over
50.0x. Now Unilever shares are rated at a forward EV/EBITDA of 6.4x and a forward PE of 15.1x.

Unilever Nigeria, Forward EV/ Unilever Nigeria . Forward P/E

EBITDA

Source: Company, Coronation Research, Bloomberg (for share prices).

This kind of investor behaviour is consistent with a shrinking business. Indeed, the outline
evidence we present in the Long-term growth trends section suggests that a long-term
inflation-adjusted sales decline was taking place at Unilever over the period 2011-18. When we
looked at the annual data broken down by division (Unilever’s are roughly 50/50 food and HPC)
2008-18 we found that the food business grew at an inflation-adjusted 0.4% CAGR while its HPC
business shrank by an inflation-adjusted 2.7% CAGR over the same period.

However, recent medium-term data, for 2014-18, is more encouraging than this. The quarterly
sales data broken down by product group 2014-18, when adjusted for inflation, shows that both
the food and HPC businesses have been growing, by CAGRs of 3.4% and 2.2% respectively. Albeit
on a short timescale, and including the period of significant currency devaluation in 2016 and 2017,
it seems that Unilever has been able to return to growth.

Against this, it must be recognised that inflation-adjusted sales in Q1 2019 were extremely weak
(by Unilever’s own standards) and raises a question mark over its medium-term recovery. On
balance, we believe a return to medium-term (2014-18) trend is possible.
52 2019 Nigeria Consumer Report | Power to the Price Point

The question is: which historic valuation norms should be used, given that including the very high
market ratings of 2015 would be unrealistic? We have taken the average for the period 2016-18 and
calculated a range of 5.4x – 16.8x forward EV/EBITDA and 15.6x – 37.0x forward PE. The middle of
this range is 10.7x forward EV/EBITDA and 24.1x forward PE. At these levels Unilever shares would
be priced at N49.7/share (mid-range forward EV/EBITDA) and N52.1/share (mid-range forward PE).
The average of these two potential price targets is N50.9/share.

PZ Cussons Nigeria

The shares of PZ Cussons have de-rated in recent years. As with FMN and Unilever, investors once
valued the shares as a high-growth stock. In PZ Cussons’ case this meant a forward EV/EBITDA of
close to 15.0x and a forward PE of over 60.0x. Now PZ Cussons shares are rated at a forward EV/
EBITDA of 3.1x and a forward PE of 22.0x.

PZ Cussons Nigeria, Forward EV/ PZ Cussons Nigeria . Forward

EBITDA P/E

Source: Company, Coronation Research, Bloomberg (for share prices).

Such investor behaviour is consistent with a shrinking business. The evidence which we present in
the Long-term growth trends section suggests a long-term inflation-adjusted sales decline 2011-18.
Investors are having trouble putting a value on a business when there is a question mark over its
size. Until the decline in inflation-adjusted sales is arrested, in our view, it will be difficult to assess
PZ Cussons’ fair value. PZ Cussons’ recent financial reports are not reassuring in this regard.
2019 Nigeria Consumer Report | Power to the Price Point 53

There are some reasons to think that PZ Cussons will be able to turn the corner. It is currently
overhauling its route-to-market (RTM) strategy which may well enhance its products’ visibility.
During our analysts’ market visits it was noticeable that PZ Cussons’ products such as Zip
detergent, Venus lotion, Joy lotion, Coast milk and Olympic powdered milk were not prominent
in street markets, nor in the nearby supermarkets which they visited. Therefore, implementation
of the new RTM strategy could dramatically improve the situation.

In order to arrive at potential values for PZ Cussons we have taken the average spot multiples
for the period 2016-18 and calculated a range of 2.0x – 13.2x forward EV/EBITDA and 13.2x – 60.3x
forward PE. The middle of this range is 5.6x forward EV/EBITDA and 35.6x forward PE. At these
levels PZ Cussons shares would be priced at 11.90/share (mid-range forward EV/EBITDA) and
N12.92/share (mid-range forward PE). The average of these two potential price targets is N12.41/
share.

The cross-border comparison approach

In this part of the valuation discussion we compare three spot valuation multiples - EV/EBITDA,
EV/Sales and PE - with those of peer group companies in other emerging markets. We use a
simple average of peer group valuations as benchmarks for the valuations of the companies under
study. Using 2017 and 2018 spot multiple valuations we arrive at three blended potential price
targets, and take the simple average of these as a final blended potential price target for each
stock.

The logic behind such cross-border peer group comparisons is that international investors will,
over time, accord similar valuations to similar companies regardless of location. While this is true to
some degree (there are plenty of international investors who employ such comparisons) there are
obvious drawbacks.

For example, no account is taken of different growth rates, unless we take projected spot multiple
ratios far into forecast periods. And local market valuations can often be out of proportion with
each other, which is a function of local investment conditions (e.g. interest rates) and local investor
behaviour.

Another problem is that the companies do not necessarily have similar industry profiles. So,
for example, comparing the EV/Sales of Flour Mills of Nigeria with that of a company with
much higher operating margins is, in some ways, misleading. On the other hand, by employing
three measures in each case and taking averages, such anomalies can be reduced while still
encompassing a lot of data.
54 2019 Nigeria Consumer Report | Power to the Price Point

Price targets (₦/share) reached by: Nestle

Nigeria
Flour Mills
of Nigeria
Unilever
Nigeria
PZ Cussons
Nigeria
Summary of spot
multiples target prices
EV/EBITDA 903.70 64.70 64.30 39.90
EV/Sales 644.30 107.30 64.40 14.70
PE 887.10 34.10 53.40 51.90
Simple average 811.70 68.80 60.70 35.50

Source: Companies, Coronation Research

Peers FY 2017 EV/EBITDA FY 2018 EV/EBITDA

Nestle Nigeria relative
Nestle Nigeria 19.98x 16.25x
valuation (at year-end
Nestle Pakistan 21.72x 16.85x
prices)
Oman Flour Mills 8.92x 6.84x
Agthia Group Dubai 9.58x 9.26x
Tongaat Hulett Ltd South Africa 8.00x 5.09x
Emerging markets peer average (ex- Nestle Nigeria) 12.06x 9.51x
Nestle EBITDA, Nm 62,184 71,995
Enterpise value 749,704 684,608
- Net debt, Nm' 9,053 -7,420
- Pension Provisions - -
- Minority Interest - -
Equity Value, Nm 740,650 692,028
No. of shares, millions 792.7 792.7
Price target N/s 934 873
2-year blended target price, N/s 903.7

Peers FY 2017 EV/SALES FY 2018 EV/SALES

Nestle Nigeria 5.09x 4.39x

Nestle Pakistan 4.57x 3.05x
Oman Flour Mills 2.00x 1.19x
Agthia Group Dubai 1.47x 1.46x
Tongaat Hulett Ltd South Africa 1.54x 0.89x
Emerging markets peer average (ex- Nestle Nigeria) 2.39x 1.65x
Nestle Sales, Nm 244,151 266,275
Enterpise value 584,555 438,546
- Net debt, Nm 9,053 -7,420
- Pension Provisions - -
- Minority Interest - -
Equity Value, Nm 575,501 445,967
No. of shares, millions 792.7 792.7
Price target N/s 726 563
2-year blended target price, N/s 644.3

Source: Bloomberg, Coronation Research.

2019 Nigeria Consumer Report | Power to the Price Point 55

Peers FY 2017 P/E FY 2018 P/E

Nestle Nigeria 36.57x 27.37x

Nestle Pakistan 36.71x 30.98x
Oman Flour Mills 11.54x 8.56x
Agthia Group Dubai 15.09x 14.16x
Tongaat Hulett Ltd South Africa 22.18x 10.02x
Emerging markets peer average (ex- Nestle Nigeria) 21.38x 15.93x
Nestle Nigeria EPS 42.55 54.26
Price target N/s 910 864
2-year blended target price, N/s 887.1

Spot multiples blended average price, ₦/s 811.7

Source: Bloomberg, Coronation Research.

Peers FY 2017 EV/EBITDA FY 2018 EV/EBITDA Flour Mills of Nigeria

FMN 4.16x 3.22x (FMN) relative
Dangote Sugar Refinery 4.09x 4.30x valuation (at year-end
Astral Foods 9.62x 2.35x prices)
Oman Flour Mills 8.92x 6.84x
Nitto Fuji Flour Mills Japan 6.20x 6.83x
Emerging markets peer average (ex- FMN) 7.21x 5.08x
FMN EBITDA, Nm 57,243 66,038
Enterpise value 412,629 335,341
- Net debt, Nm' 196,587 130,988
- Pension Provisions - -
- Minority Interest 4,080 5,358
Equity Value, Nm 211,962 198,995
- No. of shares, millions 2,624.30 4,100.40
- Price target N/s 81 49
2-year blended target price, N/s 64.7
56 2019 Nigeria Consumer Report | Power to the Price Point

Peers FY 2017 EV/SALES FY 2018 EV/SALES

FMN 0.45x 0.39x

Dangote Sugar Refinery 0.98x 1.08x
Astral Foods 0.96x 0.38x
Oman Flour Mills 2.00x 1.19x
Nitto Fuji Flour Mills Japan 0.44x 0.55x
Emerging markets peer average (ex- FMN) 1.09x 0.80x
FMN Sales, Nm 524,464 542,670
Enterpise value 573,144 434,632
- Net debt, Nm 196,587 130,988
- Pension Provisions - -
- Minority Interest 4,080 5,358
Equity Value, Nm 372,477 298,286
No. of shares, millions 2,624.30 4,100.40
Price target N/s 142 73
2-year blended target price, N/s 107.3

Peers FY 2017 P/E FY 2018 P/E

FMN 4.69x 6.01x

Dangote Sugar Refinery 6.05x 8.25x
Astral Foods 16.48x 3.95x
Oman Flour Mills 11.54x 8.56x
Nitto Fuji Flour Mills Japan 15.35x 11.66x
Emerging markets peer average (ex- FMN) 12.36x 8.11x
FMN EPS 3.37 3.32
Price target N/s 42 27
2-year blended target price, N/s 34
Spot multiples blended average price, ₦/s 68.8

Source: Bloomberg, Coronation Research.

2019 Nigeria Consumer Report | Power to the Price Point 57

Peers FY 2017 EV/EBITDA FY 2018 EV/EBITDA

Unilever Nigeria relative
Unilever Nigeria 11.21x 12.42x valuation (at year-end
Unilever India 44.99x 26.14x prices)
PZ Cussons Nigeria 4.75x 3.10x
Cosmax Incorporated South Korea 31.62x 22.77x
Tiger Brands South Africa 22.30x 12.76x
Emerging markets peer average (ex - Unilever 25.91x 16.19x
Nigeria)
Unilever Nigeria EBITDA, Nm 16,564 12,415
Enterpise value 429,210 201,055
- Net debt, Nm -49,819 -58,316
- Pension Provisions - -
- Minority Interest - -
Equity Value, Nm 479,030 259,371
No. of shares, millions 5,745.00 5,745.00
Price target N/s 83 45
2-year blended target price, N/s 64.3

Peers FY 2017 EV/SALES FY 2018 EV/SALES

Unilever Nigeria 2.18x 1.66x

Unilever India 11.09x 8.17x
PZ Cussons Nigeria 0.94x 0.42x
Cosmax Incorporated South Korea 1.98x 1.40x
Tiger Brands South Africa 3.20x 1.41x
Emerging markets peer average (ex - Unilever 4.30x 2.85x
Nigeria)
Unilever Nigeria Sales, Nm 85,193 92,900
Enterpise value 366,696 264,718
- Net debt, Nm -49,819 -58,316
- Pension Provisions - -
- Minority Interest - -
Equity Value, Nm 416,516 323,035
No. of shares, millions 5,745.00 5,745.00
Price target N/s 73 56
2-year blended target price, N/s 64.4
58 2019 Nigeria Consumer Report | Power to the Price Point

Peers FY 2017 P/E FY 2018 P/E

Unilever Nigeria 33.32x 23.28x

Unilever India 64.78x 37.46x
PZ Cussons Nigeria 24.61x 26.04x
Cosmax Incorporated South Korea 70.65x 39.52x
Tiger Brands South Africa 32.29x 16.95x
Emerging markets peer average (ex - Unilever 48.08x 29.99x
Nigeria)
Unilever Nigeria EPS 1.23 1.59
Price target N/s 59.17 47.68
2-year blended target price, N/s 53.4
Spot multiples blended average price, N/s 60.7

Source: Bloomberg, Coronation Research.

Peers FY 2017 EV/EBITDA FY 2018 EV/EBITDA PZ Cussons Nigeria

PZ Cussons Nigeria 4.69x 3.12x relative valuation (at
Unilever Nigeria 11.19x 11.57x year-end prices)
Cosmax Incorporated South Korea 31.62x 22.77x
Tiger Brands South Africa 22.30x 12.76x
Emerging markets peer average (ex- PZ Cussons 21.70x 15.70x
Nigeria)
PZ Cussons EBITDA, Nm 15,738 10,914
Enterpise value 341,514 171,350
- Net debt, Nm' -8,022 -14,025
- Pension Provisions

- Minority Interest 109,080 108,687

Equity Value, Nm 240,456 76,689
No. of shares, millions 3,970.50 3,970.50
Price target N/s 61 19
2-year blended target price, N/s 39.9
2019 Nigeria Consumer Report | Power to the Price Point 59

Peers FY 2017 EV/SALES FY 2018 EV/SALES

PZ Cussons Nigeria 0.94x 0.42x

Unilever Nigeria 2.18x 1.68x
Cosmax Incorporated South Korea 1.98x 1.40x
Tiger Brands South Africa 3.20x 1.41x
Emerging markets peer average (ex- PZ Cussons 2.45x 1.50x
Nigeria)
PZ Cussons Sales, Nm 78,216 80,553
Enterpise value 191,951 120,548
- Net debt, Nm' (8,022) -14,025
- Pension Provisions - -
- Minority Interest 109,080 108,687
Equity Value, Nm 90,893 25,887
No. of shares, millions 3,970.50 3,970.50
Price target N/s 23 7
2-year blended target price, N/s 14.7

Peers FY 2017 P/E FY 2018 P/E

PZ Cussons Nigeria 24.61x 26.04x

Unilever Nigeria 31.62x 20.95x
Cosmax Incorporated South Korea 70.65x 39.52x
Tiger Brands South Africa 32.29x 16.95x
Emerging markets peer average (ex- PZ Cussons 44.85x 25.81x
Nigeria)
Unilever Nigeria EPS 1.3 1.77
Price target N/s 58.17 45.59
2-year blended target price, N/s 51.9
Spot multiples blended average price, N/s 35.5

Source: Bloomberg, Coronation Research.

60 2019 Nigeria Consumer Report | Power to the Price Point

Long bond rates versus company growth rates

As well as using valuations histories and spot multiple valuations we also value our covered
companies using Discounted Cash Flow (DCF) calculations. We use a long-term Naira risk-free
rate of 14.50%, being the current yield of a Federal Government of Nigeria (FGN) 10-year bond. We
use an equity risk premium of 6.00%.

Our forecasts of financial performance of covered companies has been prepared in nominal Naira
(which compares with historic financial statements) and assumes a long-term inflation rate of
8.00%. We have modeled explicit forecasts (profit & loss, balance sheet and cashflow) for four
forecast years, followed by semi-explicit forecasts for a further five years, followed by a model
based on terminal growth rates, which we vary from company to company.
2019 Nigeria Consumer Report | Power to the Price Point 61

Nestle Nigeria (Nestle)

We value Nestle Nigeria by the discounted cash flow method by forecasting and discounting future
free cash flows, and incorporating a three-stage model: the explicit forecast stage (2019f-22f), the
semi-explicit stage (2023f-28f) and perpetuity.

Peers Summary Discounted

Risk-free rate (10-yr) 14.5% Cash Flow (DCF)
Post-tax cost of debt 9.4% valuation for Nestle
WACC-1 19.2% Nigeria
WACC-2 17.2%
WACC-3 15.2%
Terminal growth rate 10.5%
DCF 2019e-22e 193,927
DCF 2023e-28e 221,127
DCF Terminal 748,443
Net debt 2018 7,420
Equity value, Nm 1,170,918
No. of shares, m 793
Equity value per share 1,477.21

Source: Company, Coronation Research.

Flour Mills of Nigeria (FMN)

We value Flour Mills of Nigeria by the discounted cash flow method by forecasting and discounting
future free cash flows, and incorporating a three-stage model: the explicit forecast stage
(2019f-22f), the semi-explicit stage (2023f-29f) and perpetuity.

Peers

Risk-free rate (10-yr) 14.50%

Summary Discounted
Post-tax cost of debt 15.60%
Cash Flow (DCF)
WACC-1 17.30%
valuation for Flour Mills
WACC-2 16.30%
of Nigeria
WACC-3 15.30%
Terminal growth rate 5.00%
DCF 2019e-22e 180,867
DCF 2023e-29e 66,570
DCF Terminal 60,162
Net debt 2018 -130,988
Investments 3,516
Minority Interest -5,358
Equity value, Nm 174,729
No. of shares, m 4,100
Equity value per share 42.61

Source: Company, Coronation Research.

62 2019 Nigeria Consumer Report | Power to the Price Point

Unilever Nigeria (Unilever)

We value Unilever Nigeria by the discounted cash flow method using our forecast of free cash
flows to the firm and incorporating a three-stage model: the explicit forecast stage (2019f-22f), the
semi-explicit stage (2023f-31f) and perpetuity.

Peers Summary Discounted

Risk-free rate (10-yr) 14.50% Cash Flow (DCF)
Post-tax cost of debt 10.50% valuation for Unilever
WACC-1 19.90% Nigeria
WACC-2 17.90%
WACC-3 15.90%
Terminal growth rate 6.50%
DCF 2019e-22e 33,048
DCF 2023e-2031e 86,678
DCF Terminal 48,273
Net debt 2018 57,140
Pension Provision -2,021
Equity value, Nm 223,118
No. of shares, m 5,745
Equity value per share 38.84

Source: Company, Coronation Research.

2019 Nigeria Consumer Report | Power to the Price Point 63

PZ Cussons Nigeria (PZ Cussons)

We value PZ Cussons by the discounted cash flow method using our forecast of free cash flows
to the firm and also incorporating the use of a three stage model: the explicit forecast stage
(2019f-22f), the semi-explicit stage (2023f-28f) and perpetuity.

Peers Summary Discounted

Risk-free rate (10-yr) 14.5% Cash Flow (DCF)
Post-tax cost of debt 11.8% valuation for PZ
WACC-1 20.3% Cussons Nigeria
WACC-2 18.3%
WACC-3 16.3%
Terminal growth rate 5.0%
DCF 2019e-22e 136
DCF 2023e-28e 18,587
DCF Terminal 38,321
Net debt 2018 14,025
Minority Interest (2,947)
Equity value, Nm 68,122
No. of shares, m 3,970
Equity value per share 17.16

Source: Company, Coronation Research.

64 2019 Nigeria Consumer Report | Power to the Price Point

Risks
2019 Nigeria Consumer Report | Power to the Price Point 65

Risks

Risks to our investment thesis are evident in: exchange rates, in particular the Naira /
US dollar exchange rate; oil prices and production; and other contingent liabilities that
may crystalise, in particular the ongoing court case between the Federal Government of
Nigeria (FGN) and Process and Industrial Development; insurgencies and security breaches;
regulatory risk; macro-economic risk; market risk; interest rate conditions; and management
decisions as they affect the performance of the covered companies.

Naira/ US dollar exchange rate

In January 2017 the unofficial, or parallel Naira/US$ rate was N490.00/US$1 while the interbank
Naira/US$ rate stood at N314.86/US$1. By mid-August 2017 these rates had converged to
approximately N360.00/US$1. During 2017 the published foreign exchange reserves of the
Central Bank of Nigeria (CBN) rose from US$28.3bn to US$38.7bn. The CBN’s FX reserves are
currently reported at US$44.8bn. Therefore, by the end of 2017, the Naira/US dollar exchange
rate had stabilised considerably. However, inflation (April 2019: 11.25% year-on-year) currently
above its target of 6 – 9%, represents an ongoing threat to the exchange rate, which continues
to be protected by various restrictive rules and controls.

In addition, and over the long term, the Naira/US dollar exchange rate has been subject to
periodic dislocations. During periods of severe exchange rate disruption there can be limitation
on capital flows and foreign exchange transfers.

Unless the consumer companies covered in this report are able to pass cost increases to their
customers, which is unlikely because of stiff competition, a Naira devaluation will likely cause
a surge in input costs and squeeze profit margins of the covered companies. Naira devaluation
also affects the behavior of consumers negatively.

Oil prices and production rate

The average price of oil (Brent) in 2017 was US$54.75/bbl, in 2018 it was US$71.69/bbl. The
Nigerian economy, and the companies covered in this report, depend on oil prices and
production to a significant extent.

Average oil prices (Brent) in 2019 have remained favourable, having averaged US$66.04/bbl
up until 6 May. Nevertheless, a sharp decline in oil prices and/or production, especially below
US$60.00/bbl is likely to distort the implementation of the 2019 budget and confidence in the
currency. This, in our opinion, could have destabilising effects on the broader economy and
66 2019 Nigeria Consumer Report | Power to the Price Point

covered companies. To limited degree low oil prices could benefit HPC manufacturers as the
price of Linear Alkyl Benzene, a key input, tends to track oil.

Political Risk - Process and Industrial Development (P&ID)

Process and Industrial Development Limited, a company registered in the British Virgin Islands,
currently has a US$9bn claim against the Federal Government of Nigeria (FGN) over alleged
contracts with the Ministry of Petroleum Resources of the FGN to build a natural gas processing
plant – see Coronation Research: P&ID’s risk to Nigeria, 14 March 2019. Enforcement of this
contract through US courts could negatively impact the monetary and fiscal stability of Nigeria.

Political Risk - Insurgencies

The author(s) of this report are aware of three areas of insurgency in Nigeria: in the north-
east of the country, where the so-called ‘Boko Haram’ group wages a terrorist campaign;
in the south-south, particularly the Niger Delta area, where various groups disrupt oil & gas
production; in the middle belt and north-west where violent raids by bandits have disturbed
economic activity. These insurgencies are chronic and, if any one or more of them worsen, could
significantly disrupt the politics and economy of Nigeria.

Worsening of security conditions could negatively impact the ability of food and consumer
companies to distribute their products.

Regulatory Risk

Nigeria has not assented to the African Continental Free Trade Agreement (AfCFTA). If Nigeria
were to join, tariffs and barriers to entry into the Nigerian market would be removed and
highly competitive imports of food and home and personal care goods into the country would
negatively affect the covered companies, in all likelihood.

Macro-economic risk

The authors of this report expect continued growth of the Nigerian economy during the forecast
period, but cannot rule out a return to recession. Such a renewed downturn would have negative
effects on consumer behaviour and on the profitability of the covered companies featured in this
report.
2019 Nigeria Consumer Report | Power to the Price Point 67

Market risk

Some of the companies covered in this report may in future access the Naira bond market or
the international eurobond market for their financing needs. Conditions in these markets may
change for the worse and negatively affect the ability of these companies to favourably meet
their financing needs, whether in those markets or via commercial loans which take those
markets as their reference point.

The prices of shares listed on the Nigerian Stock Exchange (NSE) are subject to volatility which
exceeds that of some developed and emerging markets. While volatility does not equate to risk,
market participants may reduce participation in the Nigerian market if volatility reaches high
levels, and this could negatively impact the share prices of the covered companies.

Interest rate conditions

The Central Bank of Nigeria (CBN) actively participates in Nigeria’s interest rate markets in order
to manage liquidity, and it sets the Monetary Policy Rate (MPR) for the banking sector. Interest
rates are also driven by market demand for such products as Naira-denominated treasury bills
(T-bills) and bonds, issued by the Federal Government of Nigeria (FGN) and the CBN’s own open
market operation (OMO) paper. Either by the design of the CBN, or through market conditions
(for example, a sudden drop in demand for T-bills), interest rates could change rapidly. Such
rapid changes in interest rates could have significant implications for the companies covered in
this report.

Management decisions

Publicly-listed consumer companies are closely monitored by the NSE and are required to adhere
to a broad framework of strictly-enforced rules. Managers of Nigerian corporates are required
to have professional qualifications and experience. Nevertheless, in general, poor corporate
governance practices still pose a risk to company performance in Nigeria.
68 2019 Nigeria Consumer Report | Power to the Price Point
2019 Nigeria Consumer Report | Power to the Price Point 69

Appendices
70 2019 Nigeria Consumer Report | Rise of the Usurpers

APPENDIX I

Company Profile
Nestle Nigeria (Nestle)

The Business - Value Chain

Nestle Nigeria, the biggest food and beverage company in Nigeria, operates in several different
segments. Nestle Nigeria has limited exposure to FX effects on production materials. According
to management, some 80% of agricultural input used is sourced locally. Currently, 100% of the
grains and legumes used in Golden Morn are locally sourced, the malt in Milo is made from
sorghum supplied by smallholder farmers who cultivate the grain in north western Nigeria as
well as the soya used in Maggi.

Product portfolio

Nestle Nigeria manufactures 11 products in the Nigerian market which range from: Culinary;
Dairy; Beverages; Coffee; Baby food; Chocolates; and water (see table below). The food segment
(which includes culinary, chocolate and confectionary, and baby food) contributes 67% of
revenues, while sales from the beverage segment account for the rest.

Nestle Nigeria product portfolio

Segment Product Variants

Culinary Maggi Cubes Star, Chicken, Shrimp, Naija Pot

Maggi Mix'py Golden beef, Tomato, Classic, and Garlic & Ginger
Marvina seasoning powder Chicken
Dairy Nestle Carnation Evaporated milk
Nido Nestle NIDO Fortified, Nestle NIDO NutriPAK
Ideal Milk Evaporated milk
Beverages Milo Milo powdered beverage
Milo Ready-to-drink (RTD)
Chocolate and confectionary Kit Kat Chocolate bar
Milo Milo Energy Cubes
Cereals Golden Morn Golden morn maize cereal, Golden morn puff cereal
Coffee Nescafe NESCAFÉ Classic (Tin & Sachet), NESCAFÉ 3-in-1 mixes (32g)
Baby food Cerelac Wheat, Rice, Maize, 3 Fruits and Honey
Nutrend  Maize & Soya
Lactogen Starter infant formula, Gentle start
SMA Gold, Pro, Follow-on milk, First infant milk
NAN Optipro, Comfort, Supreme,
Water Nestle Pure Life Nestle Pure Life

Source: Company, Coronation Research.

2019 Nigeria Consumer Report | Rise of the Usurpers 71

Flour Mills of Nigeria (FMN)

The Business - Value Chain

Flour Mills of Nigeria (FMN), with over 17 subsidiaries, aims to gain an edge through its integrated
processes. The need to backwardly integrate to reduce dependence on imported materials
remains one of the strategic initiatives of the group. The reduced dependence on imports is
expected to shield the company from exchange rate fluctuations, tariffs and import barriers. To
this end, the bulk of investments made recently have been in agriculture and infrastructure to
aid sourcing of inputs and improve processes. According to the company, raw materials will be
produced locally wherever possible to ensure that good quality products are developed through
the full supply chain from growing to final consumer consumption – from farm to fork. The
company’s operations are broken into four main segments: Flour Milling; Agro-Allied; Logistics &
Support; Sugar Value Chain.

Capacity and Positioning

The Nigerian flour milling industry is dominated by a few players. The top two players, FMN and
Dangote Flour.

FMN product portfolio

Segment Product Variants

Foods Golden Penny ball foods Semovita, Garri, Masavita, Goldenvita

Golden Penny sugar Sugar cubes, granulated sugar
Golden Penny pasta Macaroni, Sphaghettini, Twists, Spaghetti
Golden Penny instant Chicken flavor
noodles
Golden Penny flour Confectionary flour, prime flour, multi-purpose flour
Snacks Concentrated powdered drink, chin-chin, cheese balls
Golden penny oils & spreads Soya oil, pure vegetable oil, margarine, butter
Agro-Allied Feeds Animal feed, Concentrate, Mash
Fertilizer NPK, Urea
Logistics & Support Bagco Laminates, Rope, Thread, Webbing, Blown film, Carrier bags
Baby food Cerelac Wheat, Rice, Maize, 3 Fruits and Honey
Nutrend  Maize & Soya
Lactogen Starter infant formula, Gentle start
SMA Gold, Pro, Follow-on milk, First infant milk
NAN Optipro, Comfort, Supreme,
Water Nestle Pure Life Nestle Pure Life

Source: Company, Coronation Research.

72 2019 Nigeria Consumer Report | Rise of the Usurpers

Unilever Nigeria (Unilever)

The Business - Value Chain

Unilever Nigeria controls sizeable market share in many of its product segments.

Looking at Unilever Nigeria’s product portfolio, its offerings are skewed towards HPC, with 11 out
of its 16 products in this segment

Product portfolio

Unilever Nigeria’s products are segmented into Home and Personal care (HPC), and Food and
Drink. The HPC segment includes sale of skin care products, and oral care products, while the
Food and Drink Segment includes sale of tea, sauces, margarines and spreads, and cooking
products such as liquid margarines. The average revenue contribution over the five years (2013 –
2017) was a 51%:49% split between HPC and Food and drinks segment.

There are currently 16 products in the Unilever Nigeria’s portfolio.

Unilever Nigeria product portfolio

Segment Product Variants

Food and Drink

Condiments Knorr Knorr Classic, Knorr Chicken

Royco Royco Beef & Royco Chicken
Spread Blue Band Low fat spread
Tea Lipton Yellow label tea, Green tea, Black tea

Home and Personal Care (HPC)

Detergent OMO Multi-Active Detergent, OMO Auto machine liquid soap

Sunlight Sunlight washing powder, Sunlight dish washing liquid
Soap LUX beauty soap Bath bar soap
Cream Fair & Lovely Skin toning lotion
Vaseline Pure petroleum jelly, Gentle protective jelly, lip therapy
Oral Care Close-UP toothpase Red hot, Naija herbal with aloe vera
Pepsodent toothpaste Cavity fighter, Expert protection
Deodarant/Sprays AXE Long lasting body sprays, roll ons
Rexona Long lasting body sprays, roll ons
Lifebuoy Anti-bacterial soap
Geisha Moisturising bath soap
Baby Products Pears baby products Moisturising cream, Moisturising oil, Bath soap

Source: Company, Coronation Research.

2019 Nigeria Consumer Report | Rise of the Usurpers 73

PZ Cussons Nigeria (PZ Cussons)

The Business - Value Chain

PZ Cussons Nigeria (PZ Cussons) manufactures, distributes and sells a range of consumer
products such as detergents, soaps, cosmetics, medicaments, confectionery, refrigerators,
freezers, air conditioners and home appliances, under various brand names. It also distributes the
milk products of Nutricima Limited, Harefield Industrial Nigeria Limited, PZ Wilmar Limited and
PZ Wilmar Food Limited. It operates in approximately 30 distribution depots across Nigeria with
over 1,000 distributors.

PZ Cussons’ revenues are broken into two distinct segments: branded consumer goods, or
Home & Personal Care (HPC), and durable electrical appliances. This we further breakdown
into: personal care, beauty, home care, food and nutrition, and electricals. The HPC segment,
contributes about two thirds of revenues (73% as at 2018) while electrical goods account for the
rest.

Capacity and Positioning

PZ Cussons’ portfolio offerings are skewed towards consumer durable goods, which still
generates the bulk of its revenues.

PZ Cussons Nigeria product portfolio

Segment Product Variants

Personal Care Imperial Leather Bar soap, Body wash, Roll Ons, Body spray, Body lotion
Carex Hand wash, Hand gel
Cussons Baby Cleansing, Hair Care, Skin Care and Gifting
Premier All-purpose bar soap
Robb Inhaler, Methyl balm
Venus Lotion
Joy Bath soap
Electricals Cool world

Haier Thermocool Refrigerators, Freezers, Air conditioner, Washing machines, Cookers,

Generators, Stabilizers
Homecare Zip Detergent
Morning Fresh Liquid dishwashing soap
Canoe All-purpose bar soap
Food and Nutrition Nunu Evaporated milk, Instant filled milk powder
Coast Full cream evaporated milk
Olympic Filled evaporated milk, Instant full cream powdered milk
Yo! Yoghurt drink

Source: Company, Coronation Research.

74 2019 Nigeria Consumer Report | Rise of the Usurpers

APPENDIX II

Company Financial Forecasts

Nestle Nigeria (Nestle)
Nestle Nigeria YE: December 2016 2017 2018 2019e 2020f 2021f 2022f
CP&L
Nm
Revenue 181,911 244,151 266,275 295,565 326,210 360,040 397,386
Change 20% 34% 9% 11% 10% 10% 10%

Cost of Sales* (102,101) (138,416) (143,838) (164,372) (180,856) (198,110) (219,991)

Grpss Profits 79,810 105,735 122,436 131,193 145,355 161,930 177,395
Change 11% 32% 16% 7% 11% 11% 10%
Margin 44% 43% 46% 44% 45% 45% 45%

Marketing and Distribution* (27,580) (33,860) (41,219) (45,377) (47,130) (52,659) (57,923)
Change 12% 23% 22% 10% 4% 12% 10%
Administrative Expenses* (8,040) (9,691) (9,222) (12,357) (13,293) (14,853) (16,337)
Change 9% 21% -5% 34% 8% 12% 10%
Total Opex (35,620) (43,551) (50,441) (57,733) (60,423) (67,511) (74,260)
Change 11% 22% 16% 14% 5% 12% 10%

EBITDA 44,190 62,184 71,995 73,459 84,931 94,419 103,135

Change 11% 41% 16% 2% 16% 11% 9%
EBITDA margin 24% 25% 27% 25% 26% 26% 26%

Depreciation (5,976) (6,486) (11,355) (6,887) (7,587) (8,287) (8,986)

Amortization - - - - - - -

Operating Profit 38,213 55,698 60,641 66,573 77,345 86,132 94,148

Change 13% 46% 9% 10% 16% 11% 9%
Margin 21% 23% 23% 23% 24% 24% 24%

Other Income - - - - - - -

EBIT 38,213 55,698 60,641 66,573 77,345 86,132 94,148

Chnage 13% 46% 9% 10% 16% 11% 9%
EBIT Margin 21% 23% 23% 23% 24% 24% 24%

Interest Income 4,199 6,239 1,717 1,419 1,121 1,758 1,800

Interest Expense (20,864) (15,109) (2,607) (1,001) (2,649) (2,601) (2,646)
Net Finance Income/ (Cost) (16,665) (8,870) (890) 418 (1,528) (843) (846)

PBT 21,548 46,829 59,751 66,990 75,817 85,289 93,302

Change -27% 117% 28% 12% 13% 12% 9%
Margin 12% 19% 22% 23% 23% 24% 23%

Tax (13,623) (13,105) (16,743) (20,097) (22,745) (25,587) (27,991)

Effective tax rate 63% 28% 28% 30% 30% 30% 30%

Net Profits 7,925 33,724 43,008 46,893 53,072 59,702 65,312

Change -67% 326% 28% 9% 13% 12% 9%
Margin 4% 14% 16% 16% 16% 17% 16%

Source: Company, Coronation Research. *Historic Cost of Sales, Marketing and Distribution expenses and Administrative expenses
have been adjusted for Depreciation, while all historic Amortisation expenses have been allocated to Administrative expenses
2019 Nigeria Consumer Report | Rise of the Usurpers 75

Nestle Nigeria, balance sheet, Nm

Nestle Nigeria YE: December 2016 2017 2018 2019e 2020f 2021f 2022f
Balance Sheet
Nm
Property, plant & equip 70,172 72,378 73,366 78,479 80,892 82,606 83,619
Other receivables 1,678 1,921 2,237 2,237 2,237 2,237 2,237
Intangible Assets - - - - - - -
Prepayments - - 3,997 3,997 3,997 3,997 3,997
Total Non- Current Assets 71,850 74,299 79,600 84,714 87,127 88,841 89,854

Inventories 20,638 23,910 23,124 34,518 37,980 41,603 43,998

Trade receivables 24,035 31,430 42,175 41,379 35,883 39,604 39,739
Other receivables & Prep 1,712 2,025 1,228 2,956 3,262 3,600 3,974
Amount due from related com- - - - - - - -
panies
Deposits for imports - - - - - - -
Short-term investments - - 445 - - - -
Cash and cash equivalents 51,351 15,139 15,762 12,458 19,536 19,998 21,895
Total Current Assets 97,736 72,505 82,734 91,311 96,661 104,806 109,606

Total Assets 169,586 146,804 162,334 176,024 183,788 193,646 199,460

Deferred Taxation 5,186 10,405 11,374 11,374 11,374 11,374 11,374

Provisions for gratutity 2,104 2,276 2,701 2,701 2,701 2,701 2,701
Loans and borrowings - Longterm 10,384 9,565 5,921 12,365 13,132 14,563 14,853
Total Non-Current Liabilities 17,674 22,245 19,996 26,440 27,207 28,638 28,928

Trade Payables 10,639 14,209 27,086 21,651 25,482 30,438 31,258

Other Payables 54,023 34,846 37,772 43,165 47,493 52,024 57,770
Loans and Borrowings - Short- 40,130 10,913 1,026 6,720 4,961 2,631 1,321
term
Current Tax payable 15,490 15,099 23,630 23,630 23,630 23,630 23,630
Dividend payable - - - - - - -
Bank Overdraft 155 3,714 1,394 2,989 3,586 4,856 5,123
Provisions 597 899 1,209 1,209 1,209 1,209 1,209
Amount due to related companies - - - - - - -
Total Current Liablities 121,033 79,680 92,118 99,364 106,361 114,788 120,311

Ordinary Share Capital 396 396 396 396 396 396 396
Share Premium 32 32 32 32 32 32 32
Share based reserve 126 147 155 155 155 155 155
Retained Earnings 30,323 44,302 49,637 49,637 49,637 49,637 49,637
Total Equity 30,878 44,878 50,220 50,220 50,220 50,220 50,220

Total libs & shrhldrs' funds 169,586 146,804 162,334 176,024 183,788 193,646 199,460

Source: Company, Coronation Research.

76 2019 Nigeria Consumer Report | Rise of the Usurpers

Nestle Nigeria, cash flow, Nm

Nestle Nigeria YE: December 2016 2017 2018 2019e 2020f 2021f 2022f
Cashflow
Nm
Operating profit('07-'09) / Net Profits from 7,925 33,724 43,008 46,893 53,072 59,702 65,312
2010

Taxation 13,623 13,105 16,743

Interest Income 378 (2,299) 794
Interest Expense
Depreciation of fixed assets 5,976 6,486 11,355 6,887 7,587 8,287 8,986
Share based payment charge 85 79 80
Reinstatement of previously impaired assets
Write off of fixed assets
Amortization of intangible assets
Gain/(loss) on foreign exchange transactions 16,287 11,169 96
Impact of foreign exchange difference on
intercompany loans
(Gain )/ loss on the disposal of fixed assets 42 (19) 359
Curtailment gain on change in gratuity
scheme
Curtailment loss arising from restructuring
execercise
(Write back)/Provision for gratuity (86) 556 699
Provision for long service awards
Changes in long term receivables
(Increase)/decrease in long term debtors and
prepayments
Stock related exceptional items not involving
cash movement
44,231 62,800
Working Capital Changes
(Increase)/decrease in inventories (9,824) (3,273) 786 (11,394) (3,462) (3,623) (2,395)
Changes in long term receivables (326) (243) (316) - - - -
(Increase)/decrease in Trade and other (776) (7,709) (10,270) (932) 5,189 (4,060) (508)
receivables + Prepayments
(Increase)/ Decrease in other receivables
(Increase)/ Decrease in Non current Prepay- (3,763) - - - -
ments
(Increase)/decrease in deposits for imports
(Increase)/decrease in short term invesment (260) 445 - - -
(Increase)/decrease in amount due from
related companies
Increase in amount due to related companies 33,052 (23,922)
Increase/ (decrease) in other payables
Increase/ (decrease) in Tax payables - - - -
Increase/ (decrease) in deferred taxation - - - -
Increase/ (decrease) in contract liabilities 472
Increase/ (decrease) in refund liabilities 372
Increase/ (decrease) in provision gratuity - - - -
Change in assets classified as held for sale
Changes in provisions (19) 302 310 - - - -
Increase/ (decrease) in trade and other 21,696 (43) 8,159 9,487 6,566
payables
Operating cash flow 66,338 27,956 82,161 41,857 70,546 69,793 77,961
2019 Nigeria Consumer Report | Rise of the Usurpers 77

Nestle Nigeria YE: December 2016 2017 2018 2019e 2020f 2021f 2022f
Cashflow
Nm
Gratuity Paid
Long Service Awards paid (192) (384) (73)
Share based payment recharge paid (109) (58) (274)
VAT paid
Tax paid (4,551) (8,277) (7,195)
Net Cash provided by operating activities 61,485 19,236 74,619 41,857 70,546 69,793 77,961

Purchase of fixed assets (7,068) (8,716) (12,727) (12,000) (10,000) (10,000) (10,000)
Short term investments
Purchase of intangible asset
Proceeds from sale of fixed assets 26 43 26
Interest received 4,199 6,239 1,717
Net cashflow from investing activities (2,843) (2,433) (10,984) (12,000) (10,000) (10,000) (10,000)

Free Cash Flow 58,642 16,803 63,635 29,857 60,546 59,793 67,961

Dividend paid (20,081) (11,429) (44,554) (46,893) (53,072) (59,702) (65,312)

Interest paid (2,090) (7,289) (2,478)
(Decrease)/ Increase in bank overdraft
Increase in long term loans (1,503) (1,503) (1,115) 6,444 767 1,431 290
Repayments of borrowings (4,364) (41,241) (12,544)
Change in Short term loans 5,694 (1,760) (2,330) (1,309)
Proceeds from loans obtained- Intercom- 7,968 4,887
pany loan
Net cashflow from financing activities (20,070) (56,574) (60,691) (34,756) (54,065) (60,601) (66,331)

Net Increase/(Decrease) in cash and cash 38,572 (39,772) 2,944 (4,899) 6,481 (808) 1,630
equivalent
Cash and Cash equivalents, beginning of the 12,625 51,197 11,425 14,368 9,469 15,950 15,142
year
Cash and Cash equivalents , 31st December 51,197 11,425 14,368 9,469 15,950 15,142 16,772
Short-term bank overdraft 155 3,714 1,394 2,989 3,586 4,856 5,123
Total Cash and Cash equivalents 51,351 15,139 15,762 12,458 19,536 19,998 21,895

Source: Company, Coronation Research.

78 2019 Nigeria Consumer Report | Rise of the Usurpers

FMN Nigeria, profit and loss account, Nm

Flour Mills of Nigeria YE: March 2016 2017 2018 2019e 2020f 2021f 2022f
P&L
Nm
Sales 342,586 524,464 542,670 532,989 553,975 595,697 630,638
change 11% 53% 3% -2% 4% 8% 6%

Cost of Sales (292,810) (444,997) (459,082) (460,825) (473,932) (509,195) (533,628)

Gross Profit 49,777 79,467 83,588 72,164 80,043 86,502 97,011

Margin 15% 15% 15% 14% 14% 15% 15%

Distribution (4,719) (4,695) (6,180) (5,330) (5,540) (5,957) (6,306)

Adminstration (13,593) (16,041) (17,313) (15,990) (16,619) (17,871) (18,919)

Other operating income 16,011 (1,488) 5,943 6,240 6,553 6,880 7,224

EBITDA 47,476 57,243 66,038 57,085 64,436 69,555 79,009

EBITDA margin 14% 11% 12% 11% 12% 12% 13%

Depreciation (14,692) (15,803) (17,615) (20,912) (24,236) (27,810) (31,594)

Amortisation 0 0 0 0 0 0 0

Operating Profit 32,784 41,440 48,423 36,173 40,201 41,745 47,416

Operating margin 10% 8% 9% 7% 7% 7% 8%

Other Income 0 0 0 - - - -
Profit on disposal of fixed assets 0 0 0 0 0 0 0
EBIT 32,784 41,440 48,423 36,173 40,201 41,745 47,416
EBIT margin 10% 8% 9% 7% 7% 7% 8%

Interest Income 1,103 1,562 816 772 1,396 1,499 1,661

Interest Expense (22,398) (32,529) (32,697) (22,516) (25,730) (25,874) (28,174)

Net finance cost (21,294) (30,967) (31,881) (21,744) (24,333) (24,375) (26,513)
change 40% 45% 3% -32% 12% 0% 9%
% of sales -2% -2% -2% -2% -2% -2% -2%
Exceptional items - -

Profit Before Taxation 11,489 10,473 16,542 14,430 15,867 17,370 20,903

Taxation 2,931 (1,636) (2,926) (2,164) (2,380) (2,606) (3,135)

Tax rate -26% 16% 18% 15% 15% 15% 15%

Net Profits 14,420 8,836 13,616 12,265 13,487 14,765 17,768

Margin 4% 2% 3% 5% 4% 3% 3%

Source: Company, Coronation Research.

2019 Nigeria Consumer Report | Rise of the Usurpers 79

FMN Nigeria, balance sheet, Nm

Flour Mills of Nigeria YE: March 2016 2017 2018 2019e 2020f 2021f 2022f
Balance Sheet
Nm
Property, plant & equip 211,588 216,866 217,901 244,959 270,581 296,384 321,548
Investments 3,773 3,633 3,516 3,762 4,025 4,307 4,608
Deferred tax assets 66 1,847 6,460 6,783 7,122 7,478 7,852
Intangible Assets 735 208 1,095 1,150 1,208 1,268 1,331
Goodwill on acqusition 4,148 4,148 4,148 4,148 4,148 4,148 4,148
Long-term loans and Receivables 0 989 944 992 1,041 1,093 1,148
Deposit for shares 0 0 0 0 0 0 0
Biological Asset 352 29 38 39 41 42 44
Other long-term assets 0 0 0 0 0 0 0
Total Non-current Assets 220,662 227,720 234,102 261,832 288,165 314,720 340,679

Current Assets
Stocks 58,699 117,296 111,373 113,628 114,263 119,975 122,807
Biological assets 183 558 180 192 206 220 235
Trade debtors 12,735 16,032 13,208 14,602 13,660 13,056 12,094
Amount due ( rel. companies) 0 0 473 473 473 473 473
Other debtors and prepayments 6,231 5,371 5,402 5,111 4,553 4,896 3,456
Cash and bank deposits 33,213 45,019 22,245 40,235 43,202 47,856 64,230
Other assets 0 756 0 0 0 0 0
Prepayments 13,625 69,851 21,364 26,284 24,284 24,481 22,461
Total current Assets 124,686 254,883 174,246 200,526 200,640 210,957 225,757

Total Assets 345,348 482,603 408,348 462,358 488,805 525,677 566,436

Trade creditors 38,494 82,735 46,586 69,439 81,802 90,679 99,416

Bank Overdrafts 16,413 49,024 19,934 21,329 22,822 24,420 26,129
Term loans 100,830 141,702 103,923 111,343 114,700 125,617 135,384
Current portion of bond 0 0 0 0 0 0 0
Amount due (Subsidiaries) 0 0 0 0 0 0 0
Amount due (Rel. companies) 0 0 0 0 0 0 0
Taxation 1,336 2,136 3,151 3,284 3,422 3,565 3,715
Other creditors 11,923 11,832 10,407 10,407 10,407 10,407 10,407
Dividend payable 1,937 2,032 2,006 2,074 2,145 2,217 2,293
Deferred revenue 1,076 2,089 2,579 2,647 2,717 2,789 2,863
Provisions 0 0 0 0 0 0 0
Customer Deposits 11,030 12,453 11,202 11,383 11,568 11,755 11,946
Derivative Liablilities 0 3,493 0 0 0 0 0
Total current liabilities 183,039 307,497 199,788 231,907 249,583 271,449 292,152

Deferred taxation 5,768 7,819 12,308 12,633 12,967 13,309 13,661

Term loans 48,010 50,879 29,376 40,982 38,480 41,177 46,512
Bond 0 0 0 0 0 0 0
Gratuity 4,078 3,676 5,194 5,194 5,194 5,194 5,194
Deferred revenue 7,094 8,618 9,117 9,265 9,415 9,568 9,723
Long service award 1,594 1,569 1,948 1,948 1,948 1,948 1,948
Total Long term liabilities 66,543 72,562 57,943 70,022 68,004 71,197 77,039
80 2019 Nigeria Consumer Report | Rise of the Usurpers

Flour Mills of Nigeria YE: March 2016 2017 2018 2019e 2020f 2021f 2022f
Balance Sheet
Nm

Total liabilities 249,583 380,059 257,731 301,929 317,587 342,646 369,191

Share capital 1,312 1,312 2,050 2,050 2,050 2,050 2,050

Share premium 36,813 36,813 75,377 75,377 75,377 75,377 75,377
Other reserves -90 -111 -73 -73 -73 -73 -73
Retained Earnings 54,901 60,451 67,904 77,716 88,506 100,317 114,531
Total shrhldrs' funds 92,936 98,464 145,259 155,071 165,861 177,673 191,887
Minority 2,830 4,080 5,358 5,358 5,358 5,358 5,358
Total equity 95,766 102,544 150,617 160,429 171,219 183,030 197,244

Total Liabilities and Shareholders' fu nds 345,348 482,603 408,348 462,358 488,805 525,677 566,436

Source: Company, Coronation Research.

2019 Nigeria Consumer Report | Rise of the Usurpers 81

FMN Nigeria, cash flow, Nm

Flour Mills of Nigeria YE: March 2016 2017 2018 2019e 2020f 2021f 2022f
Cashflow
Nm
CASHFLOW FROM OPERATING ACTIVITIES
Profit after tax 14,420 8,836 13,616 12,265 13,487 14,765 17,768
Add: Depreciation 14,692 15,803 17,495 20,912 24,236 27,810 31,594
+/- Net interest expense/income 21,294 30,967 31,881 21,744 24,333 24,375 26,513
Other adjustments (12,222) 5,687 3,046
38,185 61,294 66,038 54,921 62,056 66,949 75,874
Changes in Working Capital:
Stocks 9,727 (58,597) 4,754 (2,255) (635) (5,712) (2,833)
Trade Debtors (2,899) (3,426) 1,883 (1,394) 943 603 962
Other debtors & prepayments 1,006 291 558 (343) 1,441
Due from related companies 0 0 0 0 0 0
change in other current assets (5,577) (56,202) 48,556 (4,933) 1,987 (211) 2,004
Trade Creditors 16,054 44,241 (39,870) 22,853 12,363 8,877 8,737
Other Creditors and accruals (215) (91) 0 0 0 0
Due to related companies
Taxation
other liabilities 2,493 3,961 (218) 318 325 332 340
Net Cashflow from Operating Activities 58,774 (8,820) 81,142 69,801 77,596 70,495 86,525

Income tax paid (630) (621) (1,307)

Long service award benefit paid (65) (99) (191)
Retirement benefit paid (662) (230) (341)
Foreign exchange loss (6,544) (5,795) 1,283
Net cash (used in)/ generated from operating 50,873 (15,566) 80,586 69,801 77,596 70,495 86,525
activities

CASHFLOW FROM INVESTING ACTIVITIES

Purchase of Fixed Assets (24,116) (22,539) (21,399) (47,969) (49,858) (53,613) (56,757)
Proceeds from sale of PPE & Biological assets 389 2,419 3,336
Interest received 1,103 1,562 816 772 1,396 1,499 1,661
Acquisition of intangible assets (16) (42) (13) (55) (58) (60) (63)
Acquisition of investment property 0 (10) 0 (246) (263) (282) (301)
Acquisition of biological assets (27) (1) (1) (2) (2)
Long-term loans and Receivables 0 (47) (50) (52) (55)
Suppliers’ credit obtained
Net proceeds from sale of investment in 27,267
associate
Net loans received from / (granted to) related 3,904
companies

Net Cashflow from Investing Activities 8,532 (18,609) (17,287) (47,547) (48,833) (52,509) (55,518)

Free Cash Flow (Cash Flow Available for 67,306 (27,429) 63,298 22,255 28,763 17,986 31,007
Financing Activities)
82 2019 Nigeria Consumer Report | Rise of the Usurpers

Flour Mills of Nigeria YE: March 2016 2017 2018 2019e 2020f 2021f 2022f
Cashflow
Nm
CASHFLOW FROM FINANCING ACTIVITIES
Share Capital 0 738 0 0 0 0
Share Premium 0 38,565 0 0 0 0
Dividends Paid (3,689) (2,971) (2,839) (2,453) (2,697) (2,953) (3,554)
Interest paid (22,398) (29,037) (32,697) (22,516) (25,730) (25,874) (28,174)
Increase/decrease in LT gratuity provisions 0 0 0 0
Change in borrowings 39,340 43,741 (59,282) 19,026 855 13,614 15,102
change in taxation 135 133 130 128
change in other long term liabilities (1,467) 148 150 153 155
Bank Overdraft Borrowings / (Repayment) 1,395 1,493 1,598 1,709
Movement in Long-term debt issuance (19,248)
Net Cashflow from Financing Activities (5,995) 11,733 (56,982) (4,265) (25,796) (13,332) (14,633)

Net Change in Cash 53,410 (22,442) 6,317 17,990 2,967 4,654 16,374
Effect of exchange rate changes on balance
of cash held in foreign currency
Cash and Bank Balance (Beginning) (33,679) 19,731 (4,005) 22,245 40,235 43,202 47,856
Cash and Bank Balance (Ending) 19,731 (2,711) 2,311 40,235 43,202 47,856 64,230

Overdraft 16,413 49,024 19,934

Total Cash and cash equivalents 36,144 46,313 22,245 40,235 43,202 47,856 64,230

Source: Company, Coronation Research.

2019 Nigeria Consumer Report | Rise of the Usurpers 83

Unilever Nigeria, profit and loss account, Nm

Unilever Nigeria YE: December 2016 2017 2018 2019e 2020f 2021f 2022f
P&L
Nm
Revenue 69,777 85,193 92,900 102,399 113,228 125,408 136,497
change 18% 22% 9% 10% 11% 11% 9%

Cost of Sales* (47,746) (54,605) (62,671) (67,584) (74,730) (81,515) (88,723)

Gross Profits 22,031 30,589 30,229 34,816 38,497 43,893 47,774
change -2% 39% -1% 15% 11% 14% 9%
margin 32% 36% 33% 34% 34% 35% 35%

Selling & Distribution* (2,688) (2,971) (3,705) (3,584) (3,963) (4,389) (4,777)
change 9% 11% 25% -3% 11% 11% 9%
Marketing & Administrative Expenses* (11,565) (11,037) (14,346) (12,288) (13,587) (14,422) (15,697)
change 0% -5% 30% -14% 11% 6% 9%
Total Opex (14,254) (14,008) (18,051) (15,872) (17,550) (18,811) (20,475)
change 1% -2% 29% -12% 11% 7% 9%

EBITDA 7,777 16,581 12,179 18,944 20,947 25,082 27,299

change -8% 113% -27% 56% 11% 20% 9%
margin 11% 19% 13% 19% 19% 20% 20%

Depreciation (2,313) (4,099) (2,672) (5,093) (5,909) (6,811) (7,794)

Amortization (233) (234) (233) (66) (57) (49) (42)

Operating Profit 5,230 12,248 9,273 13,784 14,982 18,221 19,463

change -17% 134% -24% 49% 9% 22% 7%
margin 7% 14% 10% 13% 13% 15% 14%

Other Income 124 (17) 236 260 288 319 347

EBIT 5,355 12,231 9,509 14,045 15,270 18,540 19,810

change -16% 128% -22% 48% 9% 21% 7%
margin 8% 14% 10% 14% 13% 15% 15%

Interest Income 1,028 1,565 4,027 2,857 2,899 3,093 3,392

Interest Expense (2,726) (3,201) (603) (1) (251) (171) (297)
Net Finance Income/(Cost) (1,699) (1,635) 3,424 2,857 2,648 2,922 3,095

Exceptional items - 1 (311) - - - -

Pension and Similar Obligation - - - - - - -

PBT 3,656 10,596 12,622 16,901 17,918 21,462 22,905

change 5% 190% 19% 34% 6% 20% 7%
margin 5% 12% 14% 17% 16% 17% 17%

Tax (1,035) (3,526) (3,490) (5,070) (5,375) (6,439) (6,872)

Effective tax rate 28% 33% 28% 30% 30% 30% 30%

PAT 2,621 7,070 9,132 11,831 12,542 15,023 16,034

change -10% 170% 29% 30% 6% 20% 7%
margin 4% 8% 10% 12% 11% 12% 12%

Source: Company, Coronation Research. *Historic Cost of Sales, Marketing and Distribution expenses and Administrative expenses
have been adjusted for Depreciation, while all historic Amortisation expenses have been allocated to Administrative expenses
84 2019 Nigeria Consumer Report | Rise of the Usurpers

Unilever Nigeria, balance sheet, Nm

Unilever Nigeria YE: December 2016 2017 2018 2019e 2020f 2021f 2022f
Balance Sheet
Nm
Property, plant & equip 29,272 29,881 29,678 31,752 32,637 33,350 33,746
Employee loan receivables 112 130 66 66 66 66 66
Intangible Assets 940 706 448 382 325 277 234
Non-current asset held for sale 0 0 0 0 0 0 0
Other non current assets 140 79 48 48 48 48 48
Pension scheme surplus 485 329 293 293 293 293 293
Total Non- Current Assets 30,949 31,126 30,533 32,542 33,370 34,034 34,388

Assets held for sale 171 0 0 0 0 0 0

Inventories 9,878 11,479 13,929 13,517 14,946 16,303 17,745
Trade receivables 18,946 27,907 30,188 33,792 37,365 41,385 45,044
Employee loans receivables 73 79 49 49 49 49 49
Cash and cash equivalents 12,474 50,494 57,144 57,985 61,855 67,845 74,230
Total Current Assets 41,543 89,959 101,310 105,342 114,215 125,582 137,068

Total Assets 72,491 121,084 131,843 137,884 147,585 159,616 171,455

Deferred Taxation 3,942 4,485 3,652 3,652 3,652 3,652 3,652

Provisions for gratutity 2,613 3,454 2,021 2,021 2,021 2,021 2,021
Long service award obligations 181 206 210 210 210 210 210
Other employee benefits 74 86 - - - - -
Deferred income 63 30 - - - - -
Loans and borrowings - Longterm 414 220 4 699 700 701 702
Total Non-Current Liabilities 7,288 8,481 5,887 6,582 6,583 6,584 6,585

Trade Payables 32,477 33,409 38,611 37,171 41,102 44,834 48,798

Loans and Borrowings - Short-term 20,501 455 0 870 368 1,155 1,012
Current Tax payable 503 2,799 4,556 4,556 4,556 4,556 4,556
Bank Overdraft 0 0 0 0 0 0 0
Provisions 0 0 0 0 0 0 0
Deferred Income 33 33 0 0 0 0 0
Total Current Liablities 53,513 36,695 43,167 42,597 46,026 50,544 54,366

Ordinary Share Capital 1,892 2,873 2,873 2,873 2,873 2,873 2,873
Share Premium 46 56,813 56,813 56,813 56,813 56,813 56,813
Retained Earnings 9,753 16,223 23,104 29,020 35,291 42,803 50,819
Total Equity 11,690 75,908 82,790 88,705 94,976 102,488 110,505

Total libs & shrhldrs' funds 72,491 121,084 131,843 137,884 147,585 159,616 171,455

Source: Company, Coronation Research.

2019 Nigeria Consumer Report | Rise of the Usurpers 85

Unilever Nigeria, Cashflow, Nm

Unilever Nigeria YE: December 2016 2017 2018 2019e 2020f 2021f 2022f
Cashflow
Nm
PBT 4,106 11,207 14,853 16,901 17,918 21,462 22,905
- - -
Taxation - - -
Interest Income (333) (1,304) (3,452) (2,857) (2,899) (3,093) (3,392)
Interest Expense 2,721 1,168 (37) 1 251 171 297
Depreciation of fixed assets 2,313 4,099 2,672 5,093 5,909 6,811 7,794
Inventory write down - - 75
Net impairment charge/(Write-back) - - -
Write off of fixed assets 3 - -
Amortization of intangible assets 234 234 257 66 57 49 42
Net charge in retirement benefit obligation 709 564 692
Impact of foreign exchange difference on (510) 593 -
intercompany loans
(Gain )/ loss on the disposal of fixed assets (8) 18 (160)
change in employee loan receivable 29 (25) 95 - - - -
(Gain) on sale of discontinued operations (1,971)
Impairment on intercompany receivables (1,351)
Restructuring provision - - -
(Write back)/Provision for gratuity - - - - - - -
Provision for long service awards (68) 46 35 - - - -
Statute barred dividend (14) 12 - - - - -
Other employee benefits - (286) (86) - - - -
Changes in long term receivables - - -
(Increase)/decrease in long term debtors and 61 79 -
prepayments
Stock related exceptional items not involving - - -
cash movement

Working Capital Changes - - -

(Increase)/decrease in inventories (3,705) (1,600) (2,450) 412 (1,429) (1,357) (1,442)
(Increase)/decrease in Trade receivables (8,803) (8,676) (2,567) (3,604) (3,573) (4,020) (3,659)
(Increase)/ Decrease in other receivables - - - - - - -
(Increase)/decrease in other non-current 69 61 31
assets
(Increase)/decrease in amount due from - - -
related companies
(Increase)/ decrease in Short-term invest- - - -
ments
Increase/ (decrease) in amount due to relat- - - -
ed companies
Increase/ (decrease) in trade payables 9,931 932 5,202 (1,440) 3,931 3,732 3,964
Increase/ (decrease) in other payables - - -
Increase/ (decrease) in dividend payable - - -
Increase/ (decrease) in deffered income - - - -
Changes in Short term provisions - - - - - - -
Increase/ (decrease) in current tax payables - - - - - - -
86 2019 Nigeria Consumer Report | Rise of the Usurpers

Unilever Nigeria YE: December 2016 2017 2018 2019e 2020f 2021f 2022f
Cashflow
Nm
Retirement Benefit Paid (567) (568) (1,913)
Long service award obligations paid (17) (21) (31)
Tax paid (159) (598) (3,001) (5,070) (5,375) (6,439) (6,872)
Net Cash provided by operating activities 5,991 5,935 6,893 9,502 14,788 17,317 19,638

Purchase of fixed assets (4,228) (4,559) (5,396) (7,168) (6,794) (7,525) (8,190)
Short term investments - - - 0 0 0 0
Purchase of intangible asset (5) - -
Proceeds from sale of fixed assets 17 5 5,057
Interest received 333 1,304 3,554 2,857 2,899 3,093 3,392
Net cashflow from investing activities (3,883) (3,251) 3,216 (4,311) (3,894) (4,432) (4,798)

Free Cash Flow 1,762 1,376 10,109 5,192 10,893 12,885 14,841

Dividend paid (186) (378) (2,873) (5,915) (6,271) (7,512) (8,017)

Interest paid - 57,748 (26) (1) (251) (171) (297)
Increase/ (decrease) in bank overdraft - - - - - - -
Increase/(decrease) in long-term loans 15,491 17,529 - 695 1 1 1
Repayments of Long term loan (2,410) (1,113) -
Change in long-term deferred taxes - - - -
Change in provisions - - - -
Increase/(decrease) in Short term loans (427) (33,451) (561) 870 (502) 786 (143)
Net cashflow from financing activities 12,468 40,335 (3,459) (4,351) (7,023) (6,895) (8,456)

Net Increase/(Decrease) in cash and cash 14,575 43,019 6,651 841 3,870 5,990 6,385
equivalent
Cash and Cash equivalents, beginning of the (7,100) 7,474 50,494 57,144 57,985 61,855 67,845
year
Bank Overdrafts
Short Term Loans 5,000 -
Cash and Cash equivalents, 31st December 12,474 50,494 57,144 57,985 61,855 67,845 74,230

Source: Company, Coronation Research.

2019 Nigeria Consumer Report | Rise of the Usurpers 87

PZ Cussons, profit and loss account, Nm

PZ Cussons Nigeria YE: May 2016 2017 2018 2019e 2020f 2021f 2022f
P&L
Nm
Revenue 69,528 78,216 80,553 76,525 78,129 79,791 82,080
change -5% 12% 3% -5% 2% 2% 3%

Cost of Sales* (47,710) (47,944) (53,540) (55,098) (57,034) (58,247) (59,919)

Gross Profits 21,818 30,272 27,013 21,427 21,095 21,544 22,162
change -1% 39% -11% -21% -2% 2% 3%
margin 31% 39% 34% 28% 27% 27% 27%

Selling and Distribution* (8,395) (9,096) (9,602) (9,948) (9,375) (9,575) (9,850)
change -5% 8% 6% 4% -6% 2% 3%
Administrative Expenses* (5,135) (5,637) (6,626) (6,505) (6,250) (6,383) (6,566)
change 15% 10% 18% -2% -4% 2% 3%
Total Opex (13,530) (14,733) (16,228) (16,453) (15,626) (15,958) (16,416)
change 2% 9% 10% 1% -5% 2% 3%

Operating Profit 8,288 15,539 10,785 4,974 5,469 5,585 5,746

change -5% 87% -31% -54% 10% 2% 3%
margin 12% 20% 13% 7% 7% 7% 7%

Other Income 286 199 129 269 313 319 328

EBITDA 8,574 15,738 10,914 5,243 5,782 5,905 6,074

change -3% 84% -31% -52% 10% 2% 3%
margin 12% 20% 14% 7% 7% 7% 7%

Depreciation (2,155) (2,324) (2,557) (2,778) (3,091) (3,410) (3,738)

Amortization - - - - - - -

EBIT 6,419 13,414 8,357 2,464 2,691 2,494 2,336

change -5% 109% -38% -71% 9% -7% -6%
margin 9% 17% 10% 3% 3% 3% 3%

Interest Income 210 486 181 570 640 732 692

Interest Expense (598) (290) (832) (371) (451) (735) (758)
Net Finance Income/(Cost) (387) 195 (652) 199 188 (3) (66)
Exceptional income/(loss) (2,884) (8,798) (5,392)

PBT 3,148 4,811 2,314 2,664 2,879 2,491 2,269

change -52% 53% -52% 15% 8% -13% -9%
margin 5% 6% 3% 3% 4% 3% 3%

Tax (1,019) (1,125) (386) (799) (806) (698) (635)

Effective tax rate 32% 23% 17% 30% 28% 28% 28%

PAT 2,130 3,687 1,927 1,865 2,073 1,794 1,634

change -53% 73% -48% -3% 11% -13% -9%
margin 3% 5% 2% 2% 3% 2% 2%
88 2019 Nigeria Consumer Report | Rise of the Usurpers

PZ Cussons Nigeria YE: May 2016 2017 2018 2019e 2020f 2021f 2022f
P&L
Nm
Minority Interest 267 363 82 425 448 - -

PAT ( Less Minority Interest) 1,863 3,324 1,845 1,440 1,625 1,794 1,634
change -54% 78% -44% -22% 13% 10% -9%
margin 3% 4% 2% 2% 2% 2% 2%

Source: Company, Coronation Research.. *Historic Cost of Sales, Marketing and Distribution expenses and Administrative expenses
have been adjusted for Depreciation, while all historic Amortisation expenses have been allocated to Administrative expenses
2019 Nigeria Consumer Report | Rise of the Usurpers 89

PZ Cussons, balance sheet, Nm

PZ Cussons Nigeria YE: May 2016 2017 2018 2019e 2020f 2021f 2022f
Balance Sheet
Nm
Property, plant & equip 26,505 28,514 28,430 29,478 30,294 30,873 31,239
Invesments in subsidiaries - - 24 24 24 24 24
Intangible Assets 1,017 954 954 954 954 954
Total Non- Current Assets 26,505 29,532 29,408 30,456 31,272 31,851 32,217

Inventories 19,278 28,710 26,040 26,797 27,739 28,329 29,142

Trade receivables 6,195 6,579 8,127 7,079 7,555 7,548 7,851
Other receivables & Prep 9,392 9,093 6,926 7,738 7,309 7,767 7,834
Deposits for letters of Credit 192 6,602 2,337 3,137 3,937 4,737 5,537
Cash and cash equivalents 12,868 8,022 14,260 15,996 18,294 17,300 17,153
Other assets - 1,550 1,518 1,518 1,518 1,518 1,518
Total Current Assets 47,925 60,556 59,208 62,265 66,351 67,198 69,034

Total Assets 74,430 90,088 88,616.0 92,721 97,623 99,049 101,251

Deferred Taxation 3,694 2,399 2,422 2,367 2,267 2,167 2,067

Long-term Borrowing - - - - - - -
Provisions 238 184 104 204 304 404 504
Total Non-Current Liabilities 3,932 2,584 2,525 2,570 2,570 2,570 2,570

Short-term Borrowing - - 235 354 678 596 911

Trade Payables 2,127 5,431 2,585 6,038 6,250 6,383 6,566
Other Payables 23,589 34,293 37,620 35,122 38,216 38,079 39,660
Current Tax Payable 1,290 2,555 458 2,892 3,547 4,301 3,612
Provisions 90 88 84 204 334 554 874
Total Current Liablities 27,096 42,366 40,982 44,610 49,025 49,913 51,624

Ordinary Share Capital 1,985 1,985 1,985 1,985 1,985 1,985 1,985
Share Premium 6,878 6,878 6,878 6,878 6,878 6,878 6,878
Retained Earnings 32,037 33,409 33,298 33,730 34,217 34,756 35,246
Shareholders' funds 40,901 42,273 42,161 42,593 43,081 43,619 44,109
Minority Interest 2,502 2,865 2,947 2,947 2,947 2,947 2,947
Total Equity 43,403 45,138 45,109 45,541 46,028 46,566 47,056

Total libs & shrhldrs' funds 74,430 90,088 88,616 92,721 97,623 99,049 101,251

Source: Company, Coronation Research..

90 2019 Nigeria Consumer Report | Rise of the Usurpers

PZ Cussons, cash flow, Nm

PZ Cussons Nigeria YE: May 2016 2017 2018 2019e 2020f 2021f 2022f
Cash flow
Nm
PAT 3,148 4,811 2,314 1,440 1,625 1,794 1,634

Depreciation 2,155 2,324 2,663 2,778 3,091 3,410 3,738

Inter Company Transfer of Fixed Assets - - -
(Profit)/loss on disposal of Fixed Assets (25) (5) -
Fixed Assets Written Off 10 - -
Unclaimed Dividend Forfeited 23 34 29
Interest Expense 598 290 832 371 451 735 758
(Interest Income) (210) (486) (181) (570) (640) (732) (692)

Working Capital Changes

(Increase)/ Decrease in Trade receivables 2,325 (2,835) 594 1,048 (476) 7 (303)
Decrease/(increase) in other assets 1,200 32
(Increase)/ Decrease in other receivables - - - (812) 429 (457) (68)
(Increase)/ Decrease in deposit for letters of 725 (6,410) 4,265 (800) (800) (800) (800)
Credit
(Increase)/ Decrease in Inventories 1,734 (9,431) 2,670 (758) (942) (590) (813)
(Increase)/ Decrease due from related - - -
companies
Increase/ (Decrease) in trade payables - - - 3,453 212 133 183
Increase/ (Decrease) in other payables 7,903 13,952 398 (2,498) 3,093 (137) 1,581
Increase/ (Decrease) in due from related - - -
parties
Increase/ (Decrease) in Provisions - - - 120 130 220 320

Operating Cash 18,385 3,444 13,617 3,773 6,175 3,583 5,540

VAT Paid
Tax Paid (1,610) (1,154) (2,461) 2,434 655 754 (688)
Net cash generated from operating 16,776 2,291 11,155 6,207 6,830 4,336 4,851
activities

Purchase of Fixed Assets (3,454) (4,333) (2,473) (3,826) (3,906) (3,990) (4,104)
Purchase of intangible Assets (1,017) (42)
Proceeds from Sale of Fixed Assets 27 5 -
Interest Income 210 486 181 570 640 732 692
Net cash used in investing activities (3,217) (4,860) (2,335) (3,256) (3,267) (3,258) (3,412)

Free Cash Flow 13,322 (2,043) 8,682 2,381 2,923 347 747

Dividend Paid to equity holders of parent (2,422) (1,985) (1,985) (1,008) (1,138) (1,256) (1,144)
Dividend Paid to non-controlling Interest - - -
Interest Expense (598) (290) (832) (371) (451) (735) (758)
Change in short-term debt 119 324 (82) 316
Change in long-term debt
Change in long-term provisions 100 100 100 100
2019 Nigeria Consumer Report | Rise of the Usurpers 91

PZ Cussons Nigeria YE: May 2016 2017 2018 2019e 2020f 2021f 2022f
Cash flow
Nm
Change in long-term deferred taxes (55) (100) (100) (100)
Net Cash used in financing activities (3,020) (2,276) (2,818) (1,215) (1,265) (2,073) (1,586)

Net Increase/(decrease) in cash and cash 10,539 (4,845) 6,003 1,736 2,298 (994) (147)
equivalents
Cash and Cash Equivalent at 1 June 2,328 12,868 8,022 14,260 15,996 18,294 17,300
short-term borrowing - - 235
Cash and Cash Equivalent at 31 May 12,868 8,022 14,260 15,996 18,294 17,300 17,153

Source: Company, Coronation Research..

92 2019 Nigeria Consumer Report | Rise of the Usurpers

APPENDIX III

The Ajayi's Diet

The Ajayi's Diet

Three meals per day, for two

The Ajayis are hearty eaters, which is not surprising given the amount of physical work they do
- both of them are on their feet all day at work. They have varied diet which reflects Nigeria's
agricultural productivity and culinary diversity. Here we present their weekly menu (the midday
meals are carried to work for consumption). In Appendix IV we break down their weekly menu
into all the items they need to buy.

Daily menu of married couple working in Lagos

Period Monday Tuesday Wednesday Thursday Friday Saturday Sunday

Morning 1. Egusi soup 1. Two loaves 1. Efo riro with 1. Porridge 1. Two loaves of 1. Akara 1. Two loaves
of bread smoked fish beans bread of bread
2. Smoked fish 2. Two hard 2. Eba 2. Fried 2. Beef stew 2. Pap 2. Two hard
boiled eggs plantain boiled eggs
2. Eba 3. Two cups
of tea
Afternoon 1. Boiled white 1. Fried yam 1. Soaked garri 1. Boiled 1. Jollof 1. Fried rice 1. Jollof rice
rice plantain spaghetti
2. Beef stew 2. Beef stew 2. Sugar 2. Efo riro 2. Two hard 2. Fried beef 2. Fried
boiled eggs plantain
3. Milk 3. Smoked fish 3. Stew 3. Fried beef
Evening 1. Soaked garri 1. Three packs 1. Jollof spaghetti 1. Boiled yam 1. Beans 1. Soaked garri 1. Three packs
of noodles (salted) porridge of noodles
2. Sugar 2. Two hard 2. Palm oil 2. Boiled yam 2. Sugar 2. Smoked fish
boiled eggs stew
3. Milk 3. Smoked fish 3. Milk

Source: Company, Coronation Research.

2019 Nigeria Consumer Report | Rise of the Usurpers 93

APPENDIX IV

The Ajayi's Weekly Consumption

Daily consumption of married couple working in Lagos

Food Item Monday Tuesday Wednesday Thursday Friday Saturday Sunday Weekly
Consumption
Cooking oil 250ml 600ml n/a n/a n/a n/a n/a 850ml
Salt Two tea One tea Two tea Three tea Three tea Three tea One tea 15 teaspoons
spoons spoon spoons spoons spoons spoons spoon
Seasoning Two Two One Two Two One Two 12 seanoning
cube/ seasoning seasoning seasoning seasoning seasoning seasoning seasoning cubes
powder cubes cubes cubes cubes cubes cubes cubes
Drinking Eight Eight Eight sachets Eight Eight Eight Eight sachets 56 sachets
water sachets sachets sachets sachets sachets
Sugar Three tea n/a Three tea n/a n/a Three tea n/a 9 tea spoons
spoons spoons spoons (36g)
Milk Three table n/a Three table n/a n/a Three table n/a 9 table spoons
spoons spoons spoons (135g)
Tomato Half sachet Half Half sachet n/a Half sachet n/a Half Sachet 2.5 sachets
puree sachet (175g)
Pepper Three Three Three Three Three Three Three peppers 23 peppers
peppers peppers peppers peppers peppers peppers
Onions One bulbs One bulb One bulb One bulb One bulb One bulb one bulb Seven bulbs
(c. 7g)
Tomato Three plum One plum One plum Three plum Three Three plum One plum 15 plum
tomatoes tomatoes tomatoes tomatoes plum tomatoes tomatoes tomatoes
tomatoes
Beans n/a n/a n/a one cup one cup one cup n/a three cups
Garri two cups n/a Two cups n/a n/a one cup n/a five cups
Vegetables One small n/a Two small Two small n/a n/a n/a 5 small bowls
(Efo) bowl bowls bowls
Rice One and n/a n/a n/a n/a One and half One and half 4.5 cups
half cups cups cups
Egusi 1/4 de rica n/a n/a n/a n/a n/a n/a 1/4 de rica tin
tin
Yam n/a Four slices n/a Four slices Two slices n/a n/a Ten slices
Carrot n/a Three Three carrots n/a Three Three n/a n/a
carrots carrots carrots
Plantain n/a n/a n/a Three n/a n/a One plantains four plantains
Plantains
Noodles n/a Two packs n/a n/a n/a n/a Two packs four packs
Spaghetti n/a n/a One pack n/a One pack n/a n/a two packs
Eggs n/a Two eggs Two eggs n/a Two eggs n/a Two eggs eight eggs
Fish One small n/a One small One small One small n/a One small five small
smoked smoked titus smoked smoked smoked titus smoked titus
titus titus titus
Beef Two pieces Two n/a n/a Two pieces Two pieces Two pieces eight pieces
pieces
Palm Oil 45ml n/a n/a 150ml 150ml 45ml n/a 390ml
Pap n/a n/a n/a n/a n/a Two bowls n/a Two bowls
Bread n/a Two n/a n/a Two loaves n/a Two loaves six loaves
loaves

Source: Company, Coronation Research.

94 2019 Nigeria Consumer Report | Rise of the Usurpers

APPENDIX V

Total Shareholder Returns

Naira returns

Only two of our four covered listed companies made positive total returns in Naira over the
period 2011-18. Our measure takes a purchase on 1 January 2011 and then accounts for share price
changes and gross dividends received.

Total return in Naira (share price + gross dividend)

Period Nestle Nigeria Flour Mills of Unilever Nigeria PZ Cussons Nigeria
Nigeria
2011 49.20% -2.30% 13.50% 14.50%
2012 61.60% 1.80% 65.60% 1.50%

2013 75.10% 36.90% 18.70% 34.10%

2014 -13.60% -48.00% -33.30% -33.50%
2015 -13.10% -41.60% 21.00% 11.40%
2016 -4.70% -6.30% -18.80% -41.20%
2017 97.30% 76.30% 29.00% 46.30%
2018 -0.80% -16.90% -9.00% -38.80%
Cumulative return Jan 2011 - Dec 2018 452.90% -40.40% 70.40% -31.40%
Total return CAGR 23.80% -6.30% 6.90% -4.60%

Source: Bloomberg, Coronation Research. NB Does not treat dividends as reinvested

US dollar returns

US dollar-based investors have contended with periodic devaluation of the Naira (most notably,
for this data set, in 2016 and 2017). Translating returns into US dollars, only one company, Nestle
Nigeria, delivered positive returns over the period 2011-18.

Total return in Naira (share price + gross dividend)

Period Nestle Nigeria Flour Mills of Unilever Nigeria PZ Cussons Nigeria
Nigeria
2011 37.40% -10.00% 4.60% 5.50%
2012 67.90% 5.80% 72.20% 5.50%

2013 70.50% 33.40% 15.60% 30.70%

2014 -24.50% -54.60% -41.70% -41.90%
2015 -20.00% -46.20% 11.40% 2.50%
2016 -39.70% -40.80% -48.70% -62.80%
2017 72.90% 54.40% 13.00% 28.10%
2018 -1.50% -17.50% -9.60% -39.30%
Cumulative return Jan 2011 - Dec 2018 143.60% -68.70% -20.80% -65.40%
Total return CAGR 11.80% -13.50% -2.90% -12.40%

Source: Bloomberg, Coronation Research. NB Does not treat dividends as reinvested. US dollar / Naira rate is taken as the inter-bank foreign
exchange rate quoted on Bloomberg.
2019 Nigeria Consumer Report | Rise of the Usurpers 95

APPENDIX VI

Key Ratios

Key ratios of Nestle Nigeria

Nestle Nigeria 2017 2018 2019e 2020f 2021f 2022f

EV/Sales 4.7x 4.2x 3.9x 3.5x 3.2x 2.9x

EV/EBITDA 18.4x 15.6x 15.6x 13.4x 12.1x 11.0x

EBITDA Margin 25% 27% 25% 26% 26% 26%

Operating Profit Margin 23% 23% 23% 24% 24% 24%
Net Profit Margin 14% 16% 16% 16% 17% 16%
Price to earnings 33.6x 26.4x 24.2x 21.4x 19.1x 17.4x
ROAA 21% 28% 28% 29% 32% 33%
ROIC 95% 90% 91% 97% 115% 129%
ROAE 89% 90% 93% 106% 119% 130%
Net debt/equity 0.2x -0.1x 0.2x 0.0x 0.0x 0.0x
Earnings per share (N) 42.55 54.26 59.09 66.79 75.04 81.98
Gross dividend yield 3% 4% 4% 5% 5% 6%
Source: Companies, Coronation Research. Priced at N1,430.00/s at close of business on 15 May 2019

Key ratios of Flour Mills of Nigeria

Flour Mills of Nigeria 2017 2018 2019e 2020f 2021f 2022f

EV/Sales 0.5x 0.4x 0.4x 0.4x 0.4x 0.3x

EV/EBITDA 4.2x 3.0x 3.5x 3.1x 3.0x 2.7x

EBITDA Margin 11% 12% 11% 12% 12% 13%

Operating Profit Margin 8% 9% 7% 7% 7% 8%
Net Profit Margin 2% 3% 2% 2% 2% 3%
Price to earnings 4.8x 4.8x 5.3x 4.9x 4.4x 3.7x
ROAA 2% 3% 3% 3% 3% 3%
ROIC 12% 12% 10% 10% 10% 10%
ROAE 9% 11% 8% 8% 8% 9%
Net debt/equity 1.9x 0.9x 0.8x 0.8x 0.8x 0.7x
Earnings per share (N) 3.37 3.32 2.99 3.29 3.6 4.33
Gross dividend yield 6% 6% 4% 4% 5% 5%

Source: Companies, Coronation Research. Priced at N16.00/s at close of business on 15 May 2019
96 2019 Nigeria Consumer Report | Rise of the Usurpers

Key ratios of Unilever Nigeria

Unilever Nigeria 2017 2018 2019e 2020f 2021f 2022f

EV/Sales 1.5x 1.3x 1.2x 1.0x 0.9x 0.8x

EV/EBITDA 7.7x 9.9x 6.4x 5.6x 4.5x 3.9x

EBITDA Margin 19% 13% 19% 19% 20% 20%

Operating Profit Margin 14% 10% 14% 13% 15% 15%
Net Profit Margin 8% 10% 12% 11% 12% 12%
Price to earnings 25.2x 19.5x 15.1x 14.2x 11.9x 11.1x
ROAA 7% 7% 9% 9% 10% 10%
ROIC 35% 27% 34% 32% 37% 37%
ROAE 16% 12% 14% 14% 15% 15%
Net debt/equity -0.7x -0.7x -0.6x -0.6x -0.6x -0.7x
Earnings per share (N) 1.23 1.59 2.06 2.18 2.62 2.79
Gross dividend yield 0% 1% 3% 3% 3% 4%
Source: Companies, Coronation Research. Priced at N31.00/s at close of business on 15 May 2019

Key ratios of PZ Cussons Nigeria

PZ Cussons Nigeria 2017 2018 2019e 2020f 2021f 2022f

EV/Sales 0.3x 0.2x 0.2x 0.2x 0.2x 0.2x

EV/EBITDA 1.6x 1.8x 3.5x 2.8x 2.9x 2.9x

EBITDA Margin 20% 14% 7% 7% 7% 7%

Operating Profit Margin 20% 13% 7% 7% 7% 7%
Net Profit Margin 4% 2% 2% 2% 2% 2%
Price to earnings 10.2x 18.3x 23.4x 20.8x 18.8x 20.7x
ROAA 4% 2% 2% 2% 2% 2%
ROIC 30% 20% 6% 7% 6% 6%
ROAE 8% 4% 3% 4% 4% 4%
Net debt/equity -0.2x -0.3x -0.3x -0.4x -0.4x -0.3x
Earnings per share (N) 0.84 0.46 0.36 0.41 0.45 0.41
Gross dividend yield 6% 6% 3% 3% 4% 3%

Source: Companies, Coronation Research. Priced at N8.50/s at close of business on 15 May 2019
2019 Nigeria Consumer Report | Rise of the Usurpers 97

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98 2019 Nigeria Consumer Report | Rise of the Usurpers

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2019 Nigeria Consumer Report | Rise of the Usurpers 99

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100 2019 Nigeria Consumer Report | Rise of the Usurpers

Security Name Available Disclosure

Nestle Nigeria
Flour Mills of Nigeria G
Unilever Nigeria G
PZ Cussons Nigeria G

Coronation Research's equity research rating system

Coronation Research’s Investment ratings are a function of the research analyst’s expectation of a stock’s
performance relative to relevant indices or peers. The benchmark used in deciding our stock rating is the
trailing three-year average yield of the 12-month T-Bill plus one standard deviation rounded to the nearest
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Coronation Merchant Bank uses the following rating system:

Buy The analyst considers the stock undervalued and expects the stock to outperform the Benchmark over the next 12
months or the stated investment horizon.
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over the next 12 months or the stated investment horizon.
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12 months or the stated investment horizon.
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2019 Nigeria Consumer Report | Rise of the Usurpers 101

Ratings and Price target history

Date Recommendation Date Recommendation Date Recommendation Current Target

price, price,
Naira/s Naira/s
FBNH 1-Jan-19 Buy 21-Dec-18 Buy 8-May-19 Buy 7.5 12.5
Zenith 1-Jan-19 Buy 21-Dec-18 Buy 8-May-19 Buy 20.45 27.5
UBA 1-Jan-19 Buy 21-Dec-18 Buy 8-May-19 Buy 6.6 11.5
GT Bank 1-Jan-19 Hold 21-Dec-18 Hold 8-May-19 Hold 32.3 35
Access 1-Jan-19 Buy 21-Dec-18 Buy 8-May-19 Buy 7 8.7
Fidelity 1-Jan-19 Buy 21-Dec-18 Buy 8-May-19 Buy 1.85 2.4
Stanbic IBTC 1-Jan-19 Buy 21-Dec-18 Buy 8-May-19 Buy 43.5 66
Sterling 1-Jan-19 Hold 21-Dec-18 Hold 8-May-19 Hold 2.7 1.9

This documents marks the initiation of coverage by Coronation Research for Nestle Nigeria, Flour Mills of
Nigeria, Unilever Nigeria and PZ Cussons Nigeria.

Coronation Research Investment Rating Distribution

Buy 75%
Sell 0%
Hold 25%
Under review 0%

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102 2019 Nigeria Consumer Report | Power to the Price Point

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