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The Federal government have been exploring alternative strategies to generate forex income and I am sure you know the CBN is a major front-end player in this journey. So, this shouldn’t shock you anytime the apex bank releases new circulars every now and then on how Forex should be managed; from inflows, export sales and outflows.
Well! as a stock trader and equity market investor, I always follow these trend so that I can quickly trade shares of companies that are poised to benefit from all FX policy announcements.
In the past, I have witnessed the tremendous capital appreciation on the shares of Okomu Oil, Presco and the likes after CBN announced the ban on importation of palm oil, hence rewarding smart investors that keyed in.
In this buy recommendation, I will be supporting my picks with headlines from reputable sources and how the FX restrictions is helping these companies grow their top and bottom line in the short to medium term.
The first FX restriction – Sugar
The Federal Government has banned the importation of refined sugar and its derivatives from the country’s Free Trade Zones (FTZs).
The action of the Federal Government is part of its efforts to protect the sugar industry which is governed by the Nigerian Sugar Master Plan (NSMP).
The ban is contained in a letter by the Nigerian Ports Authority (NPA), Lagos Port Complex, Apapa, Lagos to one of the terminal operators in the Lagos Port Complex as a result of a directive from the Federal Ministry of Industry, Trade and Investment. (Source: Nairametrics)
Stocks to Buy – Dangote Sugar
You don’t need an investment analyst to tell you that one consumer goods company that’s well-positioned to benefit from this ban on importation of refined sugar is Dangote Sugar.
In its latest financial result (Q1, 2021), the company reported a significant increase in revenue by 41.5% to N67.39 compared to N47.64 generated in the previous comparable period while profit after tax went up by double growth, an increase of 30.2% to N8.3b from N6.37.
If you have read through the financial statement, you’d notice that the management of Dangote Sugar tied the impressive start to increase in the price of sugar on the back Naira devaluation and as inflationary pressure mounts, I anticipate a further increase in the coming months which should support operating and profit margin.
Technical Analysis
With the price bouncing off N16.52 in March 2021 after an intense sell-off which also doubles as previous resistance in December 2019 and moving averages lining up in a sequence (20, 50 and 100), I think a buy below the current market price of N17.2 or around N17 will be a good bargain before the stock resumes its medium-term uptrend.
The consumer good stock is up by 34% in the last year but down by 2.27% on year-to-date.
The second Fx restriction – Maize
A lot of farmers are already kicking against the CBN ban on maize importation citing scarcity of feed mill, increasing-price and attendant effect on poultry businesses.
A cross section of poultry farmers who spoke in separate interviews with the Nigerian Tribune with crave for anonymity stated that the decision of the CBN is targeted at making a minute number of maize merchants in a particular region of the country to be rich at the detriment of large number of poultry farmers who depend largely on maize to run their farms.
One of the poultry farmers said:”All things being equal, there would not have been any reason for maize importation. But stopping maize importation would spell doom for the nations’s food and livestock industry especially poultry.
(Source: Nigeria Tribune)
Stocks to Buy – Livestock Feeds
There’s been a surge in the demand for this company’s product in the last year. With CBN’s resolve to sustain the ban on maize import, I don’t think the increased revenue from the higher price of maize will stop anytime soon.
In its full year’s result ended 2020, Livestock revenue increased by 12% to N11.1b, gross profit increased by 56% to N1.2 while operating profit surged by 99%. As you’d expect, this rubbed off on the profit after tax of the company, a 307% increase to N503.1 million ( from N106.3 million).
Livestock Feeds didn’t end her double and triple-digit growth in the previous financial year, the latest quarterly result ended 31st, March 2021 may be an indication of a continued upward trend. The consumer goods stock started the new year on a positive note – an increase in top-line revenue by 36% to N3.3 billion, gross profit shot up by 67% and operating profit going up as high as 137% to N245.9 million.
Profit after tax figure and EPS went up by 335% to N176 million and 5.88 kobo.
You’d wonder why a company is recording such improved financials when other businesses are recovering from the disruption caused by Covid-19, right? I think the business of poultry is one that’s categorized as inelastic, people will always eat fish, meat and egg.
My second thought is tied to Premium Times:
Prices of poultry and fish feed have increased across the country weeks after the Central Bank of Nigeria stopped the issuance of forex for the importation of maize.
Traders and farmers attributed the hike in prices to the scarcity and sudden increase in the cost of the grain.
A market survey by the Premium Times Centre for Investigative Journalism (PTCIJ) in Abuja and Akwa Ibom showed that a 25kg bag of poultry feed called “Starter” that sold N4000 before now, has since risen to N4200.
The feed meant for older birds, called finisher, now goes for N4000 from the previous price of N3700.
Also, a 15kg bag of Nigerian-made fish feed that sold for N7500 for 2mm before the announcement of the policy, has increased to N8100. (Source: Premium Times)
This is a huge driver of Livestock Feed’s growing top and bottom line in the current financial year. Even if the company sells the same volume as it did in the previous financial year, the increase in the price of poultry feeds will definitely support higher revenue quarter on quarter.
Technical Analysis
Livestock is up by 164.25%, 33.09% and 41.22% in the last year, year-to-date and 6-months. This is a clear sign that the investors have been mopping the stock on every dip.
Anyone looking to take buy this stock may consider an entry around N1.52 to N1.72 (this is the previous resistance of November 2020, now turned support) which are below the current market price of N1.85. I also think that the low price-earning ratio of 8.68 and an average EPS growth above 100%, year-on-year, makes the stock a cheap one from a valuation perspective.
Conclusion:
The simple money-making truth is that consumer goods stock tend to benefit from a period of rising inflation, that’s when they increase the prices of their products to cover operating cost and generate more margin, just like we read in the comment on Dangote Sugar’s Q1 financial result.
So, it’s smart to play in the consumer good sector this year but not at the top of stock market prices.
Disclaimer: I already bought shares of Dangote Sugar and Livestock Feeds at prices below these levels, so do your due diligence.
