LAGOS (Reuters) – Higher food prices pushed up annual inflation in Nigeria last month after borders with neighboring countries were closed in a crackdown on smuggling.
Nigeria closed parts of its borders in August to fight smuggling of rice and other goods. The head of customs confirmed last month that all trade in goods via land borders had been halted indefinitely.
Annual inflation was 11.61% in October, up from 11.24% in September, the National Bureau of Statistics said on Monday — the highest rate since May 2018. Consumer inflation had dropped to it lowest in almost four years in August.
A separate food price index showed inflation at 14.09% in October, compared with 13.51% a month earlier.
“This rise in the food index was caused by increases in prices of meat, oils and fats, bread and cereals, potatoes, ham and other tubers, fish and vegetables,” the statistics office said in its report.
“The rise in food inflation does suggest that border closures may have played a part in temporarily pressuring prices higher,” said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered.
Shoppers at a market in the capital, Abuja, told Reuters the price of many food items, particularly rice, had risen in the last few weeks.
“Food items are very expensive in the market. When you go to a store they will tell you that is because the border is closed,” said housewife Naomi Nguher, who said she was given this reason for high rice prices at four different shops.
Sherifat Ajala, a rice wholesaler in the commercial capital Lagos, said Nigeria’s bad roads were delaying the transportation of the grain, further preventing the supply from meeting high demand.
“Trucks will spend almost two or three weeks on the road before they bring the rice,” he said.
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Last week the West African country, along with neighboring Benin and Niger, agreed to set up a joint border patrol force to tackle smuggling between the nations after a meeting between their foreign ministers.
The central bank is due to set its benchmark interest rate next Tuesday. The bank, which has targeted single-digit inflation, held its main interest rate at 13.5% at its last meeting, in September.
“Given the increase in inflation, we now expect that policymakers will leave their key rate on hold,” John Ashbourne, senior emerging markets economist at London-based Capital Economics, said in a note on Monday.
Reporting by Alexis Akwagyiram; additional reporting by Angela Ukomadu and Abraham Achirga; editing by Larry King
By CardinalStone Research,
Inflation accelerates at fastest pace in 36 months
According to the National Bureau of Statistics (NBS), headline inflation rose by 36bps to a seventeen-month high of 11.61% YoY in October 2019. Driven by the paciest inflation acceleration in 36 months, the current reading is also ahead of both Bloomberg consensus of 11.20% YoY and our forecast of 11.40% YoY. Unsurprisingly, the surge in price level was driven by food inflation pressures (+58bps to 14.09% in October), which coincides with closures of key land borders across the country. We believe the pass-through from border closures muted the impact of an otherwise above average main harvest and a 7bps moderation in core inflation to 8.88% YoY.
Nigerians may endure more purchasing power erosion in coming months. In our view, frontloaded festive demand may further bloat food prices and overall inflation reading in November and December. On this wise, the country may be set to witness another surge in food inflation during a main harvest season that could be worse than that of 2018. This is likely to translate to further erosion of consumers’ purchasing power, which had already been shaved by the combined impact of naira depreciation and weak wage growth in recent years. According to NBS, the highest price increases were recorded in bread & cereals, fish, meat, potatoes, and yam tuber food classes amongst others. We, however, believe this price pressure could extend to some non-food items as traders adjusts to the reality of rising cost of living. On balance, we expect the recent uptick in inflation to subsist in the near term and forecast inflation at 11.82% YoY in November, contributing to an average inflation forecast of 11.40% in 2019.
Figure 1: : Food inflationary pressure is likely to intensify in coming months
Source: NBS, CardinalStone Research
Expected surge in inflation may further reduce the allure of treasuries. The 36-bps jump in October headline inflation suggests a prevailing real yield of -1.68% on the one-year treasury bill (9.93%). The recent OMO ban restricting individuals and local corporates has catalyzed into robust demand for government bills, driving yields down by as much as 400 bps on the 360-day paper since the announcement of the ban. For us, this negative real yield is likely to expand further on expected hikes in electricity tariffs and VAT, reducing the real return in fixed income instruments. Akin to the case in 2016, expanding negative real yield could force domestic fund managers (such as Pension Fund Administrators – PFA) to further explore other investment options in coming months.
In addition, we believe the level of system liquidity, direction of inflation, and the aggressiveness (or otherwise) of government’s “non-CBN” domestic fiscal borrowings are likely to determine the pace of yield moderation in the coming year.
Kindly click here for the full report from the NBS…….CPI_REPORT_OCT_2019
By FBNQuest Research,
Slight upward adjustment to average EPS forecasts
On the surface, Flour Mills of Nigeria’s (FMN) Q2 2020 results (end-Sep) appear decent. PBT for the quarter grew marginally by 1% to N3.1bn and was in line with our forecast of N3.2bn. That said, a deeper analysis of the numbers suggests that future earnings will come under more pressure relative to previous quarters. To put this in perspective, the food business (60-65% of group sales) recorded a -94% y/y drop in PBT to N175m, fueled by elevated global wheat prices and cutthroat competition in the domestic flour space. As a result of these challenges, overall volumes declined by -1% y/y.
The impact of these on group profitability was however lessened by marked improvements in the sugar (+31% Q2 PBT growth y/y) and agro-allied businesses (-N135m vs. -N1.2bn in Q2 2018). Sugar earnings were boosted by price increases implemented in Q1. PBT for the group ex-flour was also largely underpinned by the government’s border closure. The ensuing declines in supplies of smuggled sugar and imported rice fed through positively to sugar and pasta (typically seen as a substitute for rice) sales. However, over the coming quarters, struggles from flour will be the major obstacle to growth. Indeed, BUA Group recently established a 500,000MT flour refining plant.
Further compounding FMN’s woes, food giant Olam’s ramp-up in capacity via its acquisition of Dangote Flour Mills potentially strengthens the former’s competitive edge. Nevertheless, we have left our 2020E sales forecast unchanged because flour losses will likely be offset by strong growth delivered by the other key segments. However, there are clear indications that the borders will not remain closed indefinitely. As such, with tailwinds from non-flour segments expected to ease off post-2020E, we have made 7-10% cuts to our 2021-22E sales. The only positive adjustment we have made is a -13% average cut to our 2020-22E interest expense forecast on the back of an improved debt profile.
Our 2020-22E average EPS forecasts are higher by around 3%, driven by cheaper borrowing costs but our price target is up 10% to N21 because we rolled over our valuation to 2021. Our new price target implies a potential upside of 29%. Despite the upside, we are retaining our Neutral recommendation on the stock given the persistent headwinds in flour.
Earnings lifted by decline in interest expense
PBT for Q2 was driven by a -14% y/y decline in interest charge and 38bp wider gross margin, but weighed down by a 14% y/y increase in opex. Sequentially, PBT declined by -43% q/q due to a -97bp gross margin and a 24% q/q increase in opex. Relative to our forecasts, gross margin was 25bps wider, while interest expense surprised positively by -23%. PBT was still slightly behind our forecast by -2% because opex missed by 15%.
Coy: Dangote Cement Plc
Current Market Price: N144.90
Latest Dividend: N16.00
Year High: N215
Year Low: N136.10
Fair Value: N175.34
Key Investment Ratios
- This report observed the financial numbers of Dangote Cement for the nine months ended September 30th2019, compared them with similar numbers released in 2018, so as to establish growth and rightly rate the company.
Market Update for The Week ended November 15 and Outlook for Nov 18-22, 2019
Nigeria’s equity market, over the past week, rebounded on improved demand for stocks as Treasury Bills and other money market rates dropped sharply at the end of primary market auction on Wednesday, shedding 150 basis points, when compared to that of October.
This was the first time the 91-day and 182-day bills would be offered at single-digit rates of 7.8% and 9% respectively, since June 15, 2016, just as that of 364-day instruments went for 10%, but remained below the nation’s current inflation rate of 11.24%.