FMN Plc Investment Pitch – GA Academy 3.0
This stock pitch was prepared by Basirat Adebiyi, Abbas Bashar, Oluwatobi Sholanke, and Chigbo Oguejiofor as part of their project during the recently concluded Gifted Analysts Academy 3.0
Inflation
Cracks in The Armor: Unveiling The First Republic Bank Failure
Prior to its failure, FRB was a California-based lender that served wealthy Americans with low-rate mortgages in exchange for cash, much as SVB, which catered to technology firms. However, things changed when the Federal Reserve (the Fed), started raising the benchmark interest rate in 2022 in response to escalating inflationary pressures in the world’s largest economy. Notably, the Fed increased the key policy rate by a cumulative 425bps in 2022, with rates now at their highest level since 2008. FRB’s assets suffered losses as a result, as did customer deposits, and the bank’s reputation was damaged.
Nigeria’s inflation rate hits 19.64% in July 2022, the highest in 17 years
An examination of the NBS inflation data shows that this is the highest since September 2005 when the inflation rate hit 24.32% year-on-year. On a month-on-month basis, the headline inflation rose by 1.82% in July 2022. This is the same as the rate recorded in June 2022 (1.82% m/m). In our view, higher energy prices and continued depreciation of the local currency against the US Dollar were the key drivers behind this uptick.
Is a NETFLIX Comeback on the Horizon?
NETFLIX started the year on a rough note as the platform reportedly lost 200k subscribers in Q1-22, the first time in over a decade. The streaming giant is also expected to lose 2 million more subscribers in the second quarter of 2022. Can NETFLIX make a rebound from this trajectory? How will NETFLIX fare during the post-lockdown era?
Nigeria’s Inflation Rate rose to an 8-month High of 16.82% in April 2022
We expect headline inflation to continue its upward trend in the coming months due to the supply disruptions that have ensued from the conflict in Eastern Europe which has left a mark on the local economy, given Nigeria’s dependency on imported energy and food. These factors will consequently lead to an uptick in the prices of goods and services. Also, FX pressures in the FX market will further fuel inflation expectations.
On the policy end, there is the possibility of an upward adjustment in the Monetary Policy Rate (MPR), in an attempt to keep the net foreign flows positive and also signal the monetary authority’s concern regarding inflation. However, the CBN could continue its current stance by judging that Nigeria’s inflation has a different set of drivers and as such may not respond to monetary policy decisions. Hence, we think the CBN would call on the fiscal authorities to address the structural impediments to food supply to contain higher prices. Therefore, we expect that at the next monetary policy committee meeting, the committee will hold the benchmark interest rate constant at 11.50% in order to continue to maintain post-covid economic recovery.
FMN Plc: The Home of Good Food is Moving Beyond Levels
Flour Mill of Nigeria Plc is one of the leading FMCG and a top market player in the flour-based product market. It is the first company to have constructed Nigeria’s first
wheat mill plant. With 60 years of success celebration, the firm has been able to diversify its core business of food through backward integration into other three revenue-generating segments which include Agro-allied, Sugar, and support services. Growth in these three classes of revenue has been impressive at a CAGR of 23.58%
over the past five years. These three segments reported total revenue of N293 billion (or 38.01% of total revenue) in FY-2021 compared to the N102 billion (or 19.4% of
total revenue) in FY-2017. The firm’s ability to expand its portfolio size with an explosive growth of this 23.58% CAGR validates its capacity to provide long-term value creation to shareholders while pursuing a de-risk business opportunity.
Aftereffect of the festive season Leads to a Marginal Slowdown in Inflationary Pressure
Looking further into the year, we recognize the possibility of upside inflation surprises, as the sub-par food harvests of last year could cause food supply to be slim during this year’s planting season, hence, propelling staple food prices northwards. Also, the impact of a base-effect sponsored moderation should become less material as we move further into the year, leaving the rate of inflation susceptible to the pass-through effect of soaring energy costs (fuel, electricity and gas), increased taxes associated with the finance act and currency depreciation. Our baseline expectation is for the headline inflation to average 14.81% in 2022 compared with 16.98% in 2021.
Surging Energy Prices May Not Ease Until Next Year
Spot prices for natural gas have more than quadrupled to record levels in Europe and Asia, and the persistence and global dimension of these price spikes are unprecedented. Typically, such moves are seasonal and localized. Asian prices, for example, saw a similar jump last year but those didn’t spill over with an associated similar rise in Europe.
Our expectation is that these prices will revert to more normal levels early next year when heating demand ebbs and supplies adjust. However, if prices stay high as they have been, this could begin to be a drag on global growth.
Meanwhile, ripple effects are being felt in coal and oil markets. Brent crude oil prices, the global benchmark, recently reached a seven-year high above $85 per barrel, as more buyers sought alternatives for heating and power generation amid already tight supplies. Coal, the nearest substitute, is in high demand as power plants turn to it more. This has pushed prices to the highest level since 2001, driving a rise in European carbon emission permit costs.
Inflation Scares in an Uncharted Recovery
The good news for policymakers is that long-term inflation expectations are well anchored, but economists still disagree about how enduring the upward pressure for prices will ultimately be.
Some have said government stimulus may push unemployment rates low enough to boost wages and overheat economies, possibly de-anchoring expectations and resulting in a self-fulfilling inflation spiral. Others estimate that pressures will ultimately be transitory as a one-time surge in spending fades.
Taming Market Power Could (also) help Monetary Policy
Some central banks are currently debating whether to tighten monetary policy to fight inflationary pressures, after having eased decisively in response to the COVID-19 shock. In making such decisions, central bankers have to consider how much businesses and consumers will respond. The structure of the financial system and the future expectations of consumers and businesses are key drivers of how effective monetary policy actions will be. Yet there’s another, overlooked, driver: corporate market power.