Anxiety grips corporate Nigeria over 2019

Anxiety has gripped corporate Nigeria in the run up to 2019 general elections. Troubled by a year of government policy hiccups and several operating challenges captains of industry in the country have held their breadth and held back new investments as they wait to see the outcome of what may prove to be one of Nigeria’s most fiercely contested plebiscites.

The environment of fear has soaked manufacturers ambitions in cold sweat since 2015 as tight central bank policy and lax fiscal spending have conspired to make the business system very uncertainly and uncomfortably expensive. High domestic interest rates have squeezed business margins and oversized budget deficits have elbowed private companies from the domestic loan market.

In the last three years, government has grown aggregatedebt to about $22billion, having borrowed heavily and crowded out private investment. There has been growing discomfort onthe fiscal debt service burden which currently stands at over 60 per cent of revenue.

Manufacturing sector growth has been at its lowest pace in recent years as a result of poor access to loanable funds and high interest rateshovering between 28 and 30 per cent. This, according to industry watchers has adversely affected productivity and output thereby weakening the economy.

Economists note that domestic products have remained uncompetitive as a result of high cost of energy and production. Added to this isa visible decay in infrastructure. The congestion at Apapa Ports in Lagos and the lack of good roads to evacuate imported, manufactured and other goods have tripled production and distribution costs for producers.These factors have conspiredto dampen domestic output.

That the Nigerian economy has remained wobbly and weak even when the Gross Domestic Product seem to have recorded feeble growth from 1.5 per cent in the second quarter of the year to 1.8 per cent in the third quarter, not many economic agents appear to be excited about forward prospects. Nigeria’s economic managers and political leadership do not seem to understand the dire nature of the economy’s position. Indeed, it has been observed by some corporate managers that Nigeria has never seen a more stifling macro-economic environment in recent times.

 Not unexpectedly, stakeholders have complained that the government of President Muhammadu Buhari has in fact, pushed policies that tend to starve the private sector of much needed incentives to thrive. ‘It is like removing water from plants and expecting it to survive’ some of them say.

Notably a wave of anxiety has risen over the last four or so years with business executives battling to keep factory doors open.

Whereas the present government may have tried to spend more money on capital project, retain fuel subsidy, stabilise exchange rate, ban forex allocation for 41 items to encourage domestic production, corporate would have wished that it returns some of the conditions that existed before 2015. There is a consensus that the leadership which supports low inflation, lower exchange rate, political stability, lower interest rate, less borrowing, reducing unemployment by creating jobs, funds education adequately among other enabling grounds for manufacturing to blossom would be supported and voted for in the coming election.

Dr.  Afolabi Olowokere of Financial Derivatives Company, FDC, ltd advised corporate Nigeria to interrogate thoroughly any candidate who seeks their support for leadership position with the word ‘how’.

A senior lecturer at the Lagos Business school, Dr. Adi Bongo said the Nigerian economy not only been left behind by other economies but has also been shaken to its foundation. Bongo explained that the economy which infrastructure is decayed has lost its bearing over the years and needs a benevolent and intelligent dictator who understands how the system works to lead.

Business Hallmark’s research reveal that many firms are struggling to survive. Some of those business concerns include;

Diamond Bank Q3 2018 results showed that its post-tax profit dipped -38.89 per cent to N2.26 billion, underpinned on net interest income, which declined -13.64 per cent. It suffered N9 billion loss in 2017 and if the current trend does not reverse, the bank may post another loss at the end of this year, which would make two successive losses after its profit crashed -86.31 per cent in 2016 financial year.

The lender recorded -0.56 per cent decline in gross revenue to N142.1 billion in Q3 2018, slowed down by drop in interest income and weak growth in fee and commission earning, which only rose by 1.46 per cent to N28.45 billion during this period.

Impairment provision on loans and advances, which was cut by -24.21 per cent to N25.17 billion and 261.77 per cent rise in other income and 97.22 per cent in net trading earnings were not strong enough to buoy Diamond Bank performance in Q3 2018.

The bank is still grappling with high operating costs as its operating expenses was up 2.89% year-on-year to N66.20 billion in Q3 2018, and interest expense up 18.32 per cent to N41.26 billion. But the bank said cost containment measures are underway with the digitization process contributing to quarter-on-quarter gains with OPEX declining 0.36 per cent from N22.07 billion (Q2 2018) to N22.15 billion (Q3 2018).

Customer deposit dropped by -8 per cent year-on-year to N1,107 billion, due to re-pricing and non-rollover of high priced maturing deposits, and migration to government securities while Liquidity position remains strong as current and savings account balances increased from 77.4 per cent (FY2017) to 78.08 per cent of total deposits in September 2018.

Diamond Bank may have fallen short of regulatory prudential benchmarks. The bank’s non-performing loans stood at 12.3 per cent in the first half of 2018, compared to the 5 per cent threshold set by the CBN.

More worrisome is that its capital adequacy ratio (CaR) is also very weak at 16.6 per cent, representing only 1.6 per cent above CBN’s 15 per cent peg for tier 1 banks, which Diamond Bank belongs to. It had 40.2 per cent liquidity ratio against 30 per cent required by the regulator.

These have painted a picture of weakness in the banks abilities to compete favourably with its peers in the banking industry, drawing attention of the banking public to its wobbly disposition.

In fact, shareholders and other industry stakeholders are beginning to discuss the banks sagging position in whispers on Broad and Marina streets of Lagos.

“It appears a major investor has taken over the bank, though I don’t have the details yet. So, to enable it take over control of the bank, they have asked those Directors to resign,” David Adonri, Managing Director, Highcap Security told Business hallmark through the telephone on Saturday.

The bank’s board chairman, Oluseyi Bickerseth and three other directors of Diamond Bank resigned last week. “The directors are resigning for varied personal reasons, which will include focusing on their priorities. Diamond Bank will update the market with any further development in due course. Bickersteth was appointed as chairman of the bank in July,” explained Mr. Uzoma Uja, company secretary, Diamond Bank, in a statement sent to the Nigerian Stock Exchange (NSE).

PZ’s performance in the first quarter of the year has been starkly disappointing.

This weakness is reflected in the company’s losses in the first quarter of the 2018/19 financial year. With a loss before tax of 13 percent from a huge loss of N181.005 million in 2017/18 into a deeper loss of N204.6 million, shareholders may remain in the woods for some time to come. PZ posted declining revenues as inventories went up steadily. At the close of business in the first quarter August 2018/19, revenues plunged 14.3 per cent from N18.542billion in 2017/18 to N15.895billion in 2018/19.

Receivables rose 4 per cent, indicating that the company’s products are struggling to find buyers as fewer goods get sold. PZ’s forex losses, though lower than that 2018/19, was high at N666.3 million as operating profit equally plunged 79.2 per cent from the giddy N1.793billion in the corresponding period of last year to N385.4 million in 2018/19.

These events have culminated in the weak stock market placing of the company which analysts at Cordos Capital predict will be even weaker in the forthcoming second quarter.

‘’ Compared to 2018, we now expect the group’s earnings in Q2, and indeed the rest of 2019E, to be weaker, with the trading update also released last week by the parent company suggesting still challenged conditions in Nigeria ahead of the general elections. We recently spoke to some of PZ’s distributors in Lagos and they confirmed that “the market has been subdued since June across all segments”, with new HPC launches gaining only little traction’’, said analysts at Cordros.

‘’While the focus for PZ must be on maintaining cost control, we are afraid that increasing competition will force the group to retain opex around current levels (NGN4 billion average quarterly spend since Q1-18) to maintain market share across product segments. On our forecast 2% decline in revenue, we reduce our 2019E EBIT margin estimate to 3.5% (previously 4.1%)’’, the analyst added

Over the years, PZ Cussons Nigeria Plc had competed favourably with the likes of UAC Nigeria Plc, Unilever Nigeria Plc and Cadbury Nigeria Plc and even dominated the market at some point in the 70’s and 80’s.

Older citizens remember with nostalgia, the escapades of PZ Cussons and how it dominated toiletries in their homes.

The company manufactures and distributes some of the best loved brands in Nigeria, from Imperial Leather to Cussons Baby soaps, Morning Fresh liquid cleaning detergent to Thermocool cooling appliances and Robb therapeutic balm. The firm operates in five core categories – personal care, beauty, home care, food and nutrition and electricals. Its Worldwide Group employs over 5000 people across Africa, Europe, Asia, and North America. But its fortunes particularly in Nigeria appear to be waning.

The company paid lower dividend than shareholders expected in the year ended May 30, 2018. Its annual results for 2017/18 reveal a decline of 44 per cent in its profit after tax (PAT).

However, Nigerian Breweries Plc recorded a Profit After Tax of N14.7billion for the nine months ended September 30, 2018, a decline of 38.4 per cent from the N23.9 billion achieved in the corresponding period of 2017.

The Brewers Operating Activities dropped by 34.4percent from the N42.3 billion recorded in the same period last year.

Profit before Tax also dipped by 34.7 percent from N34.4billion recorded in 2017 to N22.4billion in the period under review.

The company attributed the decline to the new excise duty regime and higher rate of beer introduced by the Federal Government in June 2018, adding that affordability in weak economy was also traumatic for the firm.

The Giant Brewer explained that the Company undertook a right-sizing exercise which resulted in a substantial one-off cost write-off during the quarter. Nigerian Breweries Plc declared an interim dividend of N4,798, 141, 231 (four billion, seven hundred and ninety-eight million, one hundred and forty one thousand, two hundred and thirty one Naira), that is, 60 (sixty) kobo per ordinary share of 50 kobo in the share capital of the Company, for the period ended September 30, 2018.

Economic experts have held the view that the performance of the economy reflects and influences the results of its companies, firms and other business activities. Even if this is not the case at all times, strong economy significantly infects with strong growth while a weak economy tends to weaken or drag down the operating fundamentals and affects performances negatively.