Cover Story
Turmoil in corporate Nigeria: Blue chip firms lose N34bn in profitability
By OKEY ONYENWEAKU
. Nestle, Guinness, NB Plc, 7UP, Dangote badly affected
Results recently released by many blue chip firms listed on the local Stock Exchange (NSE) shows that the real sector of the Nigerian economy is fast tumbling into a financial rot.
Several of the companies have had to push back against rising costs of production and cost of funds in local credit markets.
The combination of both effects has led to an average fall of 25 per cent of their after-tax earnings between 2015 and 2016.
Against this background, the Nigerian All Shares Index (ASI), a measure of the value of all companies listed on the NSE has fallen by 5.26 per cent up to date, meaning that the total value of private companies listed on the exchange has dropped by a thumping N2billion.
The subsequent results published by some of the largest firms on the local exchange explain why the market has slipped into deep waters. From Soda (or ‘soft’ drink) manufacturing companies to confectionaries and beer brewers, the outcome appears the same, harsh times have hit corporate balance sheets.
A broad overview of private company performances for the year 2016 indicate that the consumer goods sector was the hardest hit by the previous year’s recessionary blast.
As companies such as 7Up, Cadbury, Guinness and Nestle saw their annual profits pounded by the impact of rising production costs and spiraling finance charges.
The consequence of flattening profits has been a fall in dividend pay outs to shareholders and a pummeling of capital gains as investors bid downwards the prices of companies with lower earnings. According to Segun Olaniyi, Managing Partner of local investment firm, Jefferson & Associates, ‘last year was a year of corporate sorrow, tears and pain, chief executives had their heads buried in their chests as they figured out how to survive the recession, as bad as some of the results may appear, it was a sheer miracle that several of the companies were not on the other side of the divide between the living and the dead’.
According to Olaniyi, the fall in crude oil prices and exportable volumes resulted in a massive drop in foreign exchange reserves which constrained the capacity of the fiscal authority to fund the interbank exchange market with sorely needed foreign currency. The ensuing scarcity resulted in the naira to dollar exchange rate take a tumble to as low as N520/USD$1 as recently as February 2017. For most of 2016 manufacturers had had to source their foreign exchange needs at the parallel market where they had to pay between N450/USD$1 and N480/USD$1. This was against the official rate of N315/USD$1, a price at which many companies sourced less than 20 per cent of their needs.
Says Olaniyi, ‘the previous year was a dead zone. It was a time most blue chip companies saw less blue and more red, their books dripped red, their eyes saw red and I think they even dreamt red dreams. Fortunately, however, 2017 seems to be propped better, investors should see an improvement in corporate performance, but a return to happier days may come sometime in 2018′.
Business Hallmarks assessment of corporate performance of top stocks in 2016 throws up a story of shell shocked corporations currently suffering from post-traumatic economics stress disorder (PTESD).
7 UP, fizzy no more
Seven up Plc, in a result that has kept investors shuddering, recently posted a mind-boggling N4.8b loss for the third quarter of the year 2016. The result, a total collapse from its 2015 third quarter profit after tax of N2.2b, signposts one of the worst operating performances for the carbonated soft drink manufacturer in the last twenty years. This has left investors confused, angry and anxious.
The company has been affected by a battery of circumstances that has left the company’s books in tatters. A major problem has been the impact of foreign exchange on the firms cost of goods sold. The cost of critical imports such as the condensates for its various soft drink brands left the company with thin gross margins which were made worse by higher costs of domestic financing as interest rates escalated in the year.
The company’s management soberly blamed recent operating performance to weak macroeconomic factors ranging from the continued weakness of the naira against other currencies to higher costs of distribution, sales, general and administrative expenses. While the company’s revenue grew by 26% to N76bn in the nine-months to December, cost of sales rose 52% in the same period to N64bn.
The continued weakness of the naira caused finance cost to surge forward by 24% in the nine-months and ramped to 44% in the third quarter alone to N1.3bn, from N900m a year earlier.
7 Up once the toast of investors as recently as 2015 seems to have fast lost its lustre, BH research reveals the company’s share price saw massive bullishness in the last two years as investors had a deep love affair with the drink maker. The cuddly affection has since gone sour, as a growing number of analysts begin to ask the company for more detailed explanation of its disastrous third quarter loss.
NB Plc, tale of a drunken sailor
Nigeria breweries Plc used to be one of the finest corporate equities to own on the Nigerian Stock Exchange (NSE), but as Nigeria’s foreign exchange problems deepen and consumer incomes drop, the company is fast seeing its future becoming unstuck. Its 2016 yearend financial results paints a portrait of a company in depression. The company’s profit after tax dropped off by 25 per cent less than the figure posted in 2015, falling from N38billion in 2015 to N28billion in 2016.
NB Plc’s fall in profit takes vigour from a rise in the company’s cost of goods sold and a ballooning of its finance charges. Both events conspired to weaken the brewers underlying operating profit and slosh drums of water over its marginal 6.7 per cent rise in net revenue.
A review of its audited accounts for the year show that the company posted a revenue of N313.743 billion in 2016, up from N293.9 billion in 2015. The company’s cost of sale rose from N149.73 billion to N178.218 billion (19 per cent) while marketing and distribution expenses also jumped from N58.45 billion to N61.312 billion (5 per cent).
The ale maker was able to bring down administrative expenses while finance cost increased by 66 per cent from N8.217 billion to N13.645 billion. However, this increase was majorly driven by net foreign exchange loss of about N7.552 billion, compared to N752 million in 2015.
Given the huge forex loss, Nigerian Breweries Plc posted profit before tax of N39.675 billion, down from N54.514 billion in 2015 and profit after tax (PAT) of N28.416 billion as against N38.05 billion in 2015.
Interestingly, the company has promised to still spay a final dividend of N20.457 billion, which translate to N2.58 per. This brings the total dividend to N28.386 billion or N3.58 per share, having already paid an interim dividend N7.929 billion or N1.00 share (giving a 2 per cent dividend yield on current market price).
Business Hallmark notes that the negative impact of the scarcity of foreign exchange combined with the devaluation of the Naira had major adverse impact on the company in the third quarter 2016. This dragged down the Company’s Profit After Tax by 23% from N26.175 billion in 2015 to N20. 100 billion in the comparable period of 2016.
The company’s 2016 third quarter results had signaled that the company results were not going to end the year on a brilliant note. However, the solemn macro-economic environment which pushed the economy into a recession did not favour local manufacturers, not even strong ones like Nigerian Breweries.
Guinness Nigeria Plc, seeing beery trouble
The once cheerful faces of shareholders of Guinness Nigeria Plc has suddenly turned gloomy as their company’s fortunes continues to fall into a never-ending hole. Unable to ride on the back of an increasingly weaker consumer market for alcohol, the company found its 2016 financial statement dipped in red ink as it posted a towering half year loss of N4.6billion, despite a 19.4 per cent growth in sales. The company’s stock market performance has not fared any better as it lost -73 per cent of its market value in three years sliding from N253 in 2015 to N173 in January 2017.
Half year unaudited results for the company for the six-months ended December 31, 2017 showed turnover rise to N59.49 billion in December 2016 compared to N49.84 billion posted in the corresponding period of 2015.
Cost of sales rose by 55 per cent from N28.44 billion to N43.94 billion, this was the result of a severe rise in the cost of inputs that reflected a massive devaluation of the naira in the last one year. The huge rise in cost of goods as a proportion of sales choked life out of the company’s net sales and sent profit to a deathly dungeon. This was reflected in the staggering pre-tax loss of about N5billion by the middle of 2016 compared to a pre-tax profit of N1.65 billion the previous year. The brewers net loss after tax, rose to a disastrous N4.67 billion compared to a net profit of N1.17 billion in the comparable period of 2015.
Managing director, Guinness Nigeria Plc, Mr. Peter Ndegwa, who tried to assuage the concerns of stakeholders of the company, noted that there were many bright spots for the company going forward but a sorely challenging economic environment and crippling finance charges were leading to severe corporate bloodletting. The company’s net sales growth was being swallowed by escalating operating expenses and higher cost of working capital finance, twin towers that were squeezing gross margins. He noted that to push back against the worrisome headwinds the company had diversified its product portfolio to win greater market share in beverages beyond the larger crowd.
“We now have both International Premium Spirits (IPS) and locally manufactured mainstream spirits within our portfolio and these contributed to revenue growth for the half year. Our accessible beer brands also continue to grow strongly. Our productivity agenda continues to gain momentum enabling us to keep our administrative and distribution costs under control while optimizing our investments to support our brands,” Ndegwa said.
He said the negative bottom-line was caused by the high input costs driven partly by foreign exchange and foreign exchange impact on financing costs.
Udegwa stated that the unrealised foreign exchange losses during the half year were responsible for the 166 per cent growth in net finance cost.
However, chairman, board of directors, Guinness Nigeria Plc, Mr. Babatunde Savage, expressed optimism about company’s future notwithstanding the prevailing challenging operating environment.
“We are confident that the steps we are taking to steer the business through these difficult times – including a comprehensive review of our capital structure, the expansion of our brand portfolio and our continued focus on reducing operating costs, will sustain the momentum we have in top-line growth and bottom line recovery,” Savage said.
While the company have blamed the shrinking economy, which saw a sharp fall in the price of crude from $114 per barrel in June 2014 to $32 before the end of 2015 as a principal cause of lower domestic demand for its products, independent analysts claim that part of the company’s problem is a palpable loss in market share due to a growing bargain basement market for beer.
Premium beer brands are increasingly losing space on the average consumers shopping list as cheaper brands create greater spending flexibility in the face of a biting recession.
Cadbury Nigeria, the sweet bitterness of pain
Cadbury Nigeria Plc has lost its once sterling sweetness, the darling of Nigerian investors in the 1990’s has become a mortal enemy of equity traders’ portfolios. The confectioner, previously Nigeria’s largest company in that category, has offered investors a sour stew of profitability over the last two years. Indeed, the company has turned loss making into an ugly art form as its books continue to swim in red paint. Recent figures for its year end 2016 have been singularly unimpressive. The giant beverage maker posted a net loss of N740million in the period ended December 31, 2016.
Those who took position in the company’s stock may be confused by their present misfortune since the announcement of its losses. The company did not fare any better in 2016
Details of the abysmal results show that profit after tax posted a loss of N740 Million from N1.577 billion in 2015.
The company has been experiencing dwindling fortunes due to the challenging operating business environment.
For instance; The company had posted a huge loss by -675.9 per cent (N304) million from a profit of N53million in 2013. In the final year 2014, Cadbury also posted 80% drop in pre-tax profits to N1.467billion from N7.421 billion in 2013. After posting a loss of N303 million in the first quarter of 2015 ended March and posted a loss of N250million in the second quarter ended 2015. Its profit declined by 98 per cent in third quarter 2015 and profit after tax (PAT) for the period ended December 31, 2015 declined 46 percent to N1.153 billion from N2.137 billion recorded a year ago. It plunged in the red region again, having posted a loss of N740million in 2016.
Dangote Cement
Dangote Cement, the leader in the industrial sector, reported a 15% drop in net income to N133.52 billion. Despite a significant top-line growth (21% or N442.1 billion) driven by record volume growth in Nigeria and across other markets where the company operates, Dangote Cement’s lower profit was attributed to contraction in gross margin of 47.6% from 62% posted in a comparable period of the previous year.
Cost of sales, which refers to direct costs attributable to the production of the goods or supply of services by a company, increased by 67% for the cement manufacturing giant, reflecting a general trend in the country’s corporate sector, higher energy cost pushed up Dangote Cement’s operating expenses by 62%.
Its sister company, Dangote Sugar, also saw a contraction in gross margin due to significant rise in production cost. Dangote Sugar, a major player in the fast-moving consumer goods (FMCG) segment, saw a decline in its gross margin from 25.7% reported in 2015 to 16.5%.
Lower finance costs (which was down 56%) for Dangote Sugar, however, helped to reduce pressure on the company’s profit – which was N10.1 billion; up 8.4%.
Nestle Nigeria Plc, a time to defy gravity
Nestle Nigeria Plc result for the period ended December 31 2016, has shown a growth in both revenue and final dividend.
The company which proposed a dividend of N10 per share representing a dividend yield of 1.8 per cent grew revenue to N181.91 billion, from N151.27 billion posted in the corresponding period of 2015.
Gross profit also rose to N75.32 billion, against N67.35 in 2015, results from operating activities N38.21 billion, from N33.75 billion.
Weak economy pushed down the profit to N7.92 billion, against N23.74 billion in 2015 financial year.
Cost of sales in 2016 was N106.58 million, against N83.93 million in the corresponding year, while marketing and distribution expenses rose slightly to N28.78 billion from N25.90 billion in 2015.
Finance income grew to N4.2 billion, against N443.805 million in 2015. Net Finance cost was N16.66 billion from N4.42 billion recorded in 2015.
Nestle explained, “The company’s profit tax was negatively impacted both buy revaluation of foreign loans resulting from revaluation of the Naira and higher income tax provisions following expiration of pioneer status”.
Interestingly, the companies have blamed their woeful performance on the devaluation of the Naira which has plunged from N197/$1 (official) to about N350 and N230 in the parallel market to N520 a few weeks ago before easing back to N460.
The weak currency was in turn blamed on the shrinking economy, which saw a sharp fall in the price of crude from $114 per barrel in June 2014 to $32 before the end of 2015 as a principal cause of lower domestic demand for consumer goods products, independent analysts claim that part of the company’s problem is a palpable loss in market share due to a growing bargain basement market for beer. Premium beer brands are increasingly losing space on the average consumers shopping list as cheaper brands create greater spending flexibility in the face of a biting recession.
This is indeed a tough period for businesses given the general economic contraction. This, many think, would also affect the purchasing power of consumers of not only manufactured products of but also the persistent liquidity squeeze in the system. Of course, profit margin as well as turnover targets may be reduced. It is also expected that when other growth indicators are slow, dividend projections will slump and possibly drag down its share price.
Some observers sympathise with manufacturing companies as they attribute their predicament to ill-advised government policies that have crippled manufacturers and allowed little wriggle room for them to manoeuvre out of high cost manufacturing situations. The weakness of the domestic currency in the foreign exchange market and foreign exchange access restrictions placed on 41 categories of imports conspired to make a bad situation worse as manufacturing companies typically work hard to get foreign exchange from parallel currency markets where foreign currencies are sold at premiums above 60 per cent of official market rates.
Analysts have said these blue-chip companies have not performed well in recent times, fingering insecurity in the country as part of its challenges.
”The results have not been good. Weak demand for its products is affecting its bottom-line. The brewers market in the North East which has been affected adversely by the nefarious activities of Boko Haram”, Said a Lagos based analyst, Managing Director, High Cap Securities Limited, David Adonri.
Similarly, Managing Director of Crane Securities Limited, Mr Mike Ezeh, told Business Hallmark that it is difficult for companies to perform magic in an economy that is experiencing recession.
Agusto & Co., Research, Credit Ratings, Credit Risk Management had specifically rated Guinness Nigeria Plc a in 2015 as having inadequate working capital, adding that stiff competition for products in the value segments and Sub-optimal distribution network in rural areas are also some its challenges.
It is commonly known that the Nigerian manufacturing industry is relatively small in relation to the size of the domestic economy. This owes to several challenges which include the neglect of the sector in favour of oil, an epileptic power supply, and the country’s deficient infrastructure, among others
Five-year financial analysis
The company has been noted for consistency in the release of its financials during the period under review, not withstanding this year’s (2016) slight delay. This adds up to its valuation status as it stands sure in portfolio management effectiveness.
The market price as at released dates experienced an outstanding growth from the N441.00 of 2011 to all high of N1071.00 in 2013 to close at N680 in 2015, the price when the 2015 audited result hit the market. Looking at the company’s performance critically between 2011 and 2015, it is evident that there has been a stable up-trend performance with positive numbers that reveal the competence of the management.
Its sales revenue for the period rose by 54.42% from N97.96 billion in 2011 to N151.27 billion in 2015; while profit level for the same period was up by 41.23% to N23.74 billion, from N16.81 billion recorded in 2011, even when earnings remained almost flat in three of the years under consideration.
Within the same period, the economy moved from its gloomy to recovery stage due to the positive reforms before pulling back to another depressed economic situation that had befallen the nation.
Meanwhile, Net Assets stands at N38.01 billion up from the N23.49 billion posted in 2011 after recording a high of N40.59 billion in 2013. Dividend grew through the period from N12.55 in 2011 to the latest dividend of N29 per share, representing a 131.08% increase.
Transcorp Hotels
An upsurge in income from food and beverages, increased sales of rooms, and upticks in revenue from entertainment and restaurant, related service fees and rentals pushed up the bottom-line growth of Transcorp Hotels by 14% to N2.7 billion. Persistent FX challenges proved to be a drag on the performances of major operators in the FMCG sector. Nestlé Nigeria took a foreign exchange loss of N19.4 billion due to the devaluation of the naira.
The company’s net finance cost grew 414% to 19.9 billion. This sent its profit plunging 97% in the first nine months of 2016. Indeed, for the third quarter of 2016, the company suffered a loss of N51 million, compared to a profit of N8.3 billion it made in Q3 2015.
To mitigate the impact of the dwindling economic environment in Nigeria, Nestlé and other companies are ramping up exports to other countries to diversify their revenue base and generate foreign exchange
