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HI’18: Manufacturing firms’ incur more costs, up by 20.2%

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…CBN encourages companies to  raise fund through CPs
… Analysts/stakeholders caution firms to be prudent in spending

By Peter Egwuatu

Despite the steady decline in the inflation rate over the past 18 months, leading manufacturers quoted in the Nigerian Stock Exchange, NSE, which operate across sectors have recorded significant upsurge of 20.2 percent in their operating expenses, OPEX, in the first half of 2018, HI’18. The figure rose to N233.9 billion from N194.6 billion recorded in H1’17.

Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

The firms numbering 36, operated on short term borrowings amount to over N101 billion during the period, just about 1.8 percent up from N99.2 billion in 2017.

Given the political uncertainty which is likely to fuel an upsurge in inflation, market analysts and stakeholders in the Nigerian capital market have cautioned companies to be cautious and prudent in their expenditure as the country moves into the 2019 election, stressing that election will spike costs without a corresponding increase in turnover and margins, thereby reducing profitability at the end of the financial year 2018 and thus affect shareholders’ return on investment.

They further admonished that companies should weigh the cost of borrowing from banks and the capital market to be able to take prudent decision with regards to borrowing to run the companies.

Sectoral Review of Expenses

Meanwhile,  Financial Vanguard’s review of the HI’18 of the 36 companies’ performance show that  manufacturing companies in the Industrial Goods sector recorded the highest expenses in absolute term with N116.9 billion in HI’18, up by 19.4 percent from N97.978 billion in H1’17.

A review of the sector’s performance shows that out of the 12 companies captured in the study,  Dangote Cement recorded N86.863 billion, representing an increase of 19.3 percent from N 72.840 billion in HI’17. It was followed by Lafarge which expenses stood at N22.725 billion, indicating an increase of 24.9 percent  from  N18.194  billion in HI’17,  while Vitafoam Nigeria recorded  N 2.021 billion, representing an increase 1.1 percent  from N1.999 billion in H1’17.

Consumer Goods sector came second on the sectoral chart, recording N87.7 billion, representing a growth of 23.6 percent from N70.9 billion in HI’17.

A review of the sector shows that out of the 10 companies captured in the study, Nigerian Breweries, recorded N24.323 billion, which represents 9.2 percent growth from N 22.269 billion in H1’17.

Nestle Nigeria came second recording N 23.425 billion, indicating 8.2 percent growth from N21.644 billion in H1’17. International Breweries occupied the third position recording N16.352 billion, representing a growth of 265.6 percent from N4.473 billion in H1’17.

The Conglomerates sector took the third position on sectoral performance, recording N15.733 billion, an upsurge of 20.1 percent from N13.1 billion in H1’17. Out of the six companies captured in the sector, Transnational Corporation of Nigeria, Transcorp led the chart with N7.617 billion, representing 34.5percent growth from N5.664 billion in HI’17. It was followed by UACN which recorded N5.657 billion, representing a growth of 8.7 percent  from N 5.205 billion in H1’17, while AG Leventis recorded N1.749 billion, representing an increase of 10.8 percent from N 1.579 billion in H1’17.

The Agriculture sector occupied the fourth position on sectoral chart, recording N7.454 billion, representing a growth of 13.5percent from N6.565 billion in H1’17.

A review of the sector’s performance shows that out of the three companies captured in the study, Okomu Oil Palm recorded the highest expenses with N4.174 billion, representing a growth of 28.1 percent  from N 3.258 billion in H1’17. It was followed by Presco , recording N3.011 billion, dropping by -0.1 percent from N 3.014 billion in H1’17,  while Livestock Feeds recorded N0.269 billion, representing a decline of -8.2 percent from N 0.293 billion recorded in H1’17.

Health Care sector occupied the fifth position on the sectotal chart,  recording  N6.087 billion, an upsurge of 1.2 percent from N6.015 billion recorded in H1’17.

Bank borrowings

On the bank borrowings the companies in the Industrial Goods sector dominated with N78.6 billion, representing an increase of 2.9 percent from N76.4 billion recorded in H1’17.

Further analysis of the sector shows that Meyer Plc led the borrowing chart with N28.930 billion, increasing by 5.4 percent from N27.453 billion in H1’17. It was followed by Lafarge recording N 23.716 billion, representing an increase of 105.7 percent from N11.532 billion in H1’17, while Dangote Cement occupied the third position recording N 18.565 billion,  representing a drop of -23.9 percent from N 24.404 billion in H1’17.

The Consumer Goods sector came second in the sectoral borrowing chart, recording N11.639 billion, representing a drop by 1.1 percent from N11.768 billion in H1’17.

A review of the sector shows that International Breweries led borrowing recording N 7.132 billion, an increase of 210.2 percent from N2.299 billion recorded in H1’17. It was followed by Nigerian Breweries recording N 1.835 billion, representing a decline of -48.1percent from N 3.535 billion in H1’17, while Dangote Flour Mills came third recording N 1.719 billion, representing a drop of -7.3 percent from N 1.855 billion in H1’17.

The Conglomerates sector occupied the third position on sectoral borrowing chart, recording N8.989 billion, indicating a drop of  -5.3 percent from N9.493 billion in H1’17.

Topping the sector on the chart was Transcorp recording N 5.403 billion, representing a growth of 8.3 percent from N 4.989 billion in H1’17.  It was followed by UACN recording N2.412 billion, representing a decline of -31.2 percent from N 3.507 billion in H1’17, while Scoa Nigeria came third recording N0.597 billion, representing an increase of 14.1 percent from N 0.523 billion in H1’17.

Analysts /Stakeholders Reactions 

Reacting, the Head of Research & Investment, FSL Securities Limited,    Mr. Victor Chiazor, said: “ The direct implication of rising expenses to any firm will be that the firm may see its profitability reduce especially when the firms’ expenses are growing faster than its revenue base. Most firms have seen expenses rise as a result of increased competition and general increase in the cost of doing business. There has been a general rise in the cost of selling and distribution of products, a rise in the cost of running campaigns and innovations as well as a rise in brand marketing all in a bid to increase sales volume.

While some companies have immediately benefited from increased brand awareness by growing their sales volumes, some companies have not had similar successes and it may take a few more quarters for them to reap the reward and this would directly impact the profitability of such companies.”

Continuing, he said: “When rising expenses affects the profitability of a number of firms, it sends negative signals to investors especially for firms listed on the Exchange as both local and foreign investors may decide to exit their holdings in those firms to safer stocks or totally pull out of the market for fear of losing their investments and this would have a negative effect on the economy as currency outflows may increase if foreign investors fail to see any other viable investment options.”

While reacting to the inflationary trend in the country as it affects companies’ performance, he said: “We don’t believe the rate of inflation significantly impacted on any of these firms under the current period compared to the corresponding period of 2017.

Finance cost has been a major drag on earnings for most of the companies as the high cost of  borrowing has continued to exert negative pressure on the profits of these firms.

Except for the companies that have been able to raise capital in the form of equity in a bid to reduce their interest expense, most companies are also projecting a reduction in interest rate in the near term and as such instead of raising long term funds at significantly high interest rates, most have decided to raise short term funds to support their business obligation, while they await the era of a lower interest rate regime which should reduce their interest payment obligations and improve profitability given that most policy parameters suggest a possibility of lower interest rate in the short term provided that other factors or circumstances remain the same.

“The CBN (Central Bank Of Nigeria) in its last MPC meeting stated that it would support good companies who come out to raise funding through CP’s (Commercial Papers) with single digit interest rate in a bid to reduce the high borrowing rate in the country and we advise firms to look in that direction for funding at decent rates that would not be harmful to their businesses.”

Commenting as well, Managing Director, APT Securities & Funds Limited, Mallam Garba Kurfi, said : “ What is happening in the market is very unusual especially when the exchange rate is stable, the price of crude oil is high, the inflation is coming down , the Treasury bill and FGN Bonds rates are crashing yet the capital market is still going down. We lost to date almost one percent per week. Probably, investors are reacting to the political uncertainty in the country.”

The spokesperson for Independent Shareholders Association of Nigeria, ISAN, Mr Moses Igbrude said: “Expenses are incurred in companies operation in order to create values, so an increase  generally depends on the rates of activities within a  period of time. Does this increase brought about a corresponding increase in  turnover?   Or is the reverse the case.? If such increase brings  value along with it then stakeholders will be better off and if not them they will be worst of.

Then, the question will be; why should management increase expenses without creating a corresponding value?   My advice to companies is to try their best to control and manage their cost in order to  survive in this present harsh economic environment with high uncertainties and inflation. Certainly, an increase in expenses without corresponding in value will surely have serious impact on companies and economic.”

Commenting on finance cost, he said: “Finance cost is huge and a serious problem affecting companies and the country economic growth.   An economy where interest rates are high as 23 percent    to 30 percent, compounded with government policies inconsistent is limiting business growth in the country. My sincere advice to companies is to be very prudent and cautious in their business decisions as it relates to borrowings so that banks will not take over our companies because of bad debts.   Where it is so critical they should try the capital market for cheaper funds.”

In his reaction as well,   Chairman, Concerned Shareholders Association of Nigeria, Mr Segun Owolabi said; “The rising expenses by these firms without a corresponding increase in turnover and profitability is not good for the shareholders who expect maximum returns on their investment. Companies should device means of reducing their expenditure on things that will not increase in turnover. There is some inevitable expenditure and there are some that evitable. So management should also cost benefit analysis when embarking on huge expenditure. Although, there is some expenditure that will bring benefit in the long run, so such expenses can also be considered.”

On finance cost, he said: “We do tell the companies not to rely much on banks’ borrowing because of the high cost involved. When companies and using short term loan to finance medium term or long term expenditure, it is not good. It is a mismatch of funding. The capital market is the best option to consider when you need to finance medium or long term expenditure.

In your report, I think the firms only increase their finance cost marginally which still better than when it is on the high side.    Furthermore, companies should begin to use their internally generated revenue to finance most of their expenses as we have seen in some companies that have not recorded any finance cost so far in the period under review.”

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