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Funding gaps: 15 manufacturing companies borrow N418bn from banks

Vanguard

Funding gaps: 15 manufacturing companies borrow N418bn from banks

•Pay N127bn as interest to the banks
•Dangote, Flour Mills, Nestle lead borrowers’ list

By Peter Egwuatu

AT the backdrop of funding exigencies and inability to raise longer term and cheaper capital from the capital market, top 15 companies in the manufacturing sector, listed on the Nigerian Stock Exchange, NSE, were compelled in 2016, to seek expensive and short term bank loans to bridge funding gaps. Thus, they spent N127 billion servicing about N418 billion loan they borrowed.

This represents a 30 per cent increase in their loan liabilities from N322.5 billion recorded in the corresponding period of 2015. Financial Vanguard investigations revealed that the loan expenses got escalated by the persisting liquidity challenges in the banking sector coupled with subdued credit appetite of the banks as a result of huge loan defaults during the period. Consequently, lending rates escalated to over 25 per cent.

The immediate impact was adverse on the bottomline of the companies with their profitability forced to a 24 per cent decline in the cumulative profit before tax in 2016. But three of them escaped with good profits. The breakdown showed that the cumulative Profit Before Tax, PBT, declined by 24 per cent to N268.5 billion in 2016 from N351.7 billion in 2015. But they also attributed this downturn partly to the economic recession impact and other macroeconomic variables as most of them were unable to secure Foreign Exchange, forex, and this escalated their cost of fund during the period under review.

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Findings by Financial Vanguard revealed that the 15 companies paid a total interest of N127.253 billion to the banks, representing a 44 per cent increase from N88.403 billion recorded in the corresponding period of 2015. The total interest paid by the 15 manufacturing companies also represents 47.4 per cent of the total profit recorded in 2016.

Earnings reports from the companies indicate that most of them were constrained by increasing financing charges, otherwise known as interest expenses, leading to steep declines in profits in most of them. Out of the 15 companies in this coverage, 11 companies’ PBT declined during the year under review as finance charges contributed to the major cost constraints.

Management of these companies had stated that their inability to source new equity capital due to the meltdown at the capital market had forced them to continue relying on high-interest bank loans. A review of the report  showed that while other macroeconomic conditions, especially slowdown in top-lines due to decline in purchasing power and increase in costs of sales due to exchange rate depreciation, contributed to weak performances by the companies.

High cost of funds was the major factor that wiped off positive trading and operating profit performance to undermine pre-tax profit. It was further discovered that PZ Cussons and GlaxoSmithKline Consumer, GSK Nigeria Plc did not borrow money during the year under review, but paid interest to banks for previous borrowing.

Details of the borrowing are as follows:  Dangote Cement N71.732 billion in 2016 as against N31.352 billion in 2015; Cadbury Nigeria Plc N151 million in 2016 as against nill in 2015; Nestle Nigeria Plc N50.620 billion in 2016 as against N29.944 billion in 2015; Unilever Nigeria Plc N20.916 billion in 2016 as against N8.018 million in 2015 ; Flour Mills Nigeria Plc N64.421 billion in 2016 as against N114.96 billion in 2015; Honeywell Flour Mills Plc N51.289 million in 2016 as against N42.129 billion in 2015; Dangote Flour Mills N36.237 billion in 2016 as against N40.824 billion in 2015; Lafarge Wapco Plc N59.482 billion as against N11.822 billion in 2015

Others include: Guinness Nigeria Plc N39.168 billion as against N20.69 billion; Nigerian Breweries Plc N17 billion as against N17 in 2015; Dangote Sugar N2.036 billion in 2016 as against nill in 2015; May & Baker Nigeria Plc N2.972 billion in 2016 as against N3.129 billion in 2015; Fidson HealthCare Plc N2.232 billion in 2016 as against N2.6 billion in 2015.

Findings showed that Dangote Cement led the chart on interest payment in 2016 in terms of value with N45.6 billion; it was followed by Flour Mills Nigeria Plc N22.4 billion.  Nestle occupied the third position with N20.9 billion, followed by Lafarge Wapco with N15.5 billion, while Guinness Nigeria came fifth with N7.9 billion.

On the other hand, Nestle Nigeria paid the highest interest in percentage terms to N20.9 billion in 2016, from N4.9 billion in 2015, representing a growth by 329 per cent; it was followed by Lafarge Wapco rising by 45 per cent to N15.5 billion in 2016 from N10.7 billion in 2015.   Guinness Nigeria occupied the third position with a growth by 43 per to N7.9 billion in 2016, from N5.6 billion in 2015, followed by Dangote Cement   rising by 35 per cent to N45.6 billion in 2016 from N33.8 billion in 2015, while PZ Cussons occupied fifth position with a growth by 34 per cent to N598 in 2016 from N445 million in 2015.

Meanwhile, top five manufacturing companies on PBT  in absolute terms showed that Dangote Cement recorded the  highest profit during the period under review , recording N180 billion, followed by Nigerian Breweries with N39.6 billion. Nestle occupied the third position with N22 billion followed by Dangote Sugar N19.6 billion, while Dangote Flour occupied the fifth position on the chat with N16 billion.

On the other hand, in percentage terms, May & Baker Nigeria Plc led the chart on PBT as it surged by 144 per cent to N346 million in 2016 from N142 million in 2015. Unilever Nigeria Plc trailed behind, rising by 128 per cent to N4.1 billion in 2016 from N1.8 billion in 2015. It was followed by Dangote Flour, which moved up by 86 per cent to N16 billion in 2016 from N8.6 billion in 2015; Flour Mills revved by 49 per cent to N11.5 billion in 2016 from N7.7 billion in 2015, while Dangote Sugar came fifth position with an upsurge by 21 per cent to N19.6 billion in 2016 from N16.2 billion in 2015.

Companies’ reactions

Meanwhile, some of the companies who spoke on their performance in the review period said that the harsh operating environment coupled with the economic recession significantly impacted on their financial performance.

The Managing Director, Unilever Nigeria Plc, Mr. Yaw Nsarkoh said “The dismal economic climate in 2016 was driven largely by low government earnings, dearth of forex and multiple monetary policies to manage the forex crunch resulting from a protracted regime of low global crude oil prices and unresolved issues around local production.

The manufacturing sector was severely hit by the restriction around valid for forex items and inability to secure forex at predictable rates fro raw materials critical for its manufacturing processes. Net finance cost reduced by 41 per cent to N1.7billion for the year ended December 31, 2016 compared to N2.9 billion reported for the corresponding period in 2015. The result show that net finance cost as a function of operating profit improved significantly to 29 per cent (2015: 52 per cent), reflecting improvement in cash management.”

The immediate past Managing Director, Nigerian Breweries Plc, Mr. Nicolaas Vervelde said “The macroeconomic environment in 2016 was challenging mainly due to the impact of high inflation and scarcity of Foreign Exchange, forex. Through our twin agenda of cost leadership and market leadership supported by innovation, however the company was able to end the year with positive result.

Looking ahead 2017, he said “ It is anticipated that economic activities will improve in the year considering the far reaching fiscal and monetary measures being planned and (same being ) implemented by the Federal Government. This will however depend on how much foreign exchange the government is able to earn from oil. It is hoped that the gradual rise in price of oil and steady increase in the volume of oil output, the Naira will be strengthened and forex will be more available for businesses.

Companies and individuals continued to grapple with the challenge of sourcing and procuring forex.  Also, the disparity between the official forex rate and the parallel rate widened even further with the latter going as high as N495/$ in the course of the year. The devaluation equally led to companies recording huge forex losses in their financials.”

The Group President, Dangote Cement, Alhaji  Aliko Dangote said “Not only was our currency worth less in the money markets but the shortage of foreign currency in Nigeria made it difficult to convert Naira into the  Dollars we needed to pay for imports and capital expenditure.

Our Pan African diversification has provided cash streams from countries cash streams from countries such as Senegal, Cameroon, Zambia, which have provided us with essential foreign currency as forex controls made it difficult for us to obtain Dollars for operations. Furthermore, costs also came under pressure from Nigeria’s high operation and from the fact that disruption to the nation’s gas supplies forced us to use the unprecedented quantity of expensive LPFO as back up fuel.

Commenting on the financial performance in 2016, chairman of May & Baker Nigeria Plc, Lt. General Theophilus  Dajuma (rtd) said “The local pharmaceutical manufacturing industries continues to face survival challenges. Increasing cost of power and lack of foreign exchange for input materials kept many firms operating a below 40 per cent capacity, while smaller firms closed down out rightly. Despite the harsh operating environment, our company posted an impressive results which unfortunately was marred by tax expenses and consequently  impacted on  the bottom line. Cost optimisation measures initiated by management led to reduction in distribution , sales and marketing expenses by 11 per cent while finance costs also dropped by 12 per cent.

 

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