NSE-30 profit up 1 percent to N1.51 trillion as economic recovery slows

Nigeria companies are not growing profit at a pace needed to deliver returns in the form of share appreciation and bumper dividend, which validates the slow economic recovery.

The collective profit of Nigerian Stock Exchange (NSE) 30 – the lists of 30 most liquid and capitalized firms-increased by a meager 1 percent to N1.51 trillion in December 2020 from N1.50 trillion as at December 2019, data gathered by MoneyCentral shows.

That is the slowest expansion at the bottom line since MoneyCentral started gathering data.

Of course, banks, telecoms, and Agric, and a few consumer goods firms remain the major driver of the growth; and the government regulations such as the border closure was a boon for flour millers whose competitors couldn’t import the product into the country.

It is noteworthy that the companies are operating in a tough and unpredictable macroeconomic environment, and the coronavirus pandemic that dealt a great blow on oil demand, elicited a lockdown policy by the government tipping the country into a recession.

A breakdown of the NSE  30 firms profit shows the combined net income of the largest banks were up a mere 1.74 percent to N920.50 billion in December 2020 from N904.71 billion as at December 2019.

A stringent rule by the central bank has hit lenders interest income as net interest margin has been under pressure.

Interestingly, banks have been forced to lower interest rates earlier in a bid to meet the Loans to Deposit Requirement (LDR) requirement.

However, analysts have warned that increasing the LDR may cause non-performing loans (NPLs) to surge, as lots of loans will be written off as bad and irrecoverable if companies are unable to meet their obligation due to deteriorating cash flows.

As part of the CBN’s expansionary measures to support the economy in the COVID-19 era, MPR was reduced by 100bps to 12.5 percent. This means that the interest income on loans is expected to reduce. However, boosting the cash reserve ratio limits banks’ ability to put that capital to work in higher yielding assets, such as providing loans to companies or individuals, or buying government bonds.

Notably, the consumer goods are the hardest hit from the Covid-19 crisis and difficult business environment, but the consumer firms on the NSE 30 list collectively grew net income by 21 percent to N62.78 billion as at December 2020.

The major drivers of the bottom line were Flour Mills of Nigeria, Dangote Sugar, and Nascon Allied Industries, but the industry is beleaguered and there are no prognoses about the future.

Flour Mills of Nigeria is a star performer in the sector, surmounting the macroeconomic headwinds as net income spiked by 90.93 percent to N15.58 billion as at December 2020 from N8.16 billion the previous year.

The largest miller in Africa’s largest economy remains focused on increasing operating efficiency with accelerated plans for cost optimaisation across all business segments in the Group to ensure competitive business offerings and profitability in the operating environment.

Dangote Sugar has been intensifying its backward integration strategy, magnifying earnings while contributing to the economy. Its net income increased by 33.55 percent to N29.75 billion in December 2020 from N22.36 billion the previous year.

Of course, the sector has been at the receiving end of poor regulations, rising inflation that erodes consumer purchasing power, decrepit infrastructure, and currency devaluation that is ballooning cost of production.

Nigeria’s unemployment rate rose to 33.30 percent in the three months to December 2020, the second highest on the global list. That’s up from 27.10 percent in the second quarter of 2020, according to recent data from the National Bureau of Statistics (NBS).

Nigeria’s inflation rate for the month of March 2020, rose to 18.17 percent from 17.33 percent recorded in February 2021. This represents 0.82 percent points higher than the February figure.

The country’s misery index is at 51.47, which makes it rank among the six most miserable countries in the world.

Nigeria’s Gross Domestic Product (GDP) grew by 0.11 percent (year-on-year) in real terms in the fourth quarter of 2020, representing the first positive quarterly growth in the last three quarters.

There are indications that the consumer wallets will be under pressure this year as the government mulls hike in pump prices as it is poised to deregulate the downstream oil and gas industry.

At the start of the year, the Federal government implemented a VAT hike of 50.0 percent to 7.5 percent in Feb-2020. Shortly after, the Covid-19 pandemic hit, leading to job losses and wage cuts.

However, analysts say there is light at the end for consumers as they expect gradual economic recovery to underpin their pockets.

“Looking ahead, we see little respite for Nigerian consumers. While we believe that increased economic activity will marginally improve household income, cost pressures on household consumer baskets will dampen any growth,” said analysts at United Capital Limited in a recent to clients.

“A further electricity tariff hike is likely by Jun-2021 and despite the resistance to the PMS price hike, we believe a hike is inevitable in the mid to long term. Also, food prices continue to soar as FX challenges remain. Overall, in the short-term, the outlook looks grim for the Nigeria consumer; however, sometimes it is darkest before the dawn.”

Investors are asking themselves whether the rally in crude oil price that started this year is enough to erase the losses brought on by huge impairment on financial assets as rigs were abandoned at the zenith of the virus.

Seplat Corporation Development Company Plc, the largest listed upstream oil and gas firm posted a loss of N30.71 billion as at December 2020, from a profit of N85.01 billion the previous year.

The company incurred debt of N265.39 billion in December 2020, but the figure is lower than the N294.17 billion recorded in 2019.

In April 2020, oil prices turned negative for the first time on record as oil producers ran out of space to store the oversupply of crude left by the coronavirus crisis, triggering an historic market collapse which left oil traders reeling.

However, the gradual reopening of the economy and accelerated vaccine rollout-as more people got the jab at the arm- helped underpin the price of the commodity at the start of 2021.

 Early in March 2021, Brent, the oil against which Nigeria’s crude is priced, rose to a high of $70/barrel, which was the highest price in more than a year, but it had been dropping in price since then and had hovered around $60/barrel on most occasions.

For operators in the downstream oil and gas sector, total deregulation of the industry will help strengthen operating margins as they are operating on thin margins.

11 plc and Total Nigeria Plc saw combined net income reduce by 40.56 percent to N5.05 billion as at December 2020 from N8.50 billion the previous year.

The gradual reopening of the economy after a long hiatus due to the lockdown that saw slow construction activities was a boon for cement markers as workers returned to site.

Also, deleveraging strategies and cost control measures put in place by management helped add strength to margins.

The combined net income of the dominant players in the industry – Dangote Cement, Lafarge Africa, and BUA Cement- increased spiked by 38.76 percent to N323.86 billion as at December 2020 from N233.39 billion the previous year.

Analysts are optimistic that government CAPEX spending, particularly in the second half of the year, will accelerate demand for cement. They added that a sustained low yield environment would ease deficit financing pressures.

The 2021 budget submitted to the National assembly showed that the government plans to spend N3.60 trillion on capital projects, an increase of 45 percent from the revised capital expenditure for 2020 N2.49 trillion. The FGN, which will be funded mainly by the CBN and NSIA, also lends credence to our optimism.