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Weak Macro Conditions to Put Pressure on Corporate Profit in 2023

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A weakening macroeconomic environment in Nigeria increases uncertainties for companies operating in the country and is expected to exert pressure on corporate profit and valuations in 2023, Cordros Securities says.

Analysts at the investment firm in a note to client believes that macroconditions are unlikely to improve next year as demand will come under pressure due to inflation, political bedlam in the aftermath of the election, and impact of the central banks aggressive monetary policy on profit.

“As stated in our domestic outlook, the 2023 macroeconomic narrative will remain weak, dampened by elevated prices, high unemployment, and FX liquidity constraints, amid a more subdued prospect for global economic recovery given policy tightening actions from major central banks and the lingering Russia/Ukraine conflict,” said analysts at Cordros Securities.

So far this year, there has been pressure on profit margins on the back of rising input costs and pressured consumer wallets exacerbated by Russia invasion of Ukraine that balloons the price of grains which are imported raw material component for the production of goods.

It is important to note that foreign exchange scarcity that has become a protracted problems is hurting business, and hardest hit from this volatility are manufacturers and operators in the downstream oil and gas sectors.

While a high interest rate environment is a boon for banks as it underpins their net interest income, it is most likely going to impact funding cost.

“We believe the anticipated elevated interest rate in the environment will be sufficient to support revenue growth from loans and advances to customers in 2023FY,” said analysts at Cordros Securities.

“On the cost side, we envisage higher costs to be incurred in 2023FY, as the recently increased the minimum interest rates payable on local currency savings deposits from 10% to 30% of the Monetary Policy Rate (MPR) will increase the expenses incurred on deposits from customers while higher interest rate in the environment will lead to a higher cost of borrowing for the banks,” said the analysts.

Higher inflation that has risen to 17 years high of 21.09 percent in the month of October 2022 will put pressure on the distribution cost of downstream refinancing and marketing companies.

Amid the monumental challenges, the investment firm’s top pick is TotalEnergies, as the marketer sustains profitability growth this year.

It appears operators in the industrial goods sector are most susceptible to cost pressures as Dangote Cement and BUA Cement saw net income dip.

Although the domestic bourse sustained the growth momentum in 2022, the All-Share index gains of 14.47 percent as of December 12, 22 is lower than the index gains of 21.37 percent as of the half-year.

The listings of BUA Cement, share buyback by Dangote Cement, and central banks granting of payment service banks (PSB) to Airtel and MTN elicited market reactions in 2022.

Of course, the loosening stance of the central bank during the coronavirus pandemic which encouraged firms to tap the debt market to raise funds for the purposes of refinancing existing debt and funding expansion plans is also responsible for rally at the start of the year.

However, there were sell-0ffs in the third quarter as investors lost appetite for stocks amid attractiveness for yield in the fixed income market.

The Nigeria 10-year government bond has a 14.595% yield, according to World Government Bonds.

That compares with a yield of 4.1766 percent as of October 28, 2020.

“The All-share index recorded a 3.2% loss on 6 October — the most   significant single-day loss since the pandemic-induced rout on 12 March 2020, as investors reduced exposure to AIRTELAFRI,” said analysts at Cordros Securities.

Analysts at the research firm said that deliberate actions by the monetary authorities to hike interest rates significantly stoked the bearish sentiments in the market amid the resulting liquidity shortfall.

Local investors have maintained their dominance of the equity market as sustained foreign exchange liquidity and lack of transformation policy means foreign investors remain on the sidelines.

Notably, foreign investors’ share of the total transactions on the NGX fell to a new low of 7.5% in May 2022 — the lowest level since the NGX began compiling the current data series.

NGX data shows that total foreign inflows for 2022FY, as of October, settled at N178.21 billion, against total outflows of N171.38 billion, translating to a net inflow of N6.83 billion in the period, according to data from Cordros Securities.

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