Investors want listed firms to streamline businesses, develop local content

…NGX targets dollar asset listings to ease crisis

Worried by the huge losses incurred by listed firms due to foreign exchange (forex) crisis and rising inflation in Nigeria, especially in the first half of the year financials, investors have stressed the need for management of quoted companies to streamline their businesses by seeking viable local content opportunities and indigenous production of commodities.

According to them, this measure would help to mitigate and hedge against forex volatilities and other inflationary pressures that have been impacting negatively on their growth and profitability.

The investors noted that the reason some stocks have remained stagnated in the stock market was partly due to failure on the part of the companies’ board to initiate growth-induced policies that would stimulate capital appreciation and attract more investors into the company.

The stakeholders believed that local production would help reduce supply chain costs, boost revenue and improve the performance of these listed companies in the stock market.

Indeed, from the half-year 2023 losses declared by quoted companies, it was obvious that the nation’s harsh economic situation was fast-impacting sectors hitherto assumed to be immune from the vagaries of the challenges.

For instance, about seven firms listed on the exchange – Airtel, MTN, Nigeria Breweries, Guinness Nigeria, Nestle Nigeria, Cadbury Nigeria Plc and Dangote Cement –all incurred N623.6 billion losses due to naira depreciation.

In the brewery sub-sector, Guinness Nigeria incurred N49 billion in exchange rate losses in its 2023 half-year operations. The forex depreciation led the company to a loss of N18.1 billion with a loss per share of N8.29 kobo.

Also, within the same period, Nigeria Breweries Plc suffered an exchange rate loss of N70.6 billion.

Specifically, the company reported a net loss on foreign exchange of N70.6 billion taking the year-to-date exchange rate loss to N85.2 billion. The losses contributed to a massive N47 billion reduction in net assets.

Firms under the food products subsector also suffered the same fate within the same period as Nestle Nigeria Plc recorded FX loss of N123.7 billion. This impacted its profits as the firm posted a pre-tax loss of N86.5 billion. The losses contributed to wiping Q1 profits, taking its half-year profits to N61.6 billion, one of the worst performances in years.

Cadbury Nigeria Plc recorded a massive loss before tax of N17.9 billion in the second quarter of 2023, compared to the N800 million profit reported at the same time in 2022 due to N20.9 billion write-down the company took as a result of the impact of the unification of the naira on its loans.

In the building material sector, one of the cement-producing giants, Dangote Cement Plc also incurred losses. It recorded N103.8 billion in FX losses. Due to the development, the company’s pre-tax profits fell 14 per cent to N93 billion.

According to investors, if listed companies engage in local businesses and source their materials locally, it would develop smallholder farmers in the business chain and benefit poor subsistence ones and other rural traders in the long term.

Further, it would reduce, to the barest minimum, exchange rate volatility and depreciation, which hurt economic performance by contracting output growth and inflation.

Therefore, they suggested that listed firms should adopt 100 per cent local sourcing of raw materials, noting that over-dependence on foreign raw materials and forex exposure crisis have subjected firms to the vicissitudes of the Nigerian economy.

They argued that in the absence of local production capacity, importation of foreign-based raw materials would become inevitable.

President of New Dimension Shareholders Association of Nigeria, Patrick Ajudua, said there is a need for directors of quoted companies to embrace initiatives that would promote patronage of local raw materials and encourage local content.

“This is no doubt the possible way to mitigate foreign exchange losses which occur as a result of much dependence on imported production materials. This has caused many firms to incur high forex losses leading to a decline in profitability and a negative bottom line.

“If measures are not taken, it may further erode shareholder funds. The local sourcing of raw materials will serve as a hedge against forex losses, promote local content and help stabilise the naira,” he said.

President of the Independent Shareholders Association of Nigeria, Moses Igbrude, said the only lasting solution to the issue of forex crisis in Nigeria for quoted companies is by sourcing raw materials locally and also finding ways to export their products to earn forex.

He said the government needs to articulate policies that will help and encourage individuals and companies to export.

One of the major incentives, according to him, is by introducing tax rebates, and other grants that will boost exports.

“The cost of export should be made cheaper, easier and less cumbersome while infrastructure deficit and other bottlenecks that inhibit exportation in Nigeria should be eliminated,” he said.

He maintained that some boards of directors have continued to invest in failing businesses that would never yield any dividends.

“Most of these companies are having problems because of over-dependence on foreign exchange either for their raw materials or technology and because there is a shortage of foreign exchange, that is affecting them negatively.

“Since we are not sure when the resolution of that shortage will be, we are saying let them start looking inwards and several companies have started looking inwards they are now beginning to source their material locally and produce locally.”

Meanwhile, the Nigeria Exchange Limited (NGX) has disclosed plans to allow companies to list bonds denominated in dollars on the bourse, potentially expanding this later to stocks to ease their difficulty in accessing hard currency in Nigeria.

Nigerian Exchange Limited is targeting the initiative at companies operating from the country’s special economic free trade zones and those earning foreign currency, according to Chief Executive Officer Temi Popoola.

“Our primary objective is to enable these companies to issue bonds denominated in dollars and eventually offer equity in dollars as well,” he said in an interview. “It could potentially address the challenges posed by fluctuations in foreign currency.”

Oil companies in Africa’s biggest producer of crude consistently cited getting access to the dollars they need for raw materials as their biggest challenge.

Even an overhaul of the foreign-exchange market in June under the new administration of President Bola Tinubu, which led to a 40 per cent depreciation of the naira to attract inflows, is yet to ameliorate the shortage.

Recall that stockbrokers had stressed the need for investors to consider hedging their portfolio by purchasing dollar-denominated assets (foreign stocks, dollar mutual funds, Eurobonds and dollar-fixed deposits) to mitigate the impact of the currency devaluation.

According to the operators, with the low money market rates in the face of 23 per cent inflation, no investor wants to keep naira or naira assets, which is a signal of another currency crisis.

Head, Equity, Planet One, Paul Uzum, said with what is happening in the nation’s macro-economic space, there is a need for investors to diversify their investment globally and keep up to 25-30 per cent of their funds in dollar-earning assets.