Manufacturing firms’ profitability down by 351% in H1 amid soaring OPEX
• Investors urge govt to grant moratorium to sector
The harsh operating environment has triggered a downturn in the performance of the local manufacturing industry as companies under the sector recorded an average of 351 per cent decline in profitability in the first half (H1) of the year due to high operating expenses (OPEX).
Worried by the development, stock market investors have urged the Federal Government to grant tax holidays to the companies to avoid further erosion of investors’ equity.
With the prevailing foreign exchange shortages and inflationary pressures on households and logistics as well as regulatory bottlenecks, the margins of the firms were affected directly, resulting in a fall in demand, sales volume, revenue and profitability.
Also, the development is currently impacting negatively on the share value of the listed firms under the manufacturing sector as most of them are currently under-valued following negative sentiments that have enveloped trading.
A look at the half-year reports shows that with about N20.77 billion foreign exchange losses, Cadbury Nigeria Plc declared N14.52 billion loss before tax as against N3.35 billion profit before tax reported in H1 of last year.
The fast-moving consumer goods (FMCG) company listed on the Nigerian Exchange Limited (NGX) also declared N14.54 billion loss in H1 2023 from N2.34 billion profit after tax reported in H1 2022, representing a 721 per cent decline.
The company’s decline in profits could be attributable to the impairment it took due to the impact of the unification of the naira on its loans.
One of the largest food and beverage companies in Africa, Nestlé Nigeria PLC, reported revenue of N261.8 billion in the first half of 2023, representing a 17.7 per cent increase in loss position compared to its performance in the same period of 2022.
The company posted a loss after tax of N49.9 billion, a 280 per cent decline over N27.7 billion in the same period in 2022.
Nigerian Breweries Plc reported N85.26 billion net loss on foreign exchange transactions in H1 2023 from N7.28 billion in H1 2022.
The multinational breweries company also declared a loss of N47.6 billion in H1 2023, representing 348 per cent when compared to N18.74 billion achieved in H1 2022.
Also, FTN Cocoa Processors Plc, a company that produces cocoa products, has experienced a decrease in revenue for the first time in a decade.
In the second quarter of 2023, the company posted a loss after tax of N431.18 million against N192. 4 million in the corresponding period in 2022 representing 55 per cent drop.
According to the company’s financial statement, the company did not generate any revenue from local sales or exports in the second quarter of 2023.
It noted that the lack of working capital hindered production, resulting in a substantial burden of fixed costs that affected the gross margin.
Further breakdown of the financial statements showed that losses arose from huge finance costs (borrowing costs) incurred by these companies. For instance, Nestle reported N129.91 billion in finance costs in June 2023 from N2.44 billion while Nigerian Breweries posted N96.22 billion in finance costs from N10.14 billion in the corresponding period in 2022.
Cadbury incurred N20.61 billion compared to N497.05 million in 2022.
An independent investor, Amaechi Egbo, said listed firms under the sector have been severely impacted by low capacity utilisation due to poor purchasing power as most households were affected by the February cash scarcity.
Additionally, he pointed out that huge import levies, exchange rate volatility, haulage cost of imported materials and heavy dependence on alternative sources of power has increased the cost of production in the sector by almost 30 per cent.
Egbo said failure by the federal government to adopt a holistic strategy that would engender rapid development in the manufacturing sector, the trend would ultimately erode shareholders’ 2023 full-year dividend as the operating environment is currently tense and full of uncertainty.
President of Independent Shareholders Association of Nigeria, Moses Igbrude said that manufacturing firms have witnessed an unexpectedly high operating cost with the attendant reduction in profitability as operating costs are expenses associated with the maintenance and administration of a business on a day-to-day basis.
He noted that due to headwinds such as weak demand on the back of household wallets, most consumer goods companies in Nigeria have continued to find it difficult to weather the storm.
According to him, there is a gloomy outlook for the business sector in Nigeria following a significant reduction in the disposable income of consumers unless the government puts out a positive policy to mitigate the excessive increase and double taxation suffered by manufacturers and give the industry a moratorium to adjust to new policies.
Recall that following the redesign of the national currency and the withdrawal of the old currency notes in February 2023, there was also a scarcity of cash and fuel running into months in the first quarter.
The cash crisis forced many small businesses, which depend on cash transactions, to shut down while citizens were faced with difficulty accessing cash for their daily expenses. The development slowed down economic activities within the period with a huge negative impact on businesses.
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