Manufacturers lose 50% half-year profit to operating, forex costs
• Epileptic power supply, exchange rate raise cost of production by 30%
• Stakeholders urge FG to reschedule existing loans, grant tax holiday to firms
• Local sourcing of raw materials solution to forex scarcity, says MAN
The harsh operating environment aggravated by COVID-19 disruptions and foreign exchange liquidity crisis has caused the fortunes of local manufacturing firms to plunge by 50 per cent in the first half (H1) of 2021.
The manufacturers, all listed on the Nigerian Exchange Limited (NGX), were severely impacted by low capacity utilisation, on the account of huge import levies, exchange rate volatility, haulage costs of imported raw materials and heavy dependence on alternative source of power that has increased production cost by 30 per cent.
Worried by the widening chaos in the sector’s key performance indicator, operators have urged the Federal Government to reschedule existing loan repayment obligations and grant tax holiday to companies to avoid erosion of equity investors’ dividend payout in 2021 full year result.
With the prevailing forex scarcity and inflationary pressures on households and logistics, as well as regulatory bottlenecks on imported raw materials, the margins of these firms were affected directly, resulting in a fall in demand, sales volume, revenue and underlying profits of the players, especially in the half year operations.
The worst hit was the share price of these companies on the Exchange. Price movement of some stocks under the sector had remained stagnant in the past few years, following negative sentiments that have enveloped demand for the stocks.
A look at the performance of companies under the sector showed that Nestle, the biggest in the consumer goods sector by market capitalisation, grew its revenue by 22 per cent to N171.44 billion from N141.32 billion achieved in the corresponding period in 2020.
However, the company’s finance cost soared by 262.15 per cent to N3.39 billion in H1, 2021 from N937.36 million recorded during the same period in 2020. Its marketing and distribution expenses increased by over N3 billion to N23.49 billion in H1, 2021 while administrative expenses remained relatively unchanged at N6.61 billion.
Due to rise in marketing and distribution expenses, coupled with a surge in finance cost, the company’s profit before income tax dropped to N33.38 billion from N33.86 billion in H1, 2020.
The firm also paid income tax of N11.65 billion in H1, 2021, thus the profit after tax settled at N21.73 billion, slightly down from N21.83 billion reported in H1, 2020.
For Cadbury Nig. Plc, its revenue for the period showed 16 per cent increase in revenue from N15.9 billion recorded in the previous quarter to N18.5 billion. However, the company’s loss before tax stood at N516 million, while net assets declined by 2.8 per cent from N13.6 billion to N13.2 billion.
Also, Meyer Plc, a renowned manufacturer and marketer of high quality paint products in Nigeria posted a half-year loss of N9.33 million within the period. Although the firm’s revenue grew by 23 per cent to N485 million from N394 million, its net assets declined by 0.6 per cent from N1.77 billion to N1.76 billion.
In addition, NASCON Allied Industries Plc, manufacturer of stock cubes, seasoning, tomato paste and vegetable oil apart from refining salt achieved a one-fifth surge in its gross sales during the period, bringing its revenue up by N3.041 billion to N17.570 billion.
The company, however, faced huge pressure from the cost of running the business that it had a depressed profit of six per cent to N1.451 billion during the period.
International Breweries Plc incurred a loss of over N11 billion in the second quarter, three times the N3.7 billion loss it recorded in the corresponding quarter in 2020.
Foreign exchange loss of N7.8 billion recorded by the company accounted for much of the loss it incurred in the second quarter. The half-year loss figure is already above the full year loss of N12 billion in 2020.
The company reduced its debt profile last year and with that, it has cut down finance expenses considerably. That registered a positive impact on the income statement in the first quarter when there was a drop of as much as 54 percent in the loss figure.
However, a build-up of foreign exchange losses in the second quarter has sustained operating pressures giving rise to the company’s cost-income imbalance.
One adverse development that countered all the positive changes made by the company during the second quarter is the occurrence of another expense of over N11 billion, which is driven by forex loss.
Pharma-Deko Plc, a pharmaceutical company that manufactures and markets a range of pharmaceutical and consumer products grew its revenue by 125 per cent within the same period to N312 million from N139 million in the previous quarter.
However, the firm posted a loss before tax of N8 million while net assets also declined by eight per cent from N986 million to N978 million.
GlaxoSmithKline (GSK) recorded a significant decline in earnings during the period, as its profit after tax stood at N59.91 million, representing an 80.3 per cent decline when compared to N304 million achieved in the corresponding period in 2020.
The pharmaceutical firm also spent more on administration in the first half of the year, as total administrative expenses increased by 13.3 per cent to N1.01 billion from N887.9 million recorded during the same period last year.
As the company made fewer sales than last year, its cost of sales in the review period also dropped by 7.5 per cent to N7.09 billion from N7.7 billion in the same period in 2020.
A four-year assessment of the share price of these companies from 2017 indicated that Nestle stock price, which stood at N1,550.99 as at December 2017 declined to N1,400 as at close of transactions on Thursday, November 10, while Cadbury share price depreciated from N15.67 to N9.36.
NASCON share price declined from N18.50 during the period to N14.15. GSK, which rose to N21.61 in 2017, dropped to N6.40 last week Thursday. PharmDeko also depreciated from N2.36 recorded in 2017 to N2.11 last week.
The manufacturing sector has been plagued with various challenges ranging from weak economy, fallen demand for products due to poor purchasing power and parlous infrastructure.
Others are inadequate electricity supply and the high cost of alternative energy sources, port congestion and logistics bottlenecks, high inflation rate, forex scarcity, and insecurity, which is negatively affecting haulage of goods.
Over the past five years, the manufacturing sector has averaged real Gross Domestic Product (GDP) growth of -0.9 per cent. However, the sector has contracted thrice, in contrast to prior five years where the sector averaged a growth of 13.3 per cent, reflecting the struggles of the general business operating environment and unease of conducting economic activities profitably.
Experts argued that the sector could contribute to the economy’s GDP by up to 23 per cent if Nigerian trade witnessed more exports than imports, which would ultimately boost local manufacturing and expand the revenue generated from the ports.
The recent GDP report released by the National Bureau of Statistics (NBS) revealed that the real GDP of the manufacturing sector contracted by -2.75 per cent in 2020, signaling the end of a two-year run of real growth in the sector.
The contraction in the real GDP of the manufacturing sector leaves it in a vulnerable position. According to NBS computation, the sector grew by 0.77 per cent in 2019 and 2.09 per cent in 2018.
However, the sector grew by 3.4 per cent in Q1, 2021 from -1.51 per cent in Q4, 2020 and 0.43 per cent in Q1, 2020, indicating the first expansion in the past three quarters.
The Guardian gathered that manufacturers operated on increased production cost during the period, as Forex challenges, epileptic power supply pushed the sector’s cost by 30 per cent, thereby depressing further their bottom-line.
For instance, the total costs of listed firms across various categories in the sector rose by 30 per cent to N725 billion in the first half of the year from N557 billion in the same period in 2020, representing 51 per cent of their combined revenue of N1.41 trillion.
Specifically, cement producers (Dangote Cement, Lafarge, and BUA) incurred a total production cost of N439.2 billion. This is 45.7 per cent of their total income of N959.8 billion.
Within the period, Dangote reported income of N691 billion, up from N476 billion recorded in the comparable period in 2020. However, the company posted a 36.4 per cent increase in cost of sales to N276.1 billion from N202.4 billion recorded in H1, 2020.
Also, Lafarge Africa’s revenue also rose by 20.30 per cent to N145.02 billion from N120.54 billion in H1, 2020, but recorded N96.9 billion in its cost of sales.
Similarly, BUA Cement revenue increased by 22.7 per cent from N101.26 billion recorded in H1, 2020 to N124.28 billion in the comparable period of 2021. The company also recorded N66 billion production cost in H1, 2021 from N55.3 billion posted in H1, 2020.
In the consumer goods sub-sector, NASCON, Unilever, Cadbury, Nestle, and Nigerian Breweries incurred N275.7 billion production costs, accounting for 63.1 per cent of their total revenue of N436.5 billion.
In the same vein, the pharmaceutical sub-sector suffered the same fate, as Fidson Healthcare and May & Baker incurred 54.6 per cent cost of sales to revenue. Specifically, the drug-manufacturing firms incurred N10 billion-production cost out of 18.4 billion revenue from sales.
Reacting to the performance of the sector, the Head of Equity Trading, Planet Capital, Paul Uzum, urged the government to address the plight of manufacturers, especially in the areas of forex instability and boost their share price on the exchange.
He noted that manufacturers in the industrial goods sub-sector like Dangote Cement, Bua Cement and Lafarge have shown significant improvement during the period.
However, he pointed out that it has been rough for many firms in the consumer goods sector as most of them are currently struggling to replicate last year’s performance.
“Companies in the brewery sub-sector (NB, Guinness and International Breweries) have been doing so poorly, even in their Q2, only those companies producing essential goods have been able to pull through the storm.”
According to him, the manufacturing sector has been wobbling under weak economy, falling demand due to rising poverty, high inflation rate inducing rising production cost, which many firms find hard to pass on to consumers, forex scarcity to buy essential inputs and insecurity, which is negatively affecting haulage of goods.
He added that these constraining factors have contributed to poor performance within the period with a multiplier effect on the share prices.
An independent investor, Amaechi Egbo, said for the sector to record some reasonable level of improvement, especially in the current financial year, there is need for government to create a department with the responsibility of paying courtesy visits to the various manufacturing industries in Nigeria in order to understand their plight better.
In addition, he urged the government to assist manufacturers by establishing an institution that would serve as intermediaries for manufacturers in accessing forex.
“About 85 per cent of ingredients used in manufacturing are imported, while only 15 per cent is sourced locally. Government needs to assist these listed firms by having companies that would serve as intermediaries. This sector should drive the nation’s economy,” he said.
Managing Director of Academy Press Plc, Olugbenga Ladipo, listed power as a major factor militating against the progress of the sector.
He said: “There are too many ills in the environment. Power is key in the manufacturing industry as it is very expensive. No matter how much you try, when the cost of your energy is taking too much of your resources, the output will be low and your resources will be depleted.
“Also, we have a purchasing power issue with inflation, everybody will have to do with less, and so we have a lot of idle capacity because the market is not vibrant enough. We have a population but the population is so poor. People are making do with less.”
THE Manufacturers Association of Nigeria (MAN) has said that local sourcing of raw materials remains one of the solutions to foreign exchange unavailability and optimization of hard earned foreign exchange.
Speaking at the 54th Annual General Meeting (AGM) of the Ikeja branch of MAN recently in Lagos, the chairman, Otunba Francis Meshioye, noted that some of the companies have already taken the lead in the local sourcing of their raw materials, which automatically increases the local content value of their products and hence put them on edge in the market.
Speaking further at the AGM with the theme ‘Repositioning Nigeria manufacturing sector in the emerging continent for sustainable growth and profitability,’ Meshioye stressed that sourcing raw materials locally will drive up “our competitive and comparative advantages, open up more industrial sectors, increase our ingenuity and creativity via research and development.
“It increases our patency rights and thus enhances our knowledge economy. It creates more employment and of course the ripple effects of local raw material sourcing will certainly improve socio economic development in the country.”