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Energy costs, cheap cables crimp Cutix growth prospects

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The Nigeria cable industry is promising, attracting as much as $20 billion investment through standardisation of products, but the menace of unstable public power supply and the influx of cheap cable wire have hampered cable giant Cutix plc from tapping into the country’s robust economy.

For the period ended third quarter January 2015, Cutix’s profit after tax reduced by 34.45 percent to N79.09 million from N120.66 million the same period of the corresponding year (third quarter) 2014, while sales increased slightly by 2.34 percent to N1.72 billion.

Nigeria cable makers have been struggling with high cost of production they attribute to unstable power supply, which spikes overhead and input costs.

A lot of firms operating in the industry have to rely on diesel oil, which is a more expensive source of energy to power plant for the purpose of production.

They spent money in the running and acquisition of generating sets, money that would have been plunge back into the business for future expansion if they were stable power supply from the national grid. The aforementioned inhibiting factors, which contributed to denting Cutix bottomline, also spiked input cost as cost of sales ratio was as high as 72.09 percent.

It means for every N1 generated in sales, the company spent N0.72 on input costs.

The spiralling costs also left the company with low profit margins of 4.59 percent in 2015, which is lower than 7.50 recorded last year, a sign of operational inefficiency.

Also receiving a one-two punch is gross profit that reduced by 2.19 percent to N472.70 million in 2015, from N483.22 million in the same period of the corresponding year 2014, which means the company is not producing at lower costs.

Another challenge facing Cutix is the influx of cheap cable materials from Asia. This situation leads to the cannibalisation of local cable makers sales.

This is evident as Cutix’s single digit growth in sales, which is lower than the 8.2 percent January inflation rate.

There are opportunities in the Nigerian economy as the cable and wire industry has attracted as much as $20 billion worth of investment, according to the Standards Organisation of Nigeria (SON). This copious investment is expected to help diversify the country’s economy.

Furthermore, rapid urbanisation, rising population and burgeoning middle-class that crave for accommodation, which is driving the demand for housing and construction, will catapult cable makers’ growth, analysts say.

Further analysis of Cutix balance sheet shows total assets increased by 25.70 percent to N1.81 billion compared with N1.44 billion the preceding year.

Current ratio, which measures the ability of a firm to meeting its short-term obligation as of when due, stands at 1.14 times, meaning the current assets of Cutix cover its short-term obligations by 114 percent (though lower than the 200% industry average.

Return on equity (ROE) reduced to 11.05 percent in 2015 compared with N17.79 percent last year, while return on assets (ROA) fell to 4.35 percent in 2015, as against 8.33 percent the preceding year as rising costs keeps pressuring profit.

Cutix share price closed at N1.50 on the floor of the Nigeria exchange, while market capitalisation was N1.32 billion.

BALA AUGIE