As the earnings season is gradually coming to an end, a snapshot of third-quarter results shows that only three sectors are the major drivers of earnings of the most liquid companies on the Nigerian bourse.
The Nigerian Stock Exchange (NSE) 30, a list of the most capitalised firms, saw combined net income increase by 13.34 percent to N1.06 trillion in September 2019 from N939.94 billion as at September 2018.
The growth was largely underpinned by a 12.14 percent, 18.24 percent and 40.722 percent uptick in the cumulative bottom lines (profit) of banks, cement makers, and the oil and gas sectors to N731.18 billion, N174.13 billion, and N75.85 billion, respectively, according to data compiled by BusinessDay.
“High unemployment and low consumer demand are hurting many businesses. The banks have benefitted from the favourable yield environment but the new central bank rules on Loans to Deposits (LDR) could result in deteriorating asset quality,” said Johnson Chukwu, managing director and CEO of Cowry Asset Management Ltd.
Nigerian corporate earnings might have recorded an even stronger growth in the third quarter but for one sector playing the spoiler.
Deteriorating consumer purchasing power, hike in petrol price, and decrepit infrastructure that has made it practically impossible for companies to transport their goods to the factory warehouse are responsible for a 21.54 percent drop in the cumulative net income of fast moving consumer goods (FMCG) firms.
International Breweries and PZ Cussons are the only firms to record a loss among the NSE 30, and analysts see a bleak future for the sub-sector as the Federal Government plans to increase taxes on carbonated drinks, and hike Value Added Tax (VAT) to 7.5 percent from 5 percent.
Profit margins of consumer goods are thinning as cost spikes and revenue grows at a slow pace. Cumulative net margins fell to 5.79 percent in September 2019 from 10.54 percent the previous year.
“Our overall outlook for the consumer goods sector in Q4-19 is not overly positive due to myriads of macro bottlenecks that continue to weigh on operating performance,” said Yinka Ademuwagun, equity analyst with United Capital Ltd.
Analysts are of the view that the increasingly deteriorating margins of Nigerian corporates could result in an economic downturn if the fundamentals fail to improve in the near term.
Between 2009 and 2014, a total of 322 organised private sector companies closed shop, citing the harsh business environment, according to a World Bank Enterprise Survey.
The report also said that out of 5,833 firms sampled in the country within the period, at least 1,136 were reported to be at the risk of closing down.
The economy has been growing sluggishly since the country exited its first recession in 25 years, and GDP growth slowed to 1.90 percent in the second quarter (Q2) of 2019, from 2.10 percent in the first quarter (Q1), and 2.38 percent in the fourth quarter (Q4) of 2018.
The manufacturing sector, which the consumer goods industry forms a part, contracted by 0.13 percent, and another contraction means one step away from a recession.
Analysts expect investor interest in Nigerian equities to remain subdued until the government and economic policymakers begin to implement assertive and bold policies to drive accelerated growth.
They add that the present border closure is hurting companies who are unable to ship products in and out of the country.
“As long as the macroeconomic outlook is not impressive, investors will not invest their money no matter how cheap the stocks are,” said Kayode Tinuoye, head of portfolio management at United Capital Ltd.
“Government is yet to carry out reforms that will help jump-start the market, and hike in Value Added Tax (VAT) has further damped consumer spending,” said Tinuoye.
Nigeria’s stock market gained 1.84 percent to 26,339.11 points on Thursday with year-to-date return now at -14.60 percent.
Following close of Thursday’s trading session, the Nigerian equities market traded at a P/E ratio of 7.60x, according to data gathered from Bloomberg.
“Stocks should improve on the back of lower yield in the fixed income market as investors crave for stocks that have good history of dividend,” said Ayodeji Ebo, managing director/CEO of Afrinvest Securities Ltd.
BALA AUGIE
