Full year earnings may disappoint on FX loss fears

As the focus of stock investors gradually shifts to full year results, most companies may not impress as FX related financial losses/charges constitute a big snag to corporate earnings.

While falling commodity prices increase Nigerian companies’ debt servicing costs, they are also faced with FX related losses which results from change in exchange rate used when an invoice was entered at one FX rate and paid at another.

Most listed multinationals are currently faced with this challenge of closing the widening gap which reflects on their top-to-bottom line figures trickling at the Nigerian Stock Exchange (NSE).

As global macro shocks continue to expose the structural imbalance of Africa’s largest economy, analysts see strong dollar testing the nation’s resolve to finance its own growth.

John Holt plc, a multinational reported a loss after tax (LAT) of N254million in the financial year ended September 30, 2015.  John Holt, which has been an important participant in many areas of the Nigerian economy, turned in exchange loss of N528million in the review period.

Also, Honeywell Flour Mills plc in its unaudited interim financial results for the third-quarter ended December 2015 reported currency devaluation loss of N438million, though lower than N903million in the corresponding period of 2014.

Another multinational company, Seven Up Bottling Company plc is carrying an FX loss which burdened its net finance costs. The company’s unaudited statement of cash flow for the nine months ended December 2015 shows profit fell to N410.319million from record highs of N2.230billion in 2014 period.

Though, International Breweries plc reported 18 percent increase in Profit After Tax at N1.710billion for the nine months period to December 31, 2015, analysts still await management’s comment on the impact of FX on its bottom-line figures.

“We believe raw materials account for 80percent of International Breweries’ cogs and estimate that global sugar and barley prices declined by mid single digits year-on-year (y/y) during the October to December period . We did not expect any gross margin expansion to be significant given the unfavourable macroeconomic environment (and the naira devaluation). While International Breweries sources maize locally, all of its barley is imported” said Jumoke Okeowo led team of equity research analyst at FBNQuest.

PZ Cussons Nigeria plc released a disappointing Q2 unaudited financial statements for the period ended 28 November 2015 as profit for the period dropped to N779.452million from a corresponding year highs of N1.441billion.

The management of PZ Cussons UK, the parent company of PZ Cussons Nigeria plc had its interim (H1 2016) analyst presentation acknowledged challenges such as FX constraints and tough trade environment in Nigeria.

“Buying FX at the parallel market increased input costs and reduced the amount of oil that could be imported due to the scarcity of dollars at the interbank. PZ has agreements in place with all local suppliers of palm oil to serve as buffers although local oils require further processing to ensure the quality is up to standard”, said research analysts at FBNQuest.

“While the naira has appeared more stable with bulk of the dollar demand effectively shifted to the parallel market, these FX controls have also stifled the domestic economy on the other hand, as players across the diverse sectors of the economy are being forced to the more expensive parallel market to source FX. The recent ban of FX sales to BDC continues to widen the gap between the parallel and official markets,” according to Kayode Tinuoye led team of research analysts at United Capital plc.

While the performance of the stock market is strongly linked to the performance of the economy, analysts at Dun Loren Merrifield expect to see a divergence between the performance of equities and the oil market before getting more positive about the equity market.

Iheanyi Nwachukwu