The protracted deterioration in corporate performance due to macroeconomic shocks validates investors fleeing Nigeria equity market in search of better investment elsewhere.
Trading in equities on the Lagos stock exchange slumped 57 percent in June from a year earlier, figures from the bourse show. The benchmark Nigerian stock index is heading for an annual decline for the fifth time in the past six years.
There are concerns that the small and mid-sized companies do not have the resources or strength to ride out whatever is thrown at them, and that stronger balance sheets and higher profit margins have helped insulate the larger companies’ profits.
“To lure investors back to the market, there has to be the harmonisation of the foreign exchange rate and the currency should be devalued. There has to be an enabling environment for busied to thrive,” Johnson Chukuwu, managing director/CEO, Cowry Asset Management Limited, says.
The priority of every government is to improve economic environment,” Chukwu notes, as the new Companies and Allied Matters Act (CAMA) that has just been approved by the president and the deregulation of the downstream oil and gas sector could lead to economic recovery.
Wale Okunrinboye, investment analyst at Sigma Pension, is of the view that the equity market has recovered because the Nigerian Stock Exchange (NSE) ASI index has improved to -6.12 percent as at Friday, from -20 percent in March.
“The market dynamics favour local investors because low interest forces them to buy stock, but the foreign ones are not involved,” notes Okunrinboye.
The shock to economic growth as had a particularly pronounced impact on firms, as investors and analysts have blamed the precarious situation on lack of transformation policy on the part government.
For instance, the border closure by government last year stoked inflation, as manufacturers are unable to ship their products out of the country.
The refusal of the central bank to devalue the currency on time to shed the country from the shocks caused by the sudden fall in oil prices stoked a severe dollar scarcity, grounded business activities, and in its first recession in 25 years.
Banks are also grappling slow growth in earnings brought on by a slew of stringent policies by the central bank – such as a hike in minimum loans-to- deposit ratio, and the restricting non-bank locals from its Open Market Operations (OMO).
To exacerbate the already precarious position of firms is the wrought caused by coronavirus pandemic and the sudden drop in oil price that forced government to impose lockdown policy that disrupted the supply and demand side of the market.
As the earnings season approaches mid-way, Ecobank Transnational Incorporated recorded an 18.41 percent drop in net income to N48.53 billion from N59.49 billion the previous year.
Wema Bank, Union Bank and Sterling Bank fell of the cliff as they recorded a 6.58 percent, 7.22 percent, and 2.84 percent reduction in net income to N38.15 billion, N81.85 billion, and N70.23 billion, respectively.
The largest consumer goods firms that have released half-year results saw combined net income dip by 31.87 percent to N33.35 billion, from N48.96 billion.
The outbreak of the Covid-19 pandemic added a new layer of concern for operators in the industry, as lockdown in key revenue-generating and industrial states further deal a great blow on earning in the second quarter.
The disruption in global supply chains, naira adjustment, and FX market illiquidity throughout Q2-2020, added more concerns for companies with sizable import needs, according to analysts at United Capital in a recent note to client.
The hardest hit from the Covid-19 crisis and economic uncertainties are the oil and gas companies as lock down and travel ban cut consumption.
Brent crude oil fell from $70 a barrel in January to below $20 in April, as demand collapsed.
The international benchmark stabilised once lockdowns eased, but has been stuck trading within a narrow band of between $39 and $46 a barrel since June, well below pre-crisis levels. Brent was down 10 cents at $45.33 a barrel on Friday.
Seplat Petroleum, the largest upstream exploration and production in Africa’s largest economy, reported its worst quarterly results on record in recent years, taking huge write-downs on asset after it lowered its expectation for long-term prices.
The downstream oil and gas firms -Total Nigeria, II Plc, Conoil Nigeria, MRS Nigeria, Ardova Nigeria – saw combined net income dipped by 69.33 percent to N3.0 billion as at June 2020.
A change of template in Nigerian National Petroleum Corporation (NNPC), where the corporation was the sole importer of petroleum product, and foreign exchange scarcity and Covid-19 crisis are responsible for deteriorating margins.
The dominant players in the industrial goods sector – Dangote Cement, Lafarge Africa, BUA Cement – who are beset by slow construction activities due to lockdown imposed by government to curb the spread of the disease, saw combined revenue increase by 3.43 percent to N698.65 billion as at June, the slowest growth in 5 years.
Nigeria’s economic outlook remains bleak as the International Monetary Fund (IMF) has announced that the economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020.
