Listed manufacturers are not using investors’ fixed assets to generate enough sales, and the unprecedented global macroeconomic uncertainness by the coronavirus pandemics and sharp drop in oil price could compound margin woes.
The combined average fixed asset turnover (FAT) ratio of 17 largest manufacturers fell to 1.80 times in December 2019 as against 1.86 times recorded in December 2018.
That means on average they generate 1.80 times more sales than the net book value of their assets.
Analysts say the FAT ratio will continue to deteriorate on the back of weak demand, adding that in the time of economic downturn companies are not encouraged to revamp up capacity.
The demand isn’t large enough because they are operating at low capacity. Supply is well ahead of demand. If there is large enough product, companies will ramp up capacity and open more lines,” said Wale Okunringboye, analyst at Sigma Pensions Limited.
“For the cement industry, people are not going to be building house. The demand is not going to come back this year as we are grappling with an economic meltdown brought on by the coronavirus pandemic,” said Okunringboye.
The FAT ratio for the cement industry is flat at 0.66 times, as reduced capital expenditure (CAPEX) spending by the government given weaker earnings (particularly oil revenue) continues to sting the construction industry.
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The largest consumer goods firms saw FAT ratio fall to 1.25 times in December 2019 from 1.43 times as at December 2018, as the industry remain the hardest hit from an economic downturn.
Similarly, the pharmaceutical industry’s average fell to 3.86 times in the period under review as against 4.63 times as at December 2018.
But drug makers may revamp up capacity as government through the central bank has approved a special stimulus package pave the way for them to import and manufacture drugs in the face of the coronavirus pandemic.
Nigeria is in uncharted territory as the lockdown imposed by government so as to contain the spread of the virus has disrupted business activities, raising concerns about the impact on the already weak consumer purchasing power.
The recent string of economic data releases reflecting life under lockdown has been even grimmer than expected, spurring IMF a few weeks back to forecast a negative Gross Domestic Product (GDP) of 3.4 percent for the country.
The Minister for Finance, Zanaib Ahmed, has already reduced the government’s projection of 2.10 million barrels a day of production to 1.70 million, and it working to Nigeria’s record $35bn budget for 2020.
The Manufacturing Purchasing Managers Index for the fell to 51.1 in March from 58.3 in February, while the full impact of the pandemic is expected to be felt more this month.
Capitulating to pressure, the central bank devalued the official Naira rate to N360 to the dollar from N305.
Hitherto the outbreak of the virus from Wuhang city of China, manufactures were struggling with a menacing gridlock at the premier port in Apapa, weak purchasing consumer power unstable power supply, border closure by government, and hefty levies.
These bottlenecks have hindered companies from delivering higher return to shareholders in form of bumper dividend and share appreciation, while valuation remains unattractive as investors continue to dump shares on the back of poor earnings results and lack of transformation agenda on the part of government.
Manufacturers are inefficient and they are unable to turn each Niara invested in sales into higher profit as industry average combined net margin fell to 7.071 percent in December 2018 from 10.30 percent as at December 2018, according to data gathered by Busienssday.
Their combined net income reduced by 17.85 percent to N385.55 billion in the period under review from N469.33 billion the previous year; while industry operating profit dipped by 12.97 percent to N468.44 as at December 2019.
The Nigerian Stock Exchange (NSE) All Share Index (ASI) HAS shed -15.14 percent since the start of the year.
But Analysts at Chapel Hill Denham Limited in a recent report said the shutdown is boon to Nestle Nigeria Plc and Flour Mills of Nigeria plc, as consumers are spending more on food-which is largely driven by stockpiling.
“Both companies have a diverse portfolio of brands that are considered as essential items by consumers,”said Abiola Gbemisola, analyst at Chapel Hill Denham Limited
The report also stated that Nestle Nigeria’s premium brand such as Maggi cube and cereals is ubiquitous.
Analysts at Chapel Hill Denham said that on the flip side, the restriction in human congregation in most parts of the country will affect the revenue and earnings of brewery companies such as Nigerian Breweries Plc (NB), Guinness Nigerian Plc (Guinness) and International Breweries Plc (Intbrew).
“This is because people can no longer go to bars or hotels as they used before the restrictions, and an extension of the lockdown could bring more pains to brewers,” said the analysts.
