Nigerian firms defy economic woes, grow liquidity by 48%

Despite a challenging economic environment, Nigerian businesses have demonstrated resilience, significantly increasing their liquidity levels.

BusinessDay’s analysis of the latest financial statements of 14 companies shows that their combined cash and cash equivalent increased by 48.1 percent to N12.9 trillion in the first half of 2024 from N8.3 trillion in the same period last year.

The firms surveyed include Ecobank Transnational Incorporated (ETI), FBN Holdings, FCMB Group, Seplat Energy, United Capital Plc, Dangote Cement Plc, Dangote Sugar Refinery, Nigerian Breweries Plc, Presco Plc, Okomu Oil Plc, Julius Berger, Transactional Corporation Plc, Transcorp Hotels Plc and BUA Foods Plc.

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Analysts say an increase in these companies’ cash and cash equivalent marks different strategies that have worked for various sectors to improve their liquidity. Of course, a strong balance sheet provides them the firepower to ward off any macroeconomic headwinds.

Generally, when companies sit on excess cash, they have more liquid assets on hand compared to the previous period. Since cash is the lifeblood of any business, firms need it to settle their debts, pay dividends, and reinvest for future expansion.

“One of the things that might have driven the cash liquidity of some firms in the financial institution sector is the introduction of new financial products to attract their customers and encourage them to maintain deposits amid economic woes,” Uchenna Uzo, professor of marketing at Lagos Business School said.

He added that they have also been creating products for businesses to enable them to have access to loan facilities to weather the storm of the current economy.

“The manufacturing sectors have made big bets in the first two quarters because they expect that inflation will drop in the next half of the year. Some investments were made upfront that are yielding results and made it possible for them to have excess cash liquidity,” Uzo said.

Adeola Adenikinju, president of the Nigerian Economic Society (NES), said the baking sector has been doing well regardless of economic challenges, to be able to have enough cash liquidity in H1 2024.

“The banking sector is always peculiar whether the country is good or bad, naturally they will attract funding. They are largely insulated from the difficult economic environment in Nigeria,” he said.

He added that most investors who want to make money because of the devaluation of naira will look for stocks where they can get money, and the banking sector has always been available for that.

“For the manufacturing sector, some of them have been doing well, especially cement makers. They are monopolies, and they don’t have competitors, neither do they import. They took advantage of this to make money, increasing their cash liquidity,” Adenikiju said.

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A detailed analysis of the companies’ cash and cash equivalents for the first six months of 2024 shows that ETI’s cash holdings surged by 143.6 percent, reaching N5.58 billion, up from N2.29 billion.

FBN Holdings saw an increase to N2.8 billion from N1.5 billion, while FCMB Group’s figures rose to N717 billion from N384 billion.

Seplat Energy’s cash holdings grew to N546 billion from N286 billion, and United Capital’s increased to N488 billion from N214 billion. Dangote Cement reported an increase to N371 billion from N303 million.

Other notable increases include Dangote Sugar, which rose to N183 billion from N157 billion; Julius Berger, which saw a rise to N181 billion from N66 billion; Nigerian Breweries, which increased to N43 billion from N34 billion; and Presco, which grew to N18 billion from N17 billion. Okomu’s cash and cash equivalents rose to N18 billion from N8 billion, Transcorp Hotels increased to N12 billion from N5 billion, BUA Foods Plc grew to N81 billion from N65 billion, and Transactional Corporation rose to N40 billion from N10 billion.

Mustapha Umaru, an industry and equity research analyst at CSL Stockbrokers Limited said that the rising cash reserves highlight their strong financial position.

“Even amidst economic difficulties, they don’t need to dip into their cash cushion to maintain operations. This demonstrates their healthy liquidity and ability to weather future economic pressures,” Umaru said.

He added that despite current profitability, these companies may choose to either distribute profits to shareholders through dividends or reinvest them back into their operations.

However, It is unclear whether investors will demand a bumper reward in the form of dividend payment as firms may be saving money to pay higher finance costs due to rising borrowing costs as the Central Bank clings to its aggressive monetary tightening in the face of a red-hot inflation.

Of course, capital spending has been tepid, which indicates poor business confidence as weak demand, rising inflation, foreign exchange crisis, and inherent uncertainties that surround the economy discourages firms from investing.

The bold reforms by the current administration such as the removal of subsidy on fuel and the unification of the foreign exchange market stoked unprecedented deprecation of the Naira (currency) and undermined economic growth.

Since June last year when the new policies were implemented, the naira has depreciated against the dollar by 244 percent to N1,594.27/$ as of August 28 from N463.38/$. At the parallel market, the naira is being traded at around N1,615/$ as against 762/$ before the FX reform.

This year, the CBN in July raised its monetary policy rate for the fourth straight time by 800 basis points to 26.75 percent in a bid to fight inflation.

Most analysts had expected the CBN’s MPC to further hike the MPR following the rising inflationary pressure and the volatility in the exchange rate.

However, last month witnessed a significant shift in inflation dynamics, with headline inflation dropping to 33.40 percent from 34.19 percent, according to the National Bureau of Statistics.

“It’s crucial to recognise that while the rate has moderated, inflation remains at an elevated level. The core Consumer Price Index (CPI), which excludes volatile food and energy prices, edged up slightly to 27.47 percent in July,” analysts at Comercio Partners disclosed in a notice.

They disclosed that this rise in core inflation indicates that underlying inflationary pressures continue to persist, pointing to deep-rooted issues within the economy that aren’t easily resolved by short-term changes in headline inflation.

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Analysis by BusinessDay revealed that out of the 14 surveyed firms, twelve firms reported a combined after-tax profit of N1.2 trillion in H1 from N703 billion in the corresponding period of last year.

While Dangote Sugar Refinery and Nigerian Breweries Plc reported a loss of N144 billion and N85.2 billion.

According to the Central Bank’s Purchasing Managers’ Index report economic activities in Nigeria fell for the thirteenth month in July as high costs reduced new orders and employment declined.

It said the composite PMI stood at 49.7 points indicating a contraction in economic activities for the thirteenth consecutive month.

However, it improved in July by 1.8 points when compared to the PMI for June 2024 which stood at 48.8 points.

“On the output level, suppliers’ delivery time and stock of inventory expanded while new orders and employment contracted at a slower rate compared to the levels recorded in the previous month,” the report stated.