The profits of the largest consumer goods firms’ have fallen to a six-year low, and huge production cost looms, thanks to economic fallout from the coronavirus that is threatening the international oil market.
The virus contagion is increasingly worsening and has resulted in low demand for crude oil as OPEC and non-OPEC members have failed to reach an agreement over output cut.
A volatile crude oil price is inimical to the consumer goods sector because it could stoke a severe dollar scarcity that would make it difficult for companies to import raw material and equipment as the central bank would be struggling to protect the external reserves from receding.
For the year ended December 2019, the 10 largest companies posted a cumulative profit of N47.03 billion, this compares with N64.49 billion in 2018, N97.22 billion in 2017, N49.83 billion in 2016, N84.73 billion in 2015, and N87.66 billion in 2014.
The charts show the fastest bottom line (profit) was in the financial year 2017/16 when companies increased the price of key products to fend off the effect of spiraling cost of production.
Also, the introduction of a new foreign exchange regime in June 2017- that paved way for fast-moving consumer goods firms to have access to foreign currency- added impetus to earnings.
While profit declined the most in 2019/18 financial year, companies could see margins deteriorate further this year if the coronavirus that has killed over 4,000 across the world continues to threaten the global economy and the international oil market.
International Brent crude traded at $37.45 on Tuesday, up over 8 percent, while U.S West Texas Intermediate (WTI) stood at $34.05, around 9 percent higher.
It comes after Brent and WTI both dropped 24 percent on Monday, sinking to more than four-year lows.
The sudden drop in oil price, the worst since 1991, rekindles the dark memories of 2015 when a reduction in commodities price stoked a chronic dollar scarcity that paralyzed the industry as firms were unable to import raw materials and equipment.
In 2016, at least 272 firms were forced out of business as they capitulated to the headwinds, according to the Manufacturing Association of Nigeria (MAN).
That same year, South Africa’s largest publicly traded company, Truworth closed its operations in Nigeria due to stringent import restrictions.
The fear among experts is that the central bank does not have the buffers or ammunition to protect external reserves that have been falling since last year, a double whammy for consumer goods firms already struggling with deteriorating margins.
The nation’s external reserves are set to drop below $37 billion, the lowest level in 27 months.
Their production costs will go up as they may find it difficult to bring in raw materials, but the impact of an economic shock this time around may not be as severe as 2015 because a lot of them had deleveraged the balance via a rights issue,” said Abiola Gbemisola, equity research analysts at Chapel Hill Denham Limited.
“The recent vagaries in the oil market further compound their woes. Sugar producers will take some hit because they have to source some their raw materials from Brazil; Producers of wheat and beer will also be impacted,” Gbemisola.
Gbemisola said Guinness Nigeria is the most vulnerable to a shock because it has total debt of N5 billion while International Breweries had raised rights issue to settle its $250 million liabilities.
The largest consumer goods firms haven’t been able to turn each Naira invested in sales into higher profit.
The cumulative net profit margins of these firms was (0.82) in December 2019 from 6.55 percent the previous year.
However margins improved to 7.32 percent in December 2018 from 4.67 percent in December 2016, thanks to strong sales growth propelled by hike in the price of commodities.
For the year ended December 2019, Unilever Nigeria recorded its first loss of N4.76 billion, this compares with a profit of N2.14 billion in 2018, N7.45 billion in 2017, N3.07 billion in 2016, N1.97 billion in 2015, N2.41 billion in 2014.
International Breweries’ recorded a loss of N9.13 billion in December 2019, this compares with a profit of N3.27 billion in 2018, N1.42 billion in 2017, N1.03 billion in 2016, N1.94 billion in 2015, and N2.10 billion in 2014.
Nascon Allied Nigeria Plc posted a profit of N1.94 billion in December 2019, the lowest in five years..
Analysts say the devaluation of the currency on the back of continued depletion of the external reserve will erode the purchasing power of the consumer and hurt the revenues or output of companies.
There is definitely a risk if the central bank fails to hold the currency the way they did the last time.
“A base devaluation will make people poorer and companies will bear the brunt as they are finding it difficult to pass on high input cost inform of higher prices to consumers,”
Onyeka added that high cost of raw materials in the case of a deviation could result in cost push inflation.
Inflation in Nigeria quickened to a 21-month high of 12.30 percent in January as food shortages caused by border closures continued to drive up the price of staples
Over 50 percent to Nigerians live on less than $1.98 a day, while unemployment rate is at an all-time high of 23 percent
