High cost of funds and lack of access to amenable capital are adversely impacting on earnings potential and returns of several companies, reports have shown.
Early third quarter earnings reports from quoted companies indicate that most firms were constrained by increasing financing charges, otherwise known as interest expenses, leading to steep declines in profits in most cases.
Not less than 70 per cent of non-financial quoted companies that have so far submitted earnings reports for the period ended September 30, 2015 recorded declines in profits, with more than 80 per cent of the declines in the bottom line directly related to increase in financing charges.
A review of the reports showed that while other macroeconomic conditions, especially slowdown in top-lines due to decline in purchasing power and increase in costs of sales due to exchange rate depreciation, contributed to low performances by companies, high cost of funds was the major factor that wiped off positive trading and operating profit performance to undermine pre-tax profit.
For the nine-month period, Mobil Oil Nigeria Plc reported that financial charges rose by 50 per cent while its pre-tax profit dropped by the same margin. Nigeria’s second most capitalised quoted company, Nigerian Breweries, also reported that financial charges jumped by 53.6 per cent just as pre-tax profit declined by 11.8 per cent. Transnational Corporation of Nigeria (Transcorp) Plc’s financing charges rose by 42.6 per cent while its profit before tax dropped by 26 per cent.Another downstream oil company, Forte Oil, recorded a modest increase of 1.63 per cent growth in pre-tax profit against the background of 16.8 per cent increase in interest expenses.
Also, Courteville Business Solutions Plc’s financing charges jumped by 207 per cent, which contributed to 18 per cent decline in pre-tax profit. First Aluminium Nigeria Plc witnessed 14 per cent increase in interest expense, which also contributed to 26 per cent decline in pre-tax profit of the struggling company.
Financing cost, which rose by 200.8 per cent, contributed significantly to N38.58 billion loss recorded by Oando Plc in the first half ended June 30 this year according to report released at the weekend. Oando’s financial charges for the six-month period had risen to N26.65 billion this year as against N13.27 billion recorded in comparable period of last year, compounding the slowdown in sales and foreign exchange challenges. The integrated energy group had recorded profit before tax of N8.57 billion in comparable period of last year.
Many top management sources said their inability to source new equity capital due to the meltdown at the capital market had forced them to continue relying on high-interest bank loans. Many had suspended or slowed down considerably their long-term corporate growth plans due to paucity of funds.
Head, financial advisory group, GTI Capital Limited, Mr. Hassan Kehinde, said the inability of companies to raise funds locally through the capital market had forced them to opt for foreign loans, which initially were obtained at relatively cheaper rates but subsequently became serious burden due to devaluation of naira.
Citing several companies in the fast-moving consumer goods industry and oil and gas sector, Kehinde said the apathy in the primary market of the Nigerian capital market was partly responsible for undue financial leverage noticed in the accounts of many companies.
He added that besides the risk of high interest expense due to tightened banking operating environment at home and the foreign exchange risk associated with foreign loans, financial mismatch might further undermine the performance of several companies as they had been forced to use short-term banking loans to finance unsuitable relatively longer projects.
Companies that had recently launched bids to raise new capital have demurred from furthering the issuance process as share prices continued to fall at the Nigerian Stock Exchange (NSE). Flour Mills of Nigeria Plc, which recently submitted application for regulatory approval to raise N30.25 billion through a proposed rights issue, opens today below the proposed offer price at N21. Flour Mills had planned to offer 1.09 billion ordinary shares of 50 kobo each to existing shareholders at N27.50 per share. Another company, May and Baker Nigeria Plc, which had announced plan to float a rights issue, opens at N1.22, a price the promoters of the issue considered to be below the intrinsic value of the company with World Health Organisation (WHO)-certified manufacturing complex.
A management source in one of the prospective issuers had told The Nation that they were reconsidering their new issue plan and would likely opt for private placement on concerns that the company might not get the right value for its shares through the open offer and investors might shun the issue.
Companies that had floated new issues in recent period largely fell below their offer targets. All the companies have also been trading below their offer price, putting subscribers to the issues in losses. Access Bank, which had offered about 7.63 billion ordinary shares of 50 kobo each at N6.90 to existing shareholders, recorded 79.4 per cent success rate.
Source: The Nation Nigeria