Financial Health of Top Companies in Nigeria Plunged over FX Reform

(Last Updated On: July 8, 2024)Financial Health of Top Companies in Nigeria Plunged over FX Reform

Debate about the impacts of the devaluation of the Nigerian local currency has started to heat up following the visible damage that companies in Nigeria are facing 12 months after the official devaluation of the naira.

Majority of non-bank companies listed on the Nigerian Exchange are facing issues with their earnings performance, resulting in uncertainties about their survival in a tough economic environment bedevilled with high interest, and inflation rates.

The sound of near corporate distress has also been heated up by the surge in interest rates amidst efforts to combat inflation. Some analysts said the apex bank is chasing air on the notion that price instability is demand driven. Though, headline inflation has started receding due to monetary policy tightening, but at the expense of private sector growth.

Apparently, the monetary authority is willing to sacrifice economic growth to manage Nigeria’s hot red inflation condition by raising interest sucessively without minding another unintended consequence of a higher rate on borrowers.

Huge forex losses did not only reduce earnings performance, they also damaged the balance sheets of some companies with higher foreign currency liabilities. Yet, there is no signal about when the margin-dilutive, corporate balance sheet destroyer FX crisis will ease in a country that depends heavily on hydrocarbon sales for foreign currency receipts.

The recent devaluation of the naira has however triggered an unpriced risks with unintended consequences which continues to affect most of the companies operating in Nigeria, based on insight from listed companies performance review.

Due to the naira’s instability, major companies have started to leave the country despite huge FX price action by the monetary authority. In the last one year, GlaxoSmithKline, Procter & Gamble, PZ Cussons, and Guinness Nigeria Plc announced their exits from the local economy, citing FX pressure. Also, growing numbers of international oil companies have sold their assets to local operators.

Business profitability has been severely strained, with 65.0% of non-banking stocks on the NGX 30 reporting foreign exchange losses in Q1-2024, said CardinalStone Partners Limited in its half year report.

The firm added that the strain on profitability has broader implications for government revenues from company income tax (CIT), which fell by 12.9% in the first quarter of 2024.

On the fx side, local companies that rely heavily on foreign or imported raw materials or other input have been positing huge FX losses in the first three months in 2024.

Somehow, businesses have been forced to scale back operations amidst tough economic conditions with damaging inflation and interest rates. Multi-year sealed contracts with negative covenant has also hindered a quick switched from importation – especially in the service sector.

The fluctuation in price level also pushed the monetary authority to commit what some critics called extra layered mistake with successive increase in benchmark interest rate in a growth-starved economy.

Due higher interest rate, banks net interest margin surged, according to details from their respective earnings release in the first quarter of the year. On the other side, the negative impacts on borrowers also caused increase credit migration as default level spikes.

Banks booked high impairment credit charges as a result of increase default rate amidst effort to balance the increase interest income and weakening asset quality.

“ the increasingly tough macroeconomic environment, including currency-related issues, declining disposable incomes, unreliable power supply, and congested ports, have added layers of difficulty to business productivity, prompting some companies to exit the country”, CardinalStone said in its half year report.

Analysts also noted that the economy grew slower by 3.0% year on year as against 3.5% in the first quarter of 2024 due to the troika factors of material currency devaluation, rising interest rates and weak purchasing power, which masked the positive pass-through from the lower base effect.

Some of the companies that posted FX losses include BUA, PZ Cussons., Nestle Nigeria, and Guinness Nigeria, among others. Though the negative exchange rate trend affected these companies at different degree, the huge loss impacted earnings directly.

BUA Cement Plc

Profit slumped by 33% in the first quarter as FX tsunami hit BUA Cement Plc. In its unaudited financial statement, the cement company’s net profit settled at N17.97 billion, which was 33% below N26.80 billion recorded in the corresponding period of 2023.

BUA Cement reported N10 billion as FX loss in Q1 2024 because of the devaluation of the Naira, which was reversal of N1.71 billion the group posted in the corresponding period in 2023.

PZ Cussons Plc

PZ Cussons Plc’s balance has been broken with more N47 billion negative equity capital at the of Q4 of financial year 2024

Its financial report showed that the company PZ would require huge capital injection to boost its damaged shareholders fund as its exchange rate loss widened to N158 billion from N4.953 billion in 2023 in 12 months.

Nestle Nigeria Plc

Nestle Nigeria’s Plc has no capital for doing its business due to FX pressure on earnings.  The fast moving consumer goods company’s shareholders fund has been wiped out with about N71billion negative capital as of the end of the third quarter of 2024.

Nestle Nigeria Plc posted more than N104 billion loss before tax in 2023. The loss which damaged the consumer goods company earnings came as a result of large foreign currency liabilities.

Its audited result showed that Nestle Nigeria lost N195.07 billion to exchange rate movement in 2023. Consequently, the negative performance wiped out the company’s shareholders’ fund, which now stands at a negative balance of N78.0 billion.

MTN Nigeria

MTN Nigeria’s shareholders fund has been wiped off with about N435 billion negative capital as of the end of the third quarter of 2024.

The telecom giant’s reported significant net foreign exchange loss of N740.4 billion in financial year 2023, ended 31 December 2023, and N656.4 billion in the interim results as of Q1 2024.

The telecom company FX losses has led to a deterioration in leverage metrics and completely eroded shareholders equity. The steep surge in the telecom company’s FX losses have completely eroded its shareholders equity, resulting in a very weak capital structure.

Also, MTN Nigeria gross debt including lease liabilities increased to N2.2 trillion in financial 2023 from N1.3 trillion in 2022, GCR Ratings said in a note. It surged further to N2.5 trillion in March 2024, largely due to the adverse exchange rate movements as most of the company’s debt and lease agreements are denominated in US dollar.

Airtel Africa Plc

Airtel Africa Plc recorded $89 million loss after tax due to pressures from currency fluctuation in its key markets. The large FX losses due to devaluation in Nigerian market and East Africa damaged the telecom company’s performance in the year ended March 31, 2024.

The telecom loss was primarily impacted by significant foreign exchange headwinds, resulting in a $549 million exceptional loss net of tax following the Nigerian naira devaluation in June 2023 and Q4’24, and the Malawian kwacha devaluation in November 2023.

Total Energies Plc

Total Energies and Marketing Nigeria Plc’s profit declined by about 20%, according to details from its financial statement as higher funding costs damaged positive impacts of healthy revenue growth. Its naira fluctuation driven FX losses printed at N11.50 billion in 2023 as against FX gains of N71.88 million in Q4-2022. 

Cadbury Nigeria Plc

Cadbury Nigeria Plc is operating with a broken balance sheet as N13.39 billion in FX loss damaged its earnings performance in the first three months in 2024.

The company’s negative shareholders was upturned by a new deal. On 28 January 2024, the Board of Directors negotiated a debt forgiveness of $20 million from CSOL on the $40 million received on 15 January 2024.

The N19.7 billion was transferred to other reserves to give the company’s shareholders capital cosmetic face lift.  In a note to the account, Cadbury Nigeria explained that the debt forgiveness was necessary due to the significant devaluation of the Nigerian Naira from N911.68 in December to N1400+ in January 2024 against the US Dollar.

The company said the debt forgiveness amount has been included as part of other reserves in the financial statements as it is a contribution from the parent company. This lifted its negative equity capital.

Unilever Nigeria Scale Back

Unilever Nigeria Plc reported profit in the first quarter of the year after the company scale back amidst tough economic condition.

The company discontinued the Home Care product line in September 2023 and split the Personal Care and Beauty & Wellbeing lines into two separate segments at the beginning of the year.

Its net profit surged by 39.6% year on year to N3.4 billion, driven primarily by strong revenue across various product segments and a higher finance income during the quarter from N2.407 billion in Q1-2023.

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