…Slow down profitability growth to 60%
…Companies subdue inflation, outshine GDP
By Nkiruka Nnorom
Full results of leading companies quoted on the Nigeria Stock Exchange, NSE, in the first half of 2017, H1’17, point to real recovery in corporate performance reflecting positive developments in the economic environment within the period. Financial analysts say second half would be even more impressive, if the positive macroeconomic environment is sustained.
The final reports 94 leading companies show they recorded N5.27 trillion in revenue in H1‘17, a 20.3 per cent increase compared to N4.38 trillion posted in the corresponding period of 2016, while their profit before tax, PBT, rose to N960.5 billion from N598.1 billion, representing 60.6 per cent increase.
The banking sector by the virtue of release of the results of the four tier-1 banks and the three others, outpaced other sectors, accounting for N2.59 trillion or 49.2 per cent of the overall turnover and N456.24 billion, representing 48 per cent of the overall profit before tax of the 94 companies.
But a two-part analysis by Financial Vanguard indicated that the tier-1 banks (comprising First Bank, United Bank for Africa, Zenith Bank, Guaranty Trust Bank and Access Bank) with a combined H1’17 earnings of N1.353 trillion, drove up the revenue profile of the 94 companies with the five banks accounting for 25.7 percent of the 94 companies’ combined revenue. Also, while the five tier-1 banks had combined revenue growth rate of 31.1 percent, the rest of the companies numbering 89 had a combined revenue growth rate of 17 percent.
However, though the tier-1 banks dominated the size of the combined profits of the 94 companies, the PBT growth rate of the 89 companies at 85.8 percent was diminished by tier-1 banks’ PBT growth at 28.5 percent.
The combined PBT of the tier-1 banks at N338.46 billion accounted for over 35.2 percent of the combined PBT of the 94 companies which stood at N960.5 billion.
Companies subdue inflation
Nevertheless, the leading companies’ revenue and profit performances subdued inflation rate and outshined the gross domestic product, GDP, within the period.
Inflation trended lower throughout H1’17 recording a six-month average of 17.23 percent while the percent and 60.6 percent respectively.
A recovering GDP figure for quarter two, Q2’17, grew by 0.55 per cent year-on-year in real terms, while it was negative in Q1’17.
The H1’17 corporate results, according to business analysts, revalidate recent macroeconomic performance indicators, which were all in positive territories.
The growth in the companies’ fortune also confirmed the expansion in economic activities as reflected in the Central Bank of Nigeria, CBN, Purchasing Managers Index, PMI, which has been robust for five consecutive months to August, 2017.
The August manufacturing sector PMI expanded to 53.6 per cent, while the non-manufacturing sector composite PMI expanded for the fourth consecutive month to 54.1 per cent.
The report revealed that out of the 34 sectors surveyed, 27 sub-sectors experienced expansion in activities, while seven sectors experienced contraction.
However, investment experts are of the opinion that the worst may not be over yet despite the exit of the country from recession. They said that businesses still have inflationary pressure to deal with and called on the government to work on further bringing down inflation to ease the attendant challenge to business entities.
“That we are out of recession and the economy is doing well is a welcome development for business interest, which means that income to the businesses is going to increase now that the income to the economy has started and more income and make more profit,” said Mr. David Adonri, Managing Director/CEO, Highcap Securities,
He, however, said that Nigerians, including businesses would still be groaning as their income would still be eroded by inflation.
“The country has been experiencing stagflation and stagflation has two legs – recession and inflation. Now the country has come out of recession, but we still have high inflation rate challenging the economy. So, what we have achieved so far is inflationary growth, whereas the objective of any good economy is to achieve non-inflationary growth. So, the challenge that is still there is to bring down inflation to a single digit.
“So, the next challenge is to manage the economy in a such a manner that inflation would start declining and if possible, get to single digit level where the economy will enjoy non-inflationary growth,” he declared.
According to Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, the growth being witnessed in the economy is sublime coming from one sector – the oil and gas sector.
“I think we would have subdued optimism going forward. The economy has rebound from a negative to a positive growth, but growth is very sublime coming from one sector. The agriculture and manufacturing sectors are growing at a slower rate and trade has not turned positive, but given that the sector that lubricates every other sector, which is the oil sector, is now profitable, one is hoping that the trickledown effect of that recovery will be felt in every other sector. So, it is going to be a kind of subdued optimism for businesses in the remaining part of the year,” he added.
Breakdown of the corporate results showed that pharmaceutical sector, which enjoyed huge investors’ patronage on the stock exchange during the period, came tops in terms of percentage growth in revenue, recording 77 per cent growth to N11.84 billion from N6.69 billion in H1’16.
This was followed by the consumer goods sector, which rose by 64.2 per cent to N364.82 billion from N222.21 billion, while the agriculture sector came third with 58.6 per cent increase to N31.14 billion from N19.64 billion 2016.
However, the banking sector led revenue in absolute terms with the revenue of the 14 banks reviewed rising to N2.59 trillion from N2.04 trillion, a 27 per cent growth. The banking sector also accounted for 49.2 per cent of the total turnover for the period.
The oil and gas sector came second, recording N701.44 billion revenue in H1’17 against N532.87 billion posted in the same period in 2016, thus representing 31.6 per cent growth. The sector, therefore, accounted for 13.3 per cent of the overall turnover.
Industrial goods sector placed third, polling N584.05 billion in revenue, 52.3 per cent increase compared to N383.61 billion and accounted for 11.8 per cent of the total turnover of all the companies.
The consumer goods sector, which recorded subdued profitability in 2016 due, mainly, to rising cost of raw material sourcing and high cost of other manufacturing inputs occasioned by forex scarcity during the period, came tops in terms of percentage growth in PBT in H1‘17. The sector achieved huge 352.9 per cent growth to N63.875 billion in H1’17 against N14.105 billion in H1’16.
The industrial goods sector ranked second, with 189.7 per cent increase in pre-tax profit to N281.67 billion from N97.22 billion, while conglomerates sector, which ended H1’16 in negative profit position due to the same forex reason above, came third with 168.1 per cent growth. The sector’s PBT went up to N5.29 billion against -N7.77 billion loss before tax in 2016. The three sectors significantly out-performed inflation during the period under review.
Again, the banking sector outpaced others to lead profitability in absolute terms. At the end of the review period, the sector raked in N456.24 billion pre-tax profit compared to N370.64 billion in H1’16. This means that the 15 banks represent controlled 48 per cent (nearly half) of the combined pre-tax profit of the 94 leading companies in the NSE reviewed.
The industrial goods sector followed, posting N281.67 billion PBT against N122.57 billion in 2016, thereby accounting for 29.3 per cent of the overall PBT of all the companies.
The consumer goods sector was the third as the sector achieved N63.88 billion pre-tax profit in H1’17 against N14.11 billion in H1’16 and accounted for 6.7 per cent of the total PBT recorded by the companies in the half year period.
The banking sector, propelled by earning positions of Zenith Bank Plc, Ecobank Transnational Incorporated, Access Bank Plc, Stanbic IBTC Holdings Plc and UBA Plc, led others with N2.59 trillion revenue position.
Zenith Bank led other banks analysed in the sector, posting 77.1 per cent growth in revenue at N380.44 billion up from N214.81 billion in H1’16. This accounted for 14.7 per cent of the sector’s earnings. Access Bank and ETI placed second with 41.5 per cent revenue growth each. Access Bank recorded N246.58 billion against N174.01 billion in 2016, while ETI recorded revenue of N386.89 billion against N273.45 billion.
Access and ETI contributed 9.5 per cent and 15 per cent to the sector’s total earnings respectively.
Stanbic IBTC was the next as it recorded 36.3 per cent revenue growth to N97.2 billion from N71.32 billion, representing 3.7 per cent of the sector’s turnover. UBA ranked fifth, achieving N222.7 billion turnover, which represents 34.5 per cent increase compared to N165.6 billion posted in 2016 and accounted for 8.5 per cent of the sector’s turnover.
Stanbic IBTC emerged the sector leader in percentage growth in profitability, followed by Zenith Bank Plc, Fidelity Bank Plc and UBA Plc in the second, third and fourth positions respectively as the sector posted N456.24 billion PBT during the period.
Stanbic IBTC’s PBT grew by 86 per cent to N29.17 billion from N15.68 billion, thereby contributing just 6.4 per cent to the sector’s profitability. Zenith Bank followed with 74.2 per cent increase, rising to N92.18 billion from N52.91 billion and accounted for 20.2 per cent of the sector’s PBT. Fidelity Bank placed third with 66.7 per cent PBT growth to N10.22 billion from N6.13 billion, but accounted for mere 2.2 per cent of the banking sector’s profitability. UBA was the next with 65.5 per cent PBT growth to N57.53 billion from N34.76 billion, which represents 12.6 per cent of the banking sector’s profitability.
However, GT Bank Plc, which recorded N101.1 billion pre-tax profit, emerged the major contributor to the sector’s pre-tax profit in real term, contributing 22.2 per cent to the PBT.
Oil & Gas sector
The oil and gas sector, driven by improvement in earnings position of counters like Oando Plc, BOC Gases, Total Nigeria Plc and MRS Oil, recorded 31 per cent overall sector revenue growth at N701.44 billion against N532.87 billion in 2016. This shows 13.3 per cent of the total 94 companies’ turnover.
The sector recorded N7.014 billion pre-tax profit against N55.312 billion loss before tax in H1’16, representing 112.68 per cent growth. This represents 0.7 per cent of the total pre-tax profit of the 94 companies for the period.
Oando Plc led other companies analysed in the sector, rising by 129.8 per cent to close the period at N266.98 billion in comparison to N116.24 billion in the corresponding period. The company accounted for 38.1 per cent of the sector’s total turnover.
BOC Gases followed with a 77 per cent growth to N1.21 billion from N926.61 million achieved in H1’16. The company, however, accounted for mere 0.2 per cent of the sector’s turnover. MRS Oil Plc placed third, rising by 16.2 per cent to N62.48 billion from N53.78 billion and accounted for nine per cent of the sector’s turnover volume.
BOC Gases towered above others in terms of profitability. The company’s pre-tax profit rose by 496 to N199.40 million from N33.45 million in H1’16 and accounted for 2.8 per cent of the oil and gas sector’s PBT. It was followed by Caverton Offshore Group Plc with 1400 percent growth to N938.03 million from -N2.40 million loss position, while Forte Oil Plc placed third with 10.3 per cent growth to N4.74 billion from N4.26 billion PBT recorded in H1′ 2016.
Industrial goods sector
The industrial goods sector, driven by Dangote Cement, Lafarge Africa and Cement Company of Northern Nigeria, CCNN, posted N584.05 billion turnover, which represented 11.1 per cent of the 94 companies’ total turnover.
The sector recorded N281.67 billion pre-tax profit, thereby, accounting for 29.3 per cent of the total profit of the companies reviewed. Dangote Cement, which led in the sector, posted N412.68 billion revenue and N115.58 billion pre-tax profit.
The company showed leadership, controlling 70.7 per cent and 41.03 per cent of the sector’s turnover and PBT figures respectively. Lafarge Africa emerged second in the sector with N154.84 billion turnover, which represents 26.5 per cent of the sector’s turnover. Its pre-tax profit, however, stood at N18.16 billion, a mere 6.4 per cent of the sector’s profit, while CCNN was the next with N8.51 billion and N968.57 million turnover and profit before tax respectively. CCNN contributed 1.5 per cent and mere 0.3 per cent to the sector’s turnover and pre-tax profit respectively.
Consumer goods sector
The consumer goods sector posted N364.82 billion revenue and N63.875 billion in profit before tax, representing seven per cent and 6.7 per cent of the 94 companies’ total turnover and profit respectively. Analysts are of the opinion that the sector and some other manufacturing interests are beginning to enjoy the benefit of new CBN forex policy and improvement in macro-economic environment.
Nestle Nigeria Plc stood above others both in terms of revenue and profit position. Nestle during the period under review posted N121.92 billion revenue and N24.46 billion profit before tax, representing 33.4 per cent and 38.5 per cent of the sector’s turnover and pre-tax profit respectively. Dangote Sugar Refinery, DSR, came second with N118.68 billion revenue, representing 32.5 per cent contribution to the sector’s turnover. Its pre-tax profit stood at N25.61 billion, a 40.1 per cent of the sector’s profit. Dangote Flourmills Plc with N64.86 billion revenue emerged third company in the consumer goods sector. This accounted for 17.8 per cent of the sector’s turnover. Its profit before tax at N8.80 billion represents 13.8 per cent of the sector’s profit.
The sector recorded the highest number of filers as a total of 23 insurers have already filed their H1′ 17 result, a marked departure from the usual practice where majority of the companies were non-compliant. The sector pooled N169.684 billion revenue and N30.684 billion pre-tax profit for the during. This represents 3.2 per cent and 3.2 per cent of the 94 companies’ turnover and profitability respectively. Unity Kapital Plc led with N21.98 billion turnover, representing 13 per cent of the sector’s turnover, while its pre-tax profit stood at N2.61 billion, accounting for 8.5 per cent of the sector’s profit. Axamansard Insurance came second with N17.95 billion revenue and N2.32 billion profit before tax. This accounted for 10.6 per cent and 7.6 per cent of the sector’s revenue and pre-tax profit. Continental Reinsurance with N15.19 billion revenue came third in the sector, contributing nine per cent to the turnover. Its profit before tax for the review period stood at N3.11 billion, representing 10.14 per cent of the sector’s pre-tax position.
According to United Capital Plc, “The improvements observed in first quarter 2017, Q1’17 and second quarter 2017, Q2’17, were predicated on the resilience of the agriculture sector, increased crude oil production, amid the relative peace in the Niger Delta region, an aggressive drive to stimulate the economy via an expansive spending and borrowing plan and the adoption of a market friendly foreign exchange, FX rate regime (the I&E window). In our opinion, if the pace of policy pronouncement and implementation is sustained, the worst may be over”.
The investment banking house observed that five consecutive month of improvement in manufacturing PMI supports its position that the pace of output expansion in H2’17 will be stronger than witnessed in H1’17 as the market friendly policy reforms implemented in Q2’17 are expected to take full effect on the economy.
Alhaji Ola Yusuf, Managing Director/CEO, Trust Yield Securities, said that given the improvement already seen in the economy, the remaining part of the year would be good for businesses as they would make profit and declare more dividend for their investors.
“Once the environment is positive, then it means that things will turn out better and it will be reflected in companies results,” he said.
Cowry Assets Management analysts, in their H1’17 review of the economy, stressed that though improvement in the seasonal and structural factors would lead to a year-on-year moderation in both household and business input costs, but the risk to the outlook would be increased public sector spending for the 2017 fiscal year which will tend to drive up general price level.