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Q3’17: 22 manufacturing companies borrow N839.2bn

Pay N108.3bn as interest to banks

Dangote, Lafarge Wapco, Flour Mills lead borrowers’ list

By Peter Egwuatu

Amidst the country’s economic recovery phase and inability to raise long term capital from the Nigerian capital market, top 22 manufacturing companies listed across the sub sectors on the Nigerian Stock Exchange, NSE were constrained to borrow about N839.2 billion in expensive and short term loans from banks and other financial institutions to bridge funding gaps, in the nine months financial period ended September 30 (Q3’17), 2017.

Vehicle manufactureed Innoson Vehicle Manufacturing Company Ltd plant in Nnewi

These cumulative nine months loans represent  12 per cent increase from N746.9 billion recorded in the corresponding third quarter, ended September 30, (Q3’16) 2016.

The 22 companies also spent N108.3billion servicing the loans they borrowed for the period under review.  The loan servicing represents a 15 per cent increase from N94.154 billion used in servicing N746 billion loan liabilities recorded in the corresponding quarter, Q2, 2016.

Financial Vanguard investigations revealed that the loan expenses got escalated by the persisting liquidity challenges in the banking sector coupled with subdued credit appetite of the banks as a result of huge loan defaults during the period that the country was in economic recession.

Now, that the country is in economic recovery stage, companies’ profit soared in the Q3’17 recording N371.7 billion Profit Before Tax, PBT, indicating a growth of  111 per cent  from N176.5 billion in Q2’16.

Market operators have attributed the high cost of funds to the inability of the companies to secure enough foreign exchange, forex to meet up with their operations.  Earnings reports from the companies indicate that most of them were constrained by increasing financing charges, otherwise known as interest expenses.

Findings by Financial Vanguard revealed that the 22 companies paid a total interest of N108.3 billion to the financial institutions, representing a 15 per cent increase from N94.154 billion recorded in the corresponding quarter of 2016.

The total interest paid by the 22 manufacturing companies also accounted for 29.1 per cent of the total profit they recorded in Q3’17.

Earnings reports from the companies indicate that most of them were constrained by increasing financing charges, otherwise known as interest expenses, leading to steep declines in profits in some of the companies.

Out of the 22 companies in this coverage, four companies’ PBT declined during the year under review as finance charges contributed to the major cost constraints. Management of these companies had stated that 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. A review of the report 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 weak performances by the companies. High cost of funds was the major factor that wiped off positive trading and operating profit performance.

Borrowing lists

Details of the borrowing for Q3’17 are as follows:  Dangote Cement N273.065 billion, Cadbury Nigeria N2.706 billion, Nestle Nigeria N18.369 billion, Unilever Nigeria N7.596 billion, Flour Mills Nigeria N147.239 billion, Honeywell Flour N40.372 billion, Dangote Flour Mills N66.433 billion, Lafarge Wapco N171.345 billion, Guinness Nigeria N20.779 billion, Nigerian Breweries N28 billion, Dangote Sugar N2.034 billion, May & Baker Nigeria N2.587 billion.

Others are Fidson Healthcare N2.995 billion, Meyer N0.603 billion, International Breweries N16.079 billion, FTN Cocoa Processors N3.274 billion, First Aluminium N2.587 billion, 7UP Bottling Company N32.761 billion, Beta Glass N0.042 billon and Livestock Feeds N0.356 billion.


Findings show that Dangote Cement led the top five borrowers list with N273.065 billion, followed by Lafarge Wapco N171.346 billion, Flour Mills N147.239 billion, Dangote Flour Mills N66.433 billion and Honeywell Flour Mills N40.372 billion.

On finance cost otherwise known as interest expense, Dangote Cement led the chart on interest payment in Q3’17 with N39.917 billion; it was followed by Lafarge Wapco Plc N17.309 billion. Flour Mills Nigeria occupied the third position with N16.267 billion, followed by Nestle Nigeria with N8.606 billion, while Nigerian Breweries Plc came fifth with N7.993 billion.

On the other hand, in percentage terms, Lafarge Wapco recorded the highest increase in interest expense with 134 per cent growth to N17.309 billion when compared with N7.395 billion recorded in the corresponding Q3’16; it was followed by Meyer Plc with 105 increase to N39 million from N19 million. 7UP Bottling Company came third with 94 per cent increase to N1.797 billion from N917 million, followed by Beta Glass which rose by 94 per cent to N74 million from N38 million and Unilever Nigeria occupied the fifth position to N2.980 billion from N1.745 billion.

Meanwhile, top five manufacturing companies on PBT in absolute terms showed that Dangote Cement recorded the highest profit during the period under review, recording N220.182 billion, followed by Dangote Sugar with N39.3 billion. Nestle occupied the third position with N34.5 billion followed by Nigerian Breweries N34.427 billion, while Dangote Flour occupied the fifth position on the chat with N18.009 billion.

On the other hand, in percentage terms, Fidson Healthcare Plc led the chart on PBT as it surged by 763 per cent to N346 N1.044 billion in Q3’17 from N121 million in  Q2’16. Nestle Nigeria Plc trailed behind, rising by 587 per cent to N34.479 billion from N5.019 billion. It was followed by Dangote Flour, which moved up by 581 per cent to N18.009 billion from N2.644 billion. Honeywell Flour Mills revved by 474 per cent to N2.768 billion from N482 million, while May & Baker Nigeria came fifth position with an upsurge by 388 per cent to N322million from N66 million.

Stakeholders’ reactions

Managing Director, High Cap Securities Limited, Mr. David Adonri said; “Manufacturers need working capital to finance short term business activities. Banks are the best source for this. They require long term funds for expansion of facilities. This occurs occasionally. Even if there is compelling need for long term funds, the primary market is still inactive in the capital market. Investors are still avoiding the primary market because there are better returns in the fixed income market. Primary market will be revived when interest rate falls to lower single digit.”

Commenting as well, Managing Director, APT Securities & Funds Limited, Mallam Kasimu Kurfi, said: “Companies that borrow from the market are those that have confidence of the market to lend money to them and must be doing well to be able to generate enough cash to pay back both interest and principal.   Mostly companies do not like to dilute their existing holding. The implication is that you have to pay interest as an allowable expense instead of equity which will have to pay tax of 30 per cent of the profit before you declare dividend to the shareholders. Borrowing from the banks may help the company to sustain it working capital and delay coming to the market until the time price of the company’s stock is right.  For example Guinness came to market at N58 per share but now trading above N100 now. It could have come to the market at N90 that is 50 per cent above the previous price.”

Reacting to the growing economy,  Mr. Johnson Chukwu, CEO, Cowry Asset Management Limited, a Lagos based investing banking firm, said: “The fact that the economy grew by 1.4 per cent is very positive in the sense that it will further boost confidence of investors in the economy. Investors go to economies that grow, not economies that are shrinking because you don’t expect to have a robust business in an economy that is shrinking. So, the growth of 1.4 per cent from 0.72 per cent shows that the economy is actually on a continuous recovery trajectory.

“For the investing community, the implication is that the opportunity for improvement in returns is better now in the sense that it will eventually translate into positive performance by corporates.

“Although,  if you look at the performance of the GDP on sectorial basis, the major growth was recorded in the oil and gas sector. The non-oil sector contracted by 0.70 per cent, which actually implies that the growth we are experiencing may not translate to creation of jobs because we know that the structure of the oil and gas sector is that value chain in the oil and gas sector is not domesticated. So, the impact of growth in the oil and gas sector does not translate to direct creation of jobs within the economy.

“However, in the medium term, we are going to see growth in our reserve. This will impact CBN’s ability to provide liquidity in the  Foreign Exchange, FX market, which will in turn translate into improved access to FX by local manufacturers.

“So, we should see a situation where local manufacturers can easily access FX for their raw materials and equipments. However, for the non-oil sector to start growing, we need to address the issue of local currency liquidity and that in turn increase local demand, which is the major constraining factor to the real sector. Due to lack of liquidity, the demand for goods and services is weak. The monetary policy committee and the Central Bank should find ways of improving the local currency in a way that will not trigger to an uptick in inflation.”

In his own reaction, the spoke person for Independent Shareholders Association of Nigeria, ISAN, Mr. Moses Igbrude, said: “An increase in borrowing will result to an increase in finance cost and this will impact on the bottom line. Though, borrowing is part of the day to day business operations what is required is prudent and an efficient management of such borrowed fund to realize the set company’s goals and objectives.

If such fund is probably utilized it could lead to increased in volumes, capacity expansion or an increase in other company activities which result to value creations. Most manufacturing companies especially those with foreign links are borden with dollars dominating loans as results of Naira devaluation it increased borrowing cost leading to foreign exchange losses in their books.”

Continuing he said: “Some manufacturing companies have come to the market to raise money through right issues and all have over subscription and more companies are preparing to come to the market for capital injection. Before now companies were afraid to raise money through the capital market because of the recession believing that shareholders may not take up their rights which may result to under subscriptions. The beauty of it is that, dollars dominating loans are being converted into equities by the core investors and this is making their books look better and neater. I am encouraging manufacturing companies and the likes that are having such challenges to raise cheap funds from the capital market, most shareholders are ready and willing to invest in their companies especially those with good fundamentals.

In his reaction, Alhaji Gbadebo Olatokunbo, Shareholder Activist & Co Founder, Nigeria Shareholders Solidarity Association, NSSA, said: “ It is a  good sign  that the economy is recovering, because many companies had already moved out of Nigeria to neighbouring-nations for one reason or the other; while those within had already scaled-down on productions for many negative reasons that were against economic-reasoning/growth.

“Don’t forget that productions were the engine of any vibrant-economy and also some of the current Government policies, most especially on Agriculture and local productions of goods are not friendly. So,  production-level must increase with the farms outputs and the economic directions of the Government, e.g. agricultural- revolution will lead to Industrial-revolution/Productions, which would also grow the economy; therefore manufacturers would need to be very proactive to the economics reality around them, which might have left them with no other immediate option than to increase their level of borrowing.”

Continuing, he said; “Getting money from the capital market takes time and resources, due to the due-process of such venture; while it is easier and quicker to borrow from banks but at higher cost. Most of the borrowings, if not all the loans, would still come to the capital market, in-order to offset them, after obtaining the necessary approvals from the shareholders and regulatory-agencies.”


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