…As leading companies on NSE underperform inflation in Q3’19

By Peter Egwuatu

DESPITE the poor outing of financial performance by companies quoted on the Nigerian Stock Exchange, NSE, in the third quarter 2019, Q3’19, analysts in the financial sector have projected higher Gross Domestic Product, GDP, for the fourth quarter 2019, Q4’19.

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Analysts from Cordros Securities Limited said: “We expect the economy to grow by 2.36 percent in Q4’19. To start, we expect sustained growth in the Oil sector in Q4’19, mostly on account of the low base in the corresponding quarter in the prior year, as well as an improved crude production. On the latter, we revise our oil production forecast to 2.03 mb/d (million barrels per day) from 1.98 mb/d, which translates to a 6.28% Year-on-Year, YoY, growth in oil GDP.

“We expect higher growth in the Service and Agriculture sectors to support non-oil GDP growth of 2.06 % YoY. Overall, we expect growth to settle at 2.36 % YoY and 2.21% in Q4’19 respectively.

Analysts at United Capital Research said: “Looking ahead, we expect the momentum in the Nigerian economy to pick up further in Q4’19%, to 2.4%. This is as we expect Agriculture and ICT sector to continue to buoy the overall growth.

“We believe the full closure of all land borders mid-October, will bode well for Agriculture sector growth in Q4’19 as local players ramp up production to satisfy growing local demand.

“Also, we expect the growing demand for data amid rising internet penetration to spur ICT growth higher. Meanwhile, we expect the Trade sector to continue to decline as the full closure of the border impacts trading activities negatively and weak consumer wallet constrain potential upsides from festivity.

“Also, FG’s revenue challenges remain a huge downside risk growth in the trade activities amid rising debt servicing. Notably, growth in the Manufacturing, and Construction sector, that largely depends on government spending should receive further boost in Q4’19 amid the recent disbursement of Capital Expenditure by the Ministry of Finance.”

Companies under-perform inflation

Meanwhile, the current difficulty in the business environment occasioned by unfavourable fiscal and monetary policies may have taken toll on the finances of major companies in the Nigerian Stock Exchange, NSE, as they recorded mixed results in Q3’19.

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Their overall performance showed single digit growth in both turnover and profit, well below the double digit inflation rate in the economy.

Financial Vanguard’s review of the results turned in to the NSE for Q3’19, by 111 companies operating in the various sectors of the economy show combined turnover of N7.9 trillion, representing an increase of 4.2 percent from N7.6 trillion in Q3’18.

The companies accounting for the largest capitalization in the stock exchange, also recorded combined Profit Before Tax, PBT of N1.28 trillion, representing a mere increase of 1.3 percent over N1.26 trillion in the corresponding period of, Q3’18.

Nigeria’s inflation rate had averaged 11.24 percent in Q3’19, indicating clearly that the companies are under-performing inflation. It also indicated that though some of the companies increased prices of their products or services, the mark-up was, at best, helpful against absolute decline in both revenue and profit.

Trend performance

A review of the performance of these quoted companies in the last three years as collated by Financial Vanguard shows that in Q3’17, companies numbering about 64, posted a cumulative turnover of N5.239 trillion, representing a 21.6 percent rise from N4.286 trillion in Q3’16.

In Q3’18, 113 companies’ turnover surged by 9.8 percent to N7.4 trillion from N6.7 trillion in Q3’17.

Similarly, on profitability, in Q3’17, the companies’ PBT rose to N1.098 trillion, representing a whopping 50 percent jump from N732.308 billion recorded in 2016.

For Q3’18, the companies’ PBT grew to N1.124 trillion, representing a mere increase of 1.4 percent over N1.109 trillion in Q3’17.

The results which came in mixed with some positive surprises as the Construction sector led in turnover in percentage term rising by over 60 percent to N199.5 billion in Q3’19 from N124.7 billion in Q3’18 while the Banking sector led in absolute term recording N3.5trillion fromN3.2 trillion in Q3’18.

On profitability, Courier/Freight sector sprang another surprise becoming the most gained in percentage term rising by 275.9 percent to N1.752 billion from N0.466 billion in Q3’18 while in absolute the Banking sector consolidated its leadership recording N840.9 billion from N746.3 billion in Q3’18.

Sectoral turnover performance

The banking sector, which has 13 banks under our study topped activities in turnover in absolute term, recording N3.5 trillion in Q3’19. It accounted for about 44.3 percent of the combined turnover of the 111 companies.

The Oil and Gas sector followed recording N1.4 trillion and accounted for about 17.7 percent of the combined turnover. Consumer Goods sector came third in the chart recording N1.16 trillion, accounting for 14.7 percent of the overall sectors’ turnover.

In percentage term, the Courier /Freight sector led the chart rising by 275.9 percent to N1.8 billion from N0.466 billion. Insurance sector followed with a 63.8 percent rise to N840.9 while Services sector came third, rising by 53.4 percent.

Sectoral profits performance

The Banking sector also dominated other sectors in profitability in absolute terms. It recorded N840.9 billion PBT, to top the chart, followed by Industrial Goods sector which posted N218.8 billion. Consumer Goods sector occupied the third position recording N73.3 billion.

However, in percentage terms, Courier /Freight sector which has three firms in our study led the chart rising by 286.3 percent to N1.8 billion from N0.466 billion. It was followed by Insurance sector, which has 19 companies under our study, rising by 64 percent to N20.5 billion from N12.5 billion. Services sector, which has three companies under our study, also recorded surprises occupying the third position as it surged by 51.9 percent to N4.1 billion from N2.7 billion.

Banking sector

The banking sector on turnover was led by Ecobank in absolute value as it recorded N610.7 billion followed by Access Bank which posted N508.5billion, and Zenith Bank came third with N491.3billion.

In percentage term, Unity Bank led in turnover rising by 52.4 percent to N31.3 billion from N20.5billion. It was followed by Wema Bank which went up by 32.3 percent to N64.8 billion from N48.9 billion.

On profitability, in absolute term, Zenith Bank led the chart posting N176.2 billion PBT, followed by GTBank N170.7 billion and Ecobank occupying third position recording N109.5 billion.

However, in percentage term on profitability, JAIZ Bank led the chart rising by 510.4 percent to N1.5billion, followed by Unity Bank which went up by 150.2 percent to N1.6 billion from N0.644 billion. Wema Bank occupied the third position rising by 54.8 percent to N4.731billion from N  3.057 billion.

Stakeholders/analysts reactions on Coys’ performance

Reacting on the performance of the companies in the review period, Head of Research & Investment, FSL Securities Limited, Mr. Victor Chiazor, said: “The  Nigerian business environment has been tough for last ten months of 2019 and will not get any better for the rest of the year except for a few local businesses who may benefit from the border closure. The economy has also shown that growth dropped to 1.94 percent for Q2’19 from 2.10 percent in Q1’19 signalling a much slower growth compared to the country’s population growth which is estimated at an annual growth of three percent. Aside from most of the banks that performed fairly well, players in other sectors struggled. It’s clear that companies are struggling as a result of low activities in the economy and very low income levels.

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“For shareholders, though they would love their return to be higher than inflation but their focus would be a return higher than the Weighted Average Cost of Capital (WACC) and once that is not achieved, shareholder value is being eroded. The last quarter is expected to move at the same pace as businesses continue to adjust to the new fiscal and monetary policies.”

The Chief Operating Officer, Mr. Ambrose Omoriodon in his reaction said: “The marginal growth recorded in Q3’19 is a clear reflection of the nation economic situation and government post election policies that are yet to impact the system. The recent corporate earnings have revealed the weak/mixed macroeconomic reports from the CBN and Nigeria Bureau of Statistics, NBS. These numbers were below market expectations but the low prices of equities have made the earnings a bit okay to give insight what should be expected at the end of the financial year.

“Earnings are below inflation due to high cost of production and living, where the purchasing power of the people are low to drive consumption which were obvious in the marginal growth in companies toplines or sales.

“Q4’19 is expected to be better considering the year end activities due to festivities,   likely impact of low interest rate in money market which will boost consumption and productivity.”

Border closure

Commenting as well, Chairman, New Dimension Shareholders Association of Nigeria, Mr. Patrick Ajudua said: “I can say that apart from banking sector, the manufacturing sector boost in earnings and PBT was as a result of boarder closure which have reduce the effect of product smuggling, adulteration and improve local consumption.

“Why the earnings and PBT grew below inflation is as a result of high cost of goods occasioned by border closure by the federal government. Ordinarily this measure should have resulted in reduction in prices but the effect can’t be felt in short term, thereby necessitating high inflation which to me is temporary. Thereby with this development it will have effect on the bottom line.

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“My take for Q4’19 is that the full implementation of the budget, prudent management of resources, inflationary control mechanism, we expect more robust bottom line, which may translate to better reward to holders of equity.”

Vanguard