Nigerian Q3 Earnings Season Review: Macroeconomic Challenges Weigh on Companies Scorecards

Lagos, Nigeria, Capital Markets in Africa — The year 2015 has been characterized by a cocktail of macroeconomic challenges which trailed the decline in crude oil prices, and the political and policy uncertainties that shaped the direction of the economy so far in 2015. This is reflected in the trend of key macroeconomic indicators such as the slowing economic growth (Real GDP growth slowed to a 10-year low of 2.4% in Q2:2015), the steadily rising inflation (31-month high at 9.4% in October 2015), weak fiscal spending, hawkish monetary policy and foreign exchange constraints.

The Nigerian Stock market has not been exempted from this conundrum as foreign investors sold down on heightened foreign exchange risk and weaker macroeconomic fundamentals. Following the streams of majorly unimpressive Q3:2015 results released by diverse key counters on the Nigerian Bourse ranging from the Banking sector to the Consumer Goods and Oil & Gas sectors, investors’ sentiments have further waned. Consequently, the All Share Index (ASI) of Nigerian equities declined 6.5% in October while YTD loss rose to 15.8%.

Within the banking space, the constraining operating environment in 2015 was reflected in their levels of profitability in comparison to the corresponding period the year before. The high exposure of Nigerian banks to the public sector and the Oil & Gas sector (which we estimate at 5.4% and 27.0% in H1:2015 respectively) have led to a weakness in assets quality as the revenue profiles of government and indigenous downstream and upstream companies were impaired by the oil price crash. This has led to higher Non-Performing Loans and impairment charges affecting the profitability of banks, especially for Tier-2 banks. Our Y-o-Y analysis of Deposit Money Bank (DMB’s) bottom lines across tiers shows that Q3 profitability was generally affected by higher impairment charges, with STANBIC (+521.3%), FBN HOLDINGS (+247.8%), UBA (+129.9%) recording the highest increases in impairment charges. Regarding PAT (profit after tax) figures, Tier-2 banks – STANBIC (-46.3%), WEMABANK (-39.0%) and DIAMOND (-20.9%) had the highest Y-o-Y decline while others in the Tier-2 category had marginal improvement.

The earnings results of companies in the Oil & Gas sector have directly reflected the glut in the global crude oil market and price crash, foreign exchange related losses post-currency devaluation as well as delayed payments of petroleum products subsidies to downstream operators. The late and unimpressive release of OANDO’s results – having recorded a monumental loss of N179.3bn in its FY:2014 and another 35.1bn loss in Q2:2015 — doused overall market sentiments, prompting stakeholders to question corporate governance and risk management practices of NSE listed companies. This was following the release of the Q3:2015 MOBIL result which showed 39.1% Y-o-Y drop in PAT and 25.3% decline in Gross Revenue. TOTAL and CONOIL also reported negative growths in 9M:2015 earnings as the PAT of both companies fell 19.5% 16.1% Y-o-Y respectively.

The Consumer Goods and Conglomerate segment of the market did not miss the Q3:2015 unimpressive earnings season party with key player posting significant declines in both revenue and PAT save for NESTLE which was able to deliver marginal Y-o-Y increases in Gross Revenue (+5.2%) and PAT (+2.2%) despite the challenging macroeconomic landscape. On average, we observed that sales growth in 9M weakened 0.2% across the five consumer goods companies within our coverage and UACN, the cost of sales increased 1.0%, OPEX rose 1.1% and net finance costs surged 81.5%. We are of the view that weaker fiscal and consumer spending contributed to the slowdown in sales growth within the sector as observed above, whilst the impacts of the hawkish monetary policy, devaluation and low supply of FX have kept the direct cost of production up, pressured OPEX margin and have driven up finance expenses. On the back of the unimpressive earnings result, the Consumer Goods index recorded the worst sector performance in October, retreating 7.3% and currently down 18.0% YTD.  Earnings result for cement Tickers, however, remained resilient, majorly due to the high cement prices in the first half of the year which have protected margins and the diversified play of large-cap stocks in the sector.

So far, the overall performance of the economy remained bleak in Q4:2015, hence we remain conservative in our FY:2015 earnings projection. We believe a clearer fiscal picture to complement efforts of the CBN and diversification of revenue sources of government would be important in boosting investment and consumption spending which would lift growth and company earnings. Given the above, we believe the current state of the market presents the greatest attraction only to investors with the long-term horizon; however we advise short to medium term investors to position in dividend paying stocks ahead of full year result.

Source: Afrinvest West Africa Limited

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