Nigerian manufacturer of steel and plastic, GREIF Plc have succumbed to economic headwinds that is undermining the performance of most firms in the country, as first quarter 2015 profit falter.
For the first three months through March 2015, the company’s profit after tax (PAT) reduced by 82 percent to N1.80 million from N10 million the same period of the corresponding year (Q1) 2014.
Sales increased by a mere 1 percent to N187.07 million in Q1 2015 as against N185.80 million last year.
Manufacturers in Africa’s largest economy, Nigeria have had growth clogged by macroeconomic headwinds like increasing inflation that pressure consumers’ wallets.
The fall in the price of international crude oil price has floundered government revenues – thwarting allocation to states.
The volatility in oil price has forced the Nigerian central bank to devalue the country’s currency in an attempt to protect the naira and stabilize the economy.
Furthermore, the Apex bank kept its benchmark interest rate at 13 percent after raising it by a hefty 100 basis points and held the cash reserve requirements on public deposits at 75 percent and the private sector deposits at 20 percent.
Furthermore, the Apex bank’s increased the Monetary Policy Committee retained the liquidity ratio at 30 percent at its meeting on Tuesday, and held the cash reserve requirements on public deposits at 75 percent and the private sector deposits at 20 percent.
The impact of the headwinds on manufacturers like GREIF is that they will now have to borrow from financial institutions at a higher interest rate. Devaluation on the other hand means imported raw materials will become more expensive and consequently spiral material and production costs.
Erratic electricity supply which hasn’t improved despite privatization of power assets still remains a drain on the bottom line of manufacturers. Energy costs makes up to 40 percent of manufacturers and production costs of firms. Also crimping the growth of GREIF are bad roads that weigh on distribution costs
The insurgency in the northern part of the country continues to hinder firms like GREIF from pushing their products from the crisis region thus shrinking share of the market.
As a result of the aforementioned challenges, GREIF’s cost of sales ratio was as high as 80.51 percent though, lower than the 82.60 percent recorded last year. It means for every N1 generated in sales, the company spent N0.805 on cost of production.
Net margin, a measure of profitability and efficiency was as low as 1 percent as huge input costs eats into most of its sales. Operating expenses were up by 30.83 percent to N28.43 million from N21.72 million the same period of the corresponding year 2013.
Analysts have also identified the influx of cheap and substandard steel into the Nigerian market as another challenge facing manufacturers.
The importation of these materials rather than being produced locally exposes the country to the risk of building collapses due to the inferior quality being brought into the country.
Analysts say this importation can cause unemployment as factories will have to close up which could also lead to loss of foreign exchange earnings as these products can be exported.
Nigeria imports about 17 million tonnes of steel yearly and produces only 2.5 million tonnes locally according to a report by the ministry of Mines and Steel.
In addition to the huge importation of the products that is stifling growth of manufacturers like GREIF, the challenges of import/export clearance documentation and charges have all contributed to high cost of doing business for steel makers.
“A mix of unfavourable tariff rate increase in cold rolled and flat steel sheets and increased misinterpretation of shipments/consignment values chargeable for various relevant duties and tariffs by relevant government inspection agencies and shipping companies at the port, contributed to increased cost of ownership of consignments,” said the company’s statement.
Pending management, comment the surge in the company’s cost of sales ratio could be attributable to the rise in global steel price.
Further analysis of the financial statement of GREIF showed return on average equity (ROAE) reduced to 0.53 percent in Q1 2014 from 3.38 percent as at Q1 2014 while the return on average assets (ROAA) dropped to 0.26 percent as against 1.43 percent in the review period.
It means the company has been able to utilize the resources of the owners of the business in generating more profit.
Current assets, which measures the ability of a firm to meet its short term obligation as at when due reduced to 1.68x in 2015 from 1.61x in 2013 though the 1.6x is lower than the industry average of 2.1x
GREIF’s share price closed at N36.8 on the floor of the exchange while market capitalization was N1.89 billion.
BALA AUGIE
