This could be the best time to buy consumer goods firms’ stocks as the capital raising embarked upon by them combined with the relative stability in the FX market has helped lower debt to record lows while underpinning profit.
Investors are upbeat that major players in the sector will utilize the resources of their owners in generating higher profit this year since balance sheets are purged of financial risk.
The cumulative total long term debt of the 14 largest consumer goods firm that have released 2017 results dipped by 25.77 percent to N328.86 billion, this compares with a 48.75 percent increase in debt recorded in the 2016 periods at the height of the economic downturn.
Unilever Nigeria Plc, Guinness Nigeria Plc, Vitafoam Nigeria Plc, Nigerian Breweries Plc, Champion Breweries Plc, Flour Mills Nigeria Plc, Honeywell Flour Mills Plc, Dangote Flour Mills Plc, Dangote Sugar Plc, Nestle Nigeria Plc, International Breweries, PZ Cussons Plc, Nascon Allied Industries Plc, and Cadbury Nigeria Plc.
Industry debt to equity ratio, reduced to 64.95 percent in 2017, from an all-time highs of 81.36 percent and 81.15 percent in the 2015 and 2016 financial periods.
The debt to equity ratio beats NSE 30 Index average of 112.92 percent, which means firms are increasingly reducing the debt in their capital structure.
A reduction in interest expenses also helped underpin profitability of these firms. Industry ROE was 19.81 percent in 2015, slumped to 9.31 percent in 2016 while it finally spiked to 19.90 percent in 2017.
Combined finance costs or interest expenses of the largest consumer names fell by 9.06 percent to N53.73 billion in the period under review, this compares with an increase of 52.71 percent to N77.22 billion in 2016 and 2015 financial periods.
“Firms like Guinness, Unilever, and Flour Mills raised capital by way of rights issue with a view to reducing debt and that strategic plan is paying off as seen in lower debt and higher ROE,” said Olalekan Olabode, head of research at Vetiva Capital Management.
“There has also been a moderation in effective interest on their borrowing compared to few years ago because a lot them were able to refinance their debt. Earnings are expected to be better in 2017 on the back of reduction in debt in their books,” said Olabode.
Several Nigerian companies have tapped capital markets last year to strengthen their balance sheets after a currency crisis in 2015 dragged the country’s economy into recession and stoked inflation, frustrating businesses and consumers.
The year 2016 was horrendous for companies as huge finance costs exposed their bottom lines to volatility in the interest rate environment.
However, the a combination of the foreign exchange policy introduced by the central bank and a rebound in crude oil price and output helped the country exit the recession as dollar became available for companies to meet their obligations.
A N40 billion rights issue and foreign exchange stability are responsible for underpinning Flour Mills’ capital structure and cash flow position. Net Debt/Equity improved to 120 percent from 160 percent in 2017, while Free Cash Flow (Operating Cash Flow minus Capex) increased to N62bn from negative N35bn in 2017.
Unilever raised N58.85 billion in rights issue as debt to equity ratio fell to 71 percent in December 2017 from 156.85 percent recorded in 2015.
Firms are able to honour obligation to suppliers of raw materials and equipment in tandem with foreign exchange stability.
At the height of the currency crisis of 2016 cost of goods sold and production went up and firms took loans from their international partners (Group companies) to finance their expansion plans.
The cumulative trade and other payables of the 14 largest listed consumer names fell by 6.85 percent to N486.42 billion in the period under review, this compares with a 56.30 percent increase in the 2016 period.
“At the height of the foreign exchange scarcity, a lot of them couldn’t access dollars so they had trade creditors in their books,” said Johnson Chukwu, managing director and CEO of Cowry Assets Management.
“Now that FX has improved, a lot of them were able to settle suppliers,” said Chukwu.
