Fast Moving Consumable Goods Firms (FMCGs) have seen their debt and other obligations spike up by 71 percent in one year, due to a weaker naira and rising operating costs, BusinessDay analysis of the financial statements of some of the big players in the sector has shown.
The combined total accounts payable of 14 firms in the sector spiked by 70.74 percent to N584.96 billion in 2016 from N335.96 billion in 2015, driven mainly by a weaker naira, data gathered by BusinessDay shows.
The firms analysed include; Cadbury Nestle, Seven up, Flour Mills, Nigerian Breweries, Guinness, International Breweries, Honeywell, PZ Cussons Champions Breweries, Dangote Sugar Nascon and Unilever Plc. The cumulative total long term borrowings of the firms increased by 51.35 percent to N465.44 billion in 2016 from N307.52 billion in 2015.Finance costs increased by 61.28 percent to N75.48 billion.
Foreign exchange (FX) losses in the books of consumer names summed to N45.12 billion, Nestle Nigeria’s N16 billion FX losses make up 35.46 percent of the total figure.
Faced with the rising debt obligations, some of the firms are embarking on share sales of up to N143 billion to existing shareholders in order to raise funds and clear the backlog of unpaid dollar denominated obligations to suppliers.
Analysts say this is the right time for them to come out and raise capital because the market sentiment is much better and positive, adding that it is cheaper for these firms to opt for a right issue than borrow because of the high cost of borrowing.
“Most of them are having challenges, given the huge finance costs in their books. Their finances have been pressured because of foreign exchange challenges,” said Saheed Bashir, head of research at Meristem Securities Limited.
“They have losses, so they require additional capital and it is equity capital that comes to mind because debt capital would increase their financial leverage,” said Bashir.
The cumulative right issue planned by consumer goods giants: Flour Mills Nigeria Plc, Guinness Nigeria Plc and Unilever Nigeria Plc stood at N143 billion to date.
The management of PZ Cussons Nigeria (PZ) and Flour Mills of Nigeria Plc, disclosed that 100 percent of their payables are dollar-denominated, and they risk significant FX losses if unsettled in the event that the naira devalues further from current level, according to analysts at Cordros Capital Limited.
Analysts are of the view that consumer goods firms may face fresh headwinds in 2017 because of the possibility of another round of petrol pump price hikes or currency devaluation.
The International Monetary Fund (IMF) said that the naira is overvalued by about 10 percent to 20 percent and urged policy makers to look into foreign exchange policies.
“Consumer wallets continue to face headwinds, with currency weakness, high inflation, rising energy costs, job losses and an overall slowing economy,” said Pabina Yinkere, head of research at Vetiva Capital Management.
“As a result, the near term outlook for the consumer goods sector is not exciting,” said Yinkere.
The consumer goods firms have been buffeted by a severe dollar shortage that hindered them from importing raw materials to meet production demands, rising production costs fuelled by huge energy costs and weak consumer spending.
A weak currency also saw the price of imported raw materials spike, hence spiralling cost of production. Dangote Sugar Refinery said in its 2016 financial year that a shortage of gas at the factory forced it to switch to an expensive source of energy- the Low Pour Fuels Oil (LPFO).
Also, the price of raw sugar went up 97 percent.
Nigeria’s economy shrank by 1.50 percent in 2016 on the back of lower oil price, according to the National Bureau of Statistics (NBS).
Annual inflation in Nigeria stood at 17.26 in March compared to 17.78 percent in February, according to a recent report by the NBS.
Unilever plans to convert its outstanding Foreign Currency Loan (FCY) of N15.14 billion from its parent company Unilever Finance International AG into equity.
A Debt to equity conversion is positive for the firm as it eliminates FX loan servicing and repayment.
Firms had borrowed money from banks to fund capital projects when the exchange rate was N197 to the US$ but a sudden devaluation of the naira in June 2016 by the central bank ballooned dollar denominated debt as the naira lost 37 percent against the U.S currency.
“Most companies, particularly consumer ones, have found it very challenging,” said Robert Omotunde, an analyst at Afrinvest West Africa Ltd.
BALA AUGIE
