I have written a lot about how counter-productive our trade policy tends to be. In summary, we seem to have a penchant for using prohibitive measures on imports, such as tariffs and bans, as a means for spurring domestic production.
The policy makers who promote this policy argue that such measures shift demand from imported goods to domestic manufacturers which create jobs locally and all that. As I have argued many times before, the policy typically doesn’t work out that way.
First, import prohibitive measures result in higher prices for both imported products and domestic substitutes. Which means consumers suffer a welfare loss from such policies. I have also previously argued that, at least for agriculture, import prohibitive policies don’t necessarily result in welfare gains for farmers. They may be producers, but they are also consumers of the very same products.
Therefore, the welfare gains depend on their net production. If they produce less than they actually consume, then they are losing from such policies. Given that the vast majority of our farmers are subsistence farmers, then that may not be too far-fetched. But what about the large producers? What impacts do such policies have on larger producers? To answer that, we need to understand the difference between productivity and profits.
First, productivity; every economic activity requires the combination of some inputs to produce outputs through some processes over certain periods. As a farmer, for instance, land is combined with seeds, fertilizer, labour, and some other stuff to grow crops during one farming season. Or as a tomato paste manufacturer, you combine tomato concentrate, packaging, labour, electricity, and others to produce tomato paste.
Productivity measures how much output you produce from a given level of inputs, and productivity growth in essence measures how much more output you are getting from the same inputs. As a rice farmer for instance, if you were able to increase your harvest from 0.5 tonnes per hectare to 0.7 tonnes per hectare, then we can say your productivity has gone up. Or if your factory used to churn out 10,000 tins of tomato paste per month, but with the same resources you are able to churn out 12,000 tons, then your productivity has gone up. Its important to note that productivity growth does not mean just producing more but producing more with the same resources.
Profit, on the other hand, is simply the difference between revenues and costs regardless of what happens with productivity. For instance, consider a case where your rice farm has a yield of 0.5 tonnes per hectare but due to some reason, the price you received for rice doubled with your costs remaining relatively fixed. Your profits would go up even though your farm productivity hasn’t changed. In fact, if the price of rice goes up enough, your profits could be higher even if your yields drop to 0.4 tonnes per hectare.
The important takeaway is that profit growth does not necessarily mean productivity growth. Economists tend to care a lot more about productivity growth because that usually implies more economic activity or at least more efficiency. Profit growth is complicated because you could have higher profits with less economic activity. Profits could simply imply a transfer of value from one party to another without any increase in economic activity. In short, increasing profits do not represent increasing economic activity.
So, back to the main question of what impact policies that prohibit imports have on domestic producers.
First, import restrictions almost always increase profits for domestic manufacturers; although, as we have learned, increased profits do not mean much, and in this case, is simply just a transfer of value from consumers to producers. Do such policies increase productivity of domestic firms? The answer in most, but not all cases, is No. Think about it from a practical standpoint. Improving productivity requires effort. What incentive is there for businesses to put in effort to increase productivity if higher profits are already guaranteed?
Consider the fortunes in the domestic palm oil sector for instance. Between 2015 and 2016, the devaluation of the naira combined with a de facto barrier on imported palm oil imposed by the CBN banning the use of foreign exchange for palm, boosted the fortunes of domestic palm oil producers. Domestic producers like Okomu oil and Presco increased their profits by 100 percent and 80 percent respectively. What happened to their productivity? Well Nigeria’s overall output remained stable at about 970,000 tonnes, so it’s safe to say there was no increase in output.
Our yield per hectare remained the same too at 25,597 hg/ha. So, despite the increase in profits, there was no corresponding increase in productivity. It’s also not the case that there was no room for improvement as our yields are significantly lower than Ghana’s at 69,992 per hectare, Indonesia’s at 171,571 per hectare, and Malaysia’s at 172,601 per hectare. Did our domestic firms try to increase productivity? Presco, one of the two largest producers, actually reduced their research budget by almost 50 percent over the period. After all, why put in the effort when you have guaranteed profits?
The dynamics are not unique to the palm oil industry but replicate themselves in most other sectors where import barriers are erected. The result is typically more profits for domestic firms without any increase in productivity. If you combine that with the losses by consumers due to higher prices, then the overall result of such policies is a net loss for the economy.
If import prohibiting trade polices don’t improve productivity, then what does? Competition and innovation is the not so secret answer. Competition, forcing businesses to put in effort, and innovation rewarding businesses that figure out better ways of producing things. This does not imply that there is no room for trade policy, but the target must always be productivity growth, and competition and innovation must be at the centre of such efforts. Else, we are really just moving round in circles.
Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa. The opinions expressed in this article are the author’s and do not reflect the views of his employers.
Merger, Tax incentive boosts BUA Cement FY 2019 result
BUA Cement Plc recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
One of the industries set to experience the downsides of the Covid-19 pandemic is the construction industry. Given the slowdown in construction activities as a result of the lockdowns and constrained economic activities, the reasons are not farfetched.
Prior to the outbreak of the pandemic, Globe Newswire had predicted an accelerated growth pace of the global construction industry from 2.6% in 2019 to 3.1% in 2020. This growth has now been revised to 0.5%. What is even more daunting is that the revised growth rate is based on the assumption that the outbreak will be contained across all major markets by the end of the second quarter of 2020.
It is only after that (including freedom of movement in H2 2020) that events could facilitate reverting to the normal course of activities to foster businesses in the industry like BUA Cement or those that depend on it to restart activities.
Nigeria’s third-largest cement company, BUA Cement Plc, however, still has its 2019 victories in order. Involved in the manufacturing and sales of cement, BUA Cement has 3 major subsidiaries and plants in Northern and Southern Nigeria.
With a market capitalisation of N1.18 trillion ($3.3 billion), BUA is the third most capitalised company on the NSE. Its recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
The company’s profits also increased by 69.1% from N39.17 billion in 2018 to N66.24 billion in 2019. Core operating performance was strong, and this was supported by strong cement sales in the domestic market, impairment writes back, and other income.
The main reason for the company’s increased earnings is from the cost synergy and increased revenue as a result of the merger that took place between CCNN Plc and Obu Cement Company Limited.
There was also a striking jump in its income statement on its tax for the year. For FY 2019, it incurred a tax expense of N5.6 billion, in comparison to the N24.9 billion tax credit it received in FY 2018.
This was as a result of a reversal of previous tax provision made on Obu Line 1; it received approvals for an extension of the company’s pioneer status on Obu line-1 and Kalambaina line-2 in February 2020, to leave effective tax rate at just over 8% in 2019. The pioneer status will help the company save funds that will otherwise have been spent on higher taxes.
(READ MORE:Dangote Cement to access more debt funding)
BUA reported an impressive FY’19 result. Its performance shows the growing strength of the company and its increasing market share. On the back of the strong performance, management declared an N1.75 dividend per share that translates to a dividend yield of 5.5% on current prices.
Cash flow position was also robust with a strong closing cash balance – from N2.8 billion in 2018 to N15.6 billion as at year ended 2019. The company’s growth, as well as the impact of its merger, present a great buy opportunity of the highly capitalized, low-cost stock. As of today when the market closed (21st May) its share price stood at N35.60 from a 52-week range of N27.6 and N41.
What we see is a great growth stock further heightened by the population expansion and increased urbanization. However, we expect the impact of the Covid-19 pandemic to be felt from the Q1 results of the company.
The industry could slow down for the year as the level of commercial construction also slows down. Yet the best part of holding stocks like this is that even with stalled operations for a period, a resurgence will always emerge.
Analysis: Airtel Nigeria is winning where it matters
Airtel has left no stones unturned in ensuring that its provisions are top-shelf – subscribers to the network, of course will have their own ideas.
Airtel might have won our hearts over with internet-war adverts starring our favourite tribal in-laws, but its fundamentals are what will make us the bucks that keep us happy. Airtel Africa Ltd is a subsidiary of Indian telecoms group, Bharti Airtel Ltd; the group has left no stones unturned in ensuring that its provision of prepaid plans, credit transfers, mobile internet services, messaging, roaming facilities and more, are top-shelf – subscribers to the network, of course, will have their own ideas.
Since last year when Airtel Nigeria became the second telecommunication company in Nigeria listed on the NSE, the company has experienced a steady level of growth. With a presence in 14 African countries, the group’s strength lies in its diversity with stronger companies mitigating the poor performances of others.
Performance Overview: Airtel Africa
Airtel Africa’s report for the year ended March 2020, revenue jumped by 10.9% from $3.1 billion at the year ended 2019 to $3.4 billion in 2020. The consolidated profit before tax also jumped by 71.8% from $348 million in 2019 to $598 million in 2020. However, profit for the period dropped by 4.23% with earnings of $408 million in 2020 from the $426 million it had earned in 2019. A reason for this is the tax figure that moved from a credit of $78 million in 2019 to tax payments as high as $190 million in 2020. Total assets also jumped by 2.41% from 2019’s value of $9.1 billion to $9.3 billion in 2020 primarily as a result of their acquisition of more property, plant, and equipment (PPE). The total customer base grew by 9.3% to 99.7 million for the year ended.
Full Report here.
Revenue growth of 10.9% was driven by double-digit growth in Nigeria and East Africa. However, the rest of its African operations experienced a decline in revenue. Its success in Nigeria is especially commendable, considering the fact that the company lost more than 100,000 subscribers in Nigeria between December 2019 and January 2020. Raghunath Mandava, Chief Executive Officer, remarked that the results which were in line with the group’s expectations, “are clear evidence of the effectiveness of our strategy across Voice, Data and Mobile Money.”
Behind The Numbers – Nigeria
Airtel Nigeria’s performance indicates the company is making the right calls in a very competitive industry. Nigerians are fickle when it comes to data and voice but will spend if the service is right. The company grew its data revenue by a whopping 58% to $435 million a sign that its strategy to focus on data is working. Voice Revenues for the year was up 15% to $850 million. In total, Airtel Nigeria’s revenue was up 24.4% to $1.37 billion. Ebitda margin, a number closely watched by foreign investors 54.2% from 49% a year earlier. Operating profit for the year ended also jumped by 52.6% for the year from 2019 and 32.4% from Q1 2019. Total customer base in Nigeria also grew by 12.5%.
Nigeria is surely critical to Airtel Africa’s future seeing that it contributes about one-third of its revenue. Recent results thus indicate it is winning where it matters most and it must continue to stay this way if it desires to survive a brutal post-COVID-19 2020. Telcos are expected to be among the winners as Nigerians rely more on data to work remotely but there are other players in this game. Concerning the impact of the pandemic, he explained that at the time of the approval of the Group Financial Statements, the group has not experienced any material impact arising from the impact of COVID-19 on its business.
On cash flows…
The group has also taken measures to enhance its liquidity. The CEO explained that it is moving its focus to enhance liquidity towards meeting possible contingencies.
“Having considered business performance, free cash flows, liquidity expectation for the next 12 months together with its other existing drawn and undrawn facilities, the group cancelled the remaining USD 1.2 billion New Airtel Africa Facility. As part of this evaluation, the group has further considered committed facilities of USD 814 million as of date authorisation of financial statements, which should take care of the group’s cash flow requirement under both base and reasonable worst-case scenarios.”
To this end, they have put in the required strategies to preserve its cash as its cash and cash equivalents, consequently, jumped by 19.1%.
Investors looking at this impressive result will be wondering if this portends a buying opportunity. Airtel Nigeria closed at N298 on Friday and has remained at this price for about a month. The stock is quite illiquid and is not readily available to buy.
It’s the price to earnings ratio of 4.56x makes it quite attractive. Further highlighting this opportunity is its price-to-book ratio which is as low as 0.5273, suggesting that the stock could be undervalued. Whether it is available to be bought, is anyone’s guess.
Analysis: Nestlé strong but exposed.
Being a market leader is great, but in times of economic despair, it can quickly turn you into prey.
With about six decades of being the choice companion for families within Nigeria and the diaspora, Nestlé Nigeria Plc has positioned itself as one of the largest food and beverage companies on the continent. Owing to the expansive growth of Nigeria’s population – one projected to reach 300 million by the year 2030, as well as the growing middle class, the FMCG sector has a very positive outlook.
Consequently, Nestle’s leadership in the industry and its huge market size expectedly gives it a huge advantage. However, with the global economy barely racing against the impact of the Covid-19 pandemic, even the brimming FMCG sector will experience its own level of disruption.
Nestle’s recently released Q1 2020 financials reveal a revenue decline of 0.9%, as it dropped to a marginal ₦70.33 billion from the ₦70.97 billion turnover it garnered in Q1 2019. The profit before tax also experienced an 8.7% drop while the profit after tax had a 12.84% drop, both yielding ₦17.5 billion and ₦11.2 billion respectively, for the first quarter of this year. This is predominantly owing to its increased losses from its overseas activities.
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The company procures all of its raw materials on a commercial basis from overseas and local suppliers; consequently, the percentage of its supplies dependent on international suppliers had a negative impact on its Q1 2020 financials. Its profits were plagued by a foreign exchange loss of ₦154.7 million from ₦18.9 million, an even higher loss of 720.6%. While the company did not disclose the value of its export revenue, we believe it too might have suffered from reduced exportation in the latter part of the quarter.
The group has since been taking on expansionary projects, such as its launch of a second beverage production plant in Ogun State in February of 2018. The company, on a continuous basis, explores the use of local raw materials in its production processes, contributing its own quota to the Nigerian economy.
Just last week, Nestlé’s stocks went up 2.56% to close at ₦1000, a price it still currently holds today after markets closed. Its price to earnings ratio is 18 and its earnings per share (EPS) of 55.54, signal an investor sentiment of confidence. However, its high price to book ratio of 13.9865 reveals that the company is slightly overvalued and its price of ₦1000 makes it attractive primarily to institutional investors that can afford to purchase large volumes of the stock enough to benefit from its steady growth in value. The company had proposed a dividend payout of ₦45 per share. This also comes after paying ₦25 per share interim dividends earlier. Its dividend yield at the time of writing this is 7%, further heightening the possibilities for the income investor.
While the company has strong fundamentals governed predominantly by its position as a market leader, its years of experience, and its existence in the FMCG sector, it too might not have a smooth sail in the coming quarter. Its overseas business from both the supply and the demand sides are expected to experience a further decline, ultimately resulting in an even lower relative turnover and lower earnings.
We also expect the decline in average disposable income of Nigerians from loss of jobs and an overall wariness of the economic impact of the pandemic, to further drive down turnover; however, sound operational efficiencies and cost control/ profit strategies by the group could ease the burden. The company fundamentals remain strong but its exposure to consumer disposable income remains a major concern. There is always a cheaper alternative and when your pocket empties your choice for cheaper substitutes swells.