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Bottom Line: C&I Leasing is in bed with debt

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Photo by Ahmed Ashhaadh on Unsplash

C&I Leasing: Whenever a company reports profits backed by strong operating cash flows it excites my senses. In a world where profits and cash mean two different things, you will be foolhardy to rejoice whenever a company declares profits without backing it with some cash.

In its recently declared 2017 results, C&I Leasing did just that. The company reported a 19% rise in profits to about N1 billion. Operating cash flows after paying suppliers, salaries and other expenses was a healthy N9.9 billion cash. The company went to work with the money and spent N7.7 billion on operating lease assets. On Marine Equipment it splurged N5.9 billion and on cars and trucks another N1.8 billion. By the time it was done spending, it had about N2.1 billion left to spend on other things such as debts and maybe dividends.

But C&I Leasing ended the year with just N119 million out of which was N72 million, the opening cash balance at the beginning of the year. From the N2.1 billion left after spending on new assets, C&I Leasing generated just N17.8 million in extra cash. Dig a little bit further up the results and it’s easy to see what had happened. The company is basically in bed with debt.

The company has a Balance Sheet size of N45 billion out of which N35 billion made up of all kinds of debt. The interesting thing about its debt profile is not just that it is 3.5x its equity it is the number of people that the company is owing. C&I owes just about every category of debtors from banks, bondholders, tax authorities, suppliers and even retirees. It’s a long list that can make any perennial borrower proud. Who are these creditors you may wonder? So I’ll give you a little run down.

For banks it has owed, Access Bank, Diamond Bank, Citi Bank, FCMB, GT Bank, Fidelity Bank, First Bank, UBA, Zenith Bank, Standard Chartered Bank, FSDH Merchant Bank, Absa Bank, Lotus Capital, Stanbic IBTC and Intercontinental Bank – Cedi. That is about 15 banks by my count.

It also owes another N9.6 billion to “Individual Clients” and “Institutional Clients” as at 2017. In fact, its individual clients are owed about N6.9 billion. Loans from Institutional Clients include those from Bank of Industry, B.V. Scheepswerf Damen Gorinchem, a Netherlands Based lender. How a company deals with this multitude of lenders is stuff made for MBA Classes and their case studies. I have been analyzing company financials for about 10 years now, but I have not seen anything like this before. Even the folks at Oando should be proud of this.

It is interesting to note that despite these complex web of lenders, C&I Leasing has somehow managed to meet its debt obligation. It does this by outright paying off the debts when they are due or kicking the can down the road as its typical with Nigerian businesses. Rather than register a default, they negotiate with their banks and roll over the debts by restructuring with new terms and tenor. This creates a win-win situation where the bank avoids to book a loan loss provision, earns some new fees and the company in return gets a breather on its cash flows. In all this, someone suffers, and that person is you the shareholder.

Apart from the paltry dividends, it pays to its shareholders, its share price was before now nothing to write home about. Between 2015 and 2017 it traded flat at 50 kobo before it more than doubled to N1.9 between 2017 and as at this week. The rally, which is typical of Nigerian stocks probably has little to do with its fundamentals.

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In fact, a dilution of its shares is very plausible considering that it has about N2.2 billion in deposit for shares which if it converts can amount to about 1.2 billion units. The deposit for shares is a $12.48 million coupon convertible notes which it received from Aureous LLC Africa (yet another creditor).

If this crystallizes, (of which it will because C&I has agreed to convert it) the shareholders could give up 43% of shareholdings to Aureos LLC Africa, the holders of the coupon convertible notes. Some analysts believe this perhaps explains the recent rise in its share price as these dynamics typical paves the way for a new round of equity raise.

Bottom Line

C&I Leasing is an example of truly Nigerian dream and one should give the Vice Chairman Emeka Ndu credit for founding this company and keeping it alive since 1991. His profile perhaps explains the dexterity to which it has been in bed with debt over the years. However, it is time it reduces its reliance on debt in exchange for patient capital. There is increased competition in this space and some of the newer leasing companies are not quoted, have patient capital, scaling gradually, nimble and aggressive at chasing new and existing businesses. C&I leasing has the experience, brand name, and economies of scale to still muscle them out. Unfortunately, these all amount to nothing, if it cannot shake off its weakness….its flirtation with debt.

 

 

 

 

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Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market.Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

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      Blurb

      NB Plc’s share price and dividends keeping shareholders happy

      It was not all hunky-dory for the company as its cost of sales jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021.

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      Jordi Borrut Bel, Nigerian Breweries Plc

      Nigerian Breweries Plc (“NB Plc” or the “Company”) reported its first-quarter (Q1) 2021 results on April 23, 2021.

      The company’s performance was impressive considering the headwinds it faced late in 2020 and early 2021 from inflationary pressures, poor consumer purchasing power, lethargic economic growth, and increase in the company’s beer prices which took effect from Q4 2020.

      The company achieved a net revenue for the three months to March 31, 2021 of N105.68 billion compared to N83.23 billion for the same period to March 31, 2020 — a 27% increase compared to the Q1 2020 results.

      It also achieved a N39.67 billion gross profit — a 13.7% increase in gross profit compared to Q1 2020.

      Quarter-on-quarter EBITDA rose by 22.8% from N19.82 billion in Q1 2020 to N24.34 billion in Q1 2021. Other positive outcomes quarter on quarter were the increase in operating income (from N10.94 billion to N14.49 billion), profit before tax (from N8.3 billion to N11.51 billion), and profit after tax (from N5.53 billion to N7.66 billion).

      It was not all hunky-dory for the company as its cost of sales (direct costs attributable to NB Plc’s production) jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021, an increase of N17.7 billion. According to the company, its costs are subject to seasonal fluctuations as a result of weather conditions and festivities. As a result, the company’s results and volumes are dependent on the performance in the peak‐selling season, typically resulting in higher revenue and profitability in the last quarter of the year.

      The total cost of sales, marketing and distribution, and administration expenses grew from N72.47 billion in Q1 2020 to N91.63 billion in Q1 2021 – a jump of 26.43%. This jump was largely attributable to the cost of raw materials and consumables which grew to N46.53 billion (compared to N30.2 billion for the same period in Q1 2020).

      The raw materials cost pressure has been a trend since Q2 2020 driven by the rising commodity prices, foreign exchange devaluation and domestic inflationary pressures. As a result, the cost of the raw materials to net income ratio has continued to rise. This ratio was 36.3% in Q1 2020 but has risen to 44% in Q1 2021.

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      What may be a source of particular concern for the company is how well working capital is being managed from a liquidity and leverage perspective. The company reported cash and cash equivalents of N30.37 billion in Q1 2020, this had dropped to N18.43 billion by Q1 2021. In the same period, trade debtors and other receivables (i.e., those that owe the company for purchases that have not been paid for) had increased from N11.42 billion in Q1 2020 to N23.48 billion in Q1 2021, an increase of over 105% in just 12 months!

      More worrying, in terms of magnitude, are trade creditors and other payables (i.e., those that the company owes payments for goods and services purchased) which grew from N139.2 billion in Q1 2020 to N145.41 billion in Q1 2021, a rise of N6.21 billion (or 4.5%) in just 12 months.

      While the company’s loans and borrowings had reduced significantly (short-term loans in Q1 2021 was N35.65 billion versus N39.64 billion in Q1 2020; and long-term loans in Q1 2021 was N15.87 billion versus N51,81 billion in Q1 2020), the cost of borrowing, that is, interest expenses that the company paid on borrowed funds, rose from N2.7 billion in Q1 2020 to N3 billion in Q1 2021. This suggests that while short term and long-term borrowing have reduced, working capital needs are being refinanced at a higher cost or alternatively, most of the reduced short term or long-term borrowings have simply been restructured from longer-term loans to shorter-term overdrafts and commercial papers with a higher interest expense. The balance sheet as of Q1 2021 showed a liability in the form of bank overdraft and/or commercial papers of N21.44 billion which was not in the books in Q1 2020.

      The first-quarter report also showed that as of March 31, 2021, the company had revolving credit facilities with five Nigerian banks to finance its working capital with the approved limit of the loan with each of the banks ranging from N6 billion to N15 billion (total N66 billion). N9 billion of the available amount was utilized at end of March 2021 (2020: Nil).

      It should be noted that NB Plc’s financial statements for the 3 months ended 31st March 2021 are yet to be independently audited, so the results may be further improved or be worse, depending on the views and professional opinion of the external auditors in terms of accounting treatments and management judgement on significant transactions.

      From the company’s numbers and explanations, the results are clearly driven by:

      (1) Benefits from its increased pricing with the raised prices taking effect from December 10, 2020. The increases ranged from 5.2% to 6%, mainly on selected brands packaged in aluminium cans and on the 600-ml Star Larger returnable glass bottle.

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      (2) Volume growth in its premium brands (particularly Heineken) and non-alcoholic portfolio (particularly Maltina).

      (3) Relative inelastic demand for its portfolio mix despite price increases, availability of substitutes, and stagnate consumer wages eroded by inflation. In economics, inelastic demand occurs when the demand for a product remains static or changes less than changes in price.

      Overall, the company achieved outstanding results that would have confounded analysts’ estimates. Given continued inflationary trends and currency depreciation, it would be interesting to see whether turnover and profitability growth are sustainable over the remaining quarters of the year. On its financial year 2020 performance, the company paid a final dividend of NGN0.69 in April 2021 (interim of NGN0.25 paid in December 2020). If the trend is sustained, it can only be good news for NB Plc in terms of increases in its share price and dividends for its shareholders.

      Heineken Brouwerijen B.V owns 37.73% of the company to which NB Plc pays annual technical service fees and royalties.

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      Blurb

      Dangote Cement is creating its own luck

      Not only was the company able to basically eliminate Nigeria’s dependence on imported cement, but it also made Nigeria an exporter of cement to other neighbouring nations.

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      Aliko Dangote rallies private sector operators against COVID-19, 10 fantastic things Aliko Dangote has done in the last 10 years

      The year 2020 came with good tidings for Dangote Cement Plc. Beyond commissioning its Onne Export Terminal in Port Harcourt and its gas power plant in Tanzania, the group bagged over a trillion in revenue—a 16% jump from its N892 billion turnover in the year 2019. The company also successfully carried out a bond issuance and buyback programme while increasing its capacity by 3 million tonnes in Nigeria. Group sales volumes were up by 8.6% to 25.7 million tonnes across both cement and clinker lines, and finance income increased by 292% to about N30 billion, culminating in a profit before tax of N373 billion. Not bad at all for a pandemic-stricken year. Interestingly, most of these didn’t come by chance; the company appears to be creating its own luck.

      READ: Dangote Cement considers debt funding options under 300 billion bond issuance programme

      Here’s how:

      Tighter Costs

      It is not uncommon to see companies significantly increase their administrative or marketing costs in a bid to attain higher turnover. If it is because they believe that there is a direct correlation between how much is spent on overheads or marketing and the increase in revenue, Dangote Cement has certainly proven them wrong. Administrative costs for the year 2020 remained comparatively the same as its 2019 figure and selling and distribution expenses were even marginally lower despite its higher revenue. Hence, despite the circa 49% increase in taxes from its previous year disbursement, Dangote Cement still attained a profit of N276 billion for the year—38% higher than the previous year.

      READ: Aliko Dangote’s net worth falls by $1.4 billion in Q1 2021 amid stock market sell-off

      Increased investments (& Liabilities)

      While it is true that you need to spend money to make money, expenses don’t do much when it comes to growth—investments are what make all the difference. Dangote Cement currently has its operations in Cameroon (1.5Mta clinker grinding), Congo (1.5Mta), Ghana (1.5Mta import), Ethiopia (2.5Mta), South Africa (2.8Mta), Tanzania (3.0Mta), and Zambia (1.5Mta), amongst others. In addition to its 32.25Mta production capacity in Nigeria, it now boasts a total of 48.6Mta capacity across Africa.

      Not only was the company able to basically eliminate Nigeria’s dependence on imported cement, but it also made Nigeria an exporter of cement to other neighbouring nations. Its financials reveal a 15% increase in PPE to N1.4 trillion, also leading to a proportionate increase of 16% with N2 trillion in total assets. The downside? A 34% increase in total liabilities to also over a trillion, with both current and non-current liabilities increasing from prior year figures. With the higher demand for cement following recovery infrastructure spending, demand for more concrete roads, and increasing real estate development projects, its investments and industry monopoly will, however, place it in one of the best positions it can be. Consequently, it still has some of the best long-term credit ratings globally—and expectedly so.

      READ: Dangote Cement pays N1.1 trillion in dividends in 5 years.

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      Investor Focused

      The Chief Executive Officer, Michel Puchercos, in his notes on the results, revealed that Dangote Cement experienced its strongest year in terms of EBITDA and volumes; he also attributed a lot of it to their increased focus in protecting their people, customers, and communities particularly from the impact of the pandemic. Earnings per share, as noted in the results, was up 36.9% to ₦16.14 and proposed dividend was maintained at ₦16.00 per share. The company has paid more dividends to shareholders in the last five years than any other company on the NSE. However, with its cement rumoured to be one of the most expensive globally, offering value to its investors is certainly the least it can do.

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