Connect with us
nairametrics

Blurb

Nigeria’s investment outlook and Lafarge’s rights issue

In 2018, from Nigeria’s perspective, three important dynamics started to shape the investment outlook for 2019.

Published

on

Lafarge Africa provides grant for startups, Lafarge Africa’s latest earnings report reveals 8.5% decline in gross profit , Lafarge Africa gets new CFO one month after resignation of former finance director, Lafarge Plc reveals why it invited Italian man with Coronavirus to Nigeria, Lafarage Africa group Plc posts a revenue of N213 billion in 2019, profit up N17 billion

In 2018, from Nigeria’s perspective, three important dynamics started to shape the investment outlook for 2019.

US Fed rates

First is the increasing tightening of financial conditions in the US. In 2015, the US Fed raised rates for the first time in a decade, but by 2018, it raised rates four times, following three times in 2017. In the space of two years, the Fed has quickening the rates rises, effectively moved from a position of quantitatively easing to quantitative tightening. In 2019, given the recent statement by the Fed Chairman, Jerome Powell that they plan to be patient with the rising rates, it is expected that the pace will be slow. Nonetheless, companies in the emerging market, coming under pressure following the tightening of financial conditions in the US, have started to change their strategy.

CBN MPC rate

Second, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) has maintained a 14% lending rate since July 2016. In the same period, the national debt has been climbing and these rates, though primarily to sustain foreign exchange liquidity, have helped drive up the yield on government debt and tightened financial conditions for businesses. Another dimension to this is the uncertainty surrounding oil price dynamics for 2019. In the event of a significant fall in oil prices, the Naira faces pressure and prospects of devaluation, while the debts, especially international ones, are likely to be exacerbated by both currency risks and costs.

Nigeria’s GDP for 2018

The third is Nigeria’s recent weak growth. Nigeria’s GDP figures for 2018 have been very weak, recording 1.95% for Q1, 1.5% for Q2 and 1.81% for Q3. Indeed, starting from 2015, the annual growth of GDP has been weak compared to the decade before that, with 2015, 2016, and 2017 growth figures at 2.79%, -1.58% and 0.82% respectively. Given the 2018 trend, it thus means that for three consecutive years, Nigeria is expected to record less than 2% GDP growth. It is worth mentioning two important points in relation to growth, especially from the perspective of firms such as Lafarge. One is that Nigeria’s growth has been weak – the same time as that of South Africa and Angola, the three largest economies in the continent — dragging the region’s growth down. The second point is that Nigeria’s growth is currently worse than the global average, for the first time in almost two decades.

What are the implications of these for Lafarge and similar companies in the medium term?

First, the rights issue to raise the N89.2 billion for its next growth and for the purpose of restructuring its outstanding short term debt of US $315 million shareholder loans presents the best opportunity for the company and its shareholders in the medium term. It allows the company to restructure its loan portfolio through raising the capital internally, rather than through external sources. Given the tightening of financial conditions both in the US, and in Nigeria, and given the uncertainty in relation to oil prices and the stability of the Naira, the rights issue thus provide a fresh opportunity for the firm and its shareholders to defend their investments.

GTBank 728 x 90

The rights issue also provides the company with the needed capital to prepare it for the growth expectations in its key markets of Nigeria and South Africa. While growth has remained weak in the last few years in both countries, there is a strong expectation that infrastructure expenditure will continue to rise and medium-term growth expectations will also improve. Building the capacity now by shoring up its capital base is the right bet for the company for Africa’s two largest economies.

Though the company’s earnings have been weak, it coincided with weak macroeconomic conditions, and depressing business climate. So a right issue will help avoid the further dilution of shareholder value. Paying down debt and the improvement of the company’s financial conditions should have a positive impact on its bottom line (after-tax income). This would create value for shareholders in the near term.

The expectations of strong growth should translate to a positive Profit After Tax (PAT) and Earning Per Share (EPS), dividends, and possibly share buybacks. While the right issue will lead to the dilution of the EPS (earning per share) when completed, it would also avoid the outright dilution of shareholder ownership value. The negligible discrepancy between the share price and the subscription price suggests that the company is very attractive at the subscription price, and the opportunity for shareholders to benefit from improved value additions, reaping the rewards in the form of increased share value (EPS/dividends/buybacks) and this would naturally lead to increased stock prices in the medium term.

Coronation ads

In conclusion, as the rights issue closes in two weeks time, the expectation is that it was the right call. In one of the most aggressive sectors in Nigeria and Africa, the company recognises that it cannot afford to be left behind. This second rights issue will thus shape its outlook for many years to come.


This article was written by Dr Ogho Okiti, CEO of Time Economics.

Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform. To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

Click to comment

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Blurb

Fidelity Bank Plc must cover the chink in its curtains to keep rising 

Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years.

Published

on

Fidelity Bank Plc

The Nigerian banking sector has consistently been one of the most profitable sectors in the Nigeria Stock Exchange market. However, in 2020, Deposit Money Banks (DMBs) have faced a flurry of impediments, which may have affected their solidity.

With reduced income from fee and commission implemented at the start of the year by the Central Bank of Nigeria, the paucity of foreign currency for international transactions, the resulting economic contraction from dire effects of the coronavirus pandemic, and the consequent operational constraints of keeping employees safe, 2020 is obviously fraught with numerous disorders for banking institutions.

 


GTBank 728 x 90
Continue Reading

Blurb

Airtel is paying up its debts

Airtel’s annual report revealed that the company has a repayment of $890 million due in May, as well as, an installment of $505 million due in March 2023.

Published

on

Top payday loans, Airtel is paying up its debts

Airtel’s presence in 14 countries from East Africa to Central and West Africa would have been impossible without relevant financial investments. But, while the funds have been key to its growth in the past few years, many of its financial obligations are starting to mature quickly.

The Covid-19 pandemic has had negative economic effects on different sectors of the economy; however, the resilience of the telecom sector is evident in an increase in Airtel’s income. The overall performance of Airtel increased with a revenue growth in constant currency of 19.6% in Q2 compared to 16.4% recorded in Q1, while revenue on reported basis increased by 10.7% to $1.82 billion, with Q2 revenue growth of 14.3%.


Continue Reading

Blurb

Unilever Nigeria Plc: Change in management has had mixed impact

9 months into the change of management, Unilever Nigeria Plc’s performance in Nigeria has been largely underwhelming.

Published

on

Unilever Overseas increases stake in Unilever Nigeria Plc

Change in the management of a company is never a walk in the park. Transitions usually take time to yield the desired results. Organizations can look to past successful managerial transitions for inspiration, but not for instruction because there is no defined playbook. The decision to replace Mr Yaw Nsarkoh, who served as the Managing Director of Unilever Nigeria Plc until the end of 2019 was plausible, but adjustments were never going to be an easy task.

Mr Nsarkoh had served as Managing Director of the company for 5 years and steered the course of its proceedings with remarkable skill up until the financial performance disaster which culminated in his resignation on November 28th, 2019.


GTBank 728 x 90
Continue Reading