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.
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.
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.