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Productivity-enhancing reforms is required for quick economic recovery – World Bank
PFAs investment in FGN securities rises by 3.7% in November 2020
COVID-19 Update in Nigeria
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Blurb
NHF Bill: Experts differ on implications for the economy
Nigeria’s housing sector has been characterized by a housing deficit estimated at 18 million units.
Among the 17 sustainable development goals (SDGs) adopted by the United Nations (UN) and its Member States, “housing for all” forms one of the specific targets to be achieved by 2030. But 2030 is almost here, even as the issue of housing deficit continues to become worse; despite claims by successive governments to have tackled the perennial problem in their bits.
Recently, there have been debates coming from different quarters in Nigeria regarding the proposed National Housing Fund (NHF) bill, which is currently awaiting Presidential assent. Several top financial and tax analysts have rightly argued different sides to the NHF bill and its possible impacts on Nigeria. And while some are calling for the bill to be scrapped, others are throwing their weights behind it.
How housing development impacts the economy
In economic terms, the development of the housing sector forms an integral part of any country’s economic progress. Whether it is construction, rental or sale, each layer contributes spiral effects on the economy.
Basically, the influences of the housing sector on national economies can be summarised. Firstly, while housing fulfills a basic human need for shelter, it also provides the base from which households participate in the economy. Secondly, housing is the largest single asset most households will accumulate during their lifetime. Therefore, housing constitutes an important part of most countries’ stock of wealth.
An overview of Nigeria’s acute housing deficit
Despite having an estimated population of over 190 million population, Nigeria’s housing sector has been characterized by a housing deficit estimated at 18 million units. Earlier reports from the World Bank (as cited by Global Property Guide) shows that Nigeria needs about 700,000 additional units each year for the next 20 years.
However, recent Reports have shown that for the nation to upturn the high deficit figure, an additional 2 million housing unit per annum will be required for the next 10 years.
Like Nigeria, other nations equally affected
The UN-Habitat report for 2016 shows that globally, one in eight people live in slums. In total, around 1 billion people live in slum conditions today. According to the UN, the numbers are continuously increasing.
The majority of the slum dwellers are in developing economies. In spite of great progress in improving slums and preventing the formation of slums, 30 percent of the urban population living in slums in developing countries. It was further reported that 35% of the world population lives in unimaginable housing situations, representing over 2 billion today.
Recent declines
It has been revealed that the Nigerian housing sector has recently been declining, especially so during the better part of the last 5 years. Moreover, when compared to the housing sectors of some of the most advanced countries in the world, the Nigerian housing sector still has a long way to go. For instance, the Housing sector in countries like the US and Australia boasted largest in terms of the sector’s contributions to GDP and the highest employer of the labour force.
More investments needed to close housing deficits
Recent online statistics have revealed that the Nigerian housing sector would need about $400 billion investment over the next 25-30 years to reconcile this deficit.
Also, reports have shown that the World Bank stated N59.5 trillion would be needed to adequately meet the housing needs of Nigerians. To corroborate this, the Special Adviser to the Nigerian President on Economic Matters, Mr. Adeyemi Dipeolu, during the second Nigeria Housing Finance Conference in Abuja in 2018, stated the following:
“Government is giving FHF N100 billion yearly for the next five years with anticipation that it is going to leverage one trillion Naira of private resources.”
Analysts at loggerheads on the impact of proposed NHF law
Recall, that the revised National Housing Fund Law was recently passed by the National Assembly and submitted to the President. Nairametrics also joined in the debate, highlighting the possible elevated costs it could entail for several businesses in the country.
Global tax and consulting conglomerate, Price Waterhouse Coopers (PWC) has also opined that the “proposed law is a bad idea”.
The Head of Tax and Regulatory Services at PwC Nigeria and Tax
Leader for PwC West Africa, Mr. Taiwo Oyedele, called for the total withdrawal of the bill. The tax guru stated:
“The main objective of NHF should not be just to make affordable funding available for housing but to create an environment that makes affordable housing possible. To achieve this, Nigeria must adopt a holistic approach to the challenges facing the sector of which affordable financing is only a component.”
He further stated the following:
“The fact that there is no marked progress to show for the 27 years of establishing the NHF is proof that Nigeria’s housing problem cannot be solved by simply
throwing more money at the problem.”
On the contrary, some people are of the opinion that the NHF law is a good thing for the Nigerian economy. The Founder and Publisher of Nairametrics, Mr. Ugohukwu Obi Chukwu, threw his weight behind the proposed NHF bill thus:
“NHF is a contribution towards acquiring an asset, in this case, a home. It’s also important to note that NHF is a relief against tax.
“Nigeria’s property market faces a paucity of funds, thus a law that mandates every employee to contribute a part of their earnings towards owning a home is important. Just like pension funds, NHF pools funds from every employee allowing contributors to borrow money against owning a home.”
The financial expert further stated:
“NHF has largely underperformed due to the way it was structured thus the change of the law. Before now NHF was not mandatory which was why it did not have the fund size required to create loans and support the housing sector. By making it mandatory, more funds will be channeled to the fund making it easier for contributors to borrow.
This is a similar model to what esusu’s have used effectively for years now. A robust NHF will also help create new financial services products such as hedging and derivatives which will help reduce lending risks.”
Similarly, a housing industry expert, Mr. John T. Ikyaave, described the recent passage of the revised NHF bill as a positive development. According to him:
“the new NHF bill, which is now awaiting the assent of President Muhammadu Buhari, would support the provision of housing loans at best and lowest market interest rates of between six and nine percent that can be paid for a period of up to 35 years.”
“The proposed NHF law takes private sector profits and transfers to a Government program, without imposing a tax. If the Federal governemnt can unilaterally debit Profit before Taxes (PBT), then what stops another Government debiting PBT to fund “Water for All?
“The proposed law accumulates savings at a negative rate , thus a huge opportunity cost to “savers”. All these without a mention of the Land Use Act, credit rating even cost of homes.”
He stated further,
“Rather than a punitive fund, take the unclaimed dividend fund and “lend” to the NMRF at 2% Per annum for a 30 year zero coupon bond. Transfer the NLNG dividends to this fund as well. Create a N1trillion refinance fund, let developers build affordable homes…..THEN securitize the rentals into a Mortgage Backed Security and sell to the NMRF….as was designed.”
Blurb
Champion Breweries, Raysun deal highlights disclosure shortcomings
Is Heineken taking over Champions Brewery?
Champion Breweries Plc informed the Nigerian Stock Exchange, last week, via a press release that an insider, Raysun, had purchased about 1.9 billion shares at a price of N2.6 per share.
The disclosure was part of the stock exchange’s requirement that listed companies must reveal deals made by insiders of the company for the benefit of shareholders and the investor community.
That’s about how far the press release went. It did not reveal why Raysun was purchasing? Who they purchased the shares from and why the deal is being consummated? In terms of corporate disclosure, this was a dud.
READ: Analysis: Japaul, Ardova, Champion Breweries; What is behind the deals?
Raysun is the largest shareholder and majority owner of Champions Breweries. Raysun is also an entity owned by Heineken, the majority shareholder in Nigeria Breweries Plc – the largest brewer in the country. Thus, Heineken is an indirect shareholder of Champions Breweries.
These relationships give this deal enough scrutiny to warrant a better disclosure starting from the actual purchase of shares revealed in the press release.
Here are some contexts;
Champion Breweries shares breakdown
- Champions Breweries has a total of 7.82 million shares outstanding at the time of this purchase
- Raysun held about 60.4% shares in Champions Breweries according to disclosure in its 2019 annual report.
- Asset Management Nominees and Akwa Ibom Investment Corporation own 12.3% and 10% respectively. The rest of its shareholders own about 17.3% or 1,351,954 units.
- At the current share price of N1.12, Champion Breweries is valued at N10.57 billion by the market.
- However, Raysun’s purchase of 1.9 billion shares at N2.6 per share (valued at N4.9 billion, almost half of the current market capitalization), now values the company at about N20.3 billion.
READ: Court threatens to sell Ecobank and Union Bank branches
Where did the shares come from? This is a vital question and here is why.
Going by the number of shares they bought last week (24% of equity), they only could have been able to purchase that many shares by buying up all the shares owned by the Asset Nominees (12.3%), all the shares owned by Akwa Ibom Investment Corporation (10%) and another 3% from other regular shareholders.
It could also be that either or both Asset Nominees and Akwa Ibom IC sold part of their shares and then they made up the rest by purchasing some from the market. Why is Heineken, through Raysun, acquiring so many shares? Is there a takeover deal in the offing? Do they plan to merge Champions Breweries with Nigeria Breweries or still keep it as a standalone company? Will Champions Brewery cease to exist if there is a merger or will they delist following this massive acquisition of the shares of their subsidiary?
READ: Champion Breweries gains 32.35% in a week, following Heineken’s indirect acquisition of its shares
The speculation is palpable.
This is what happens when listed companies refuse to properly disclose transactions involving mega share purchases of this nature. How does a majority shareholder go from 60.4% of shares to 84% and an announcement is not made explaining or clarifying who sold and if this is a takeover bid.
But investors seem not to mind at the moment, if the momentum of the share price is anything to go by. A 57% year to date gain is a testament to this. It appears investors expect a mandatory takeover announcement to be made anytime soon and are scrambling for the shares ahead of any announcement.
READ: Resort savings raises N4.3 billion, as Camey and Rock acquire majority shares
Unfortunately, this is not how markets should work anywhere, and the sooner it stops the better. The Nigerian Stock Exchange has made massive progress with compliance to disclosure requirements and we believe strongly that they will at some point bring Champion Breweries to order and have them disclose all the requisite information about this transaction. Better late than never.
Blurb
Downstream players suffer revenue declines due to Covid-19, forex, fuel subsidy
2020 has no doubt been one of the most challenging years for players in the oil and gas downstream sector, having to deal with several issues.
Nigeria’s downstream oil and gas players are in the midst of one of the lowest revenue declines in their history of operations. In an industry used to the highs and lows of economic and commodity price cycles, 2020 poses one of the greatest challenges to oil and gas companies.
Total Plc, 11 Plc, MRS, Ardova and Conoil are some of the major downstream players (all quoted) that have suffered revenue declines and margin drops in one of the worst years in modern history.
READ: Aviation: Nigerian ground handling firms count revenue losses due to pandemic-induced plunge
- Conoil Plc, one of the major downstream players reported its 2020 9 months results revealing revenue declined 21.84% YoY t0 N88.1 billion.
- 11Plc, another major player in the sector, also saw its topline revenues plummet from N141.5 billion in the first 9 months of 2019 to N114.7 billion in the corresponding period in 2020.
- Total Nigeria Plc, one of the largest players in the downstream sector also recorded declining revenues. In 2019 it reported total sales of N181.6 billion compared to N117.3 billion in 2019. The 35% drop was the largest of the lot.
- The only outlier of the lot was Ardova Petroleum which somehow managed to record revenue growth with 2020 9 months revenue rising to N116 billion compared to N110.7 billion same period the year before.
READ: Nigeria’s 5,000 BPD refinery will produce 271 million liters of petrol every year
In general, revenues for the major oil and gas downstream players in the country fell by a whopping 21% from N646.8 billion in 2019 (9M) to N514.2 billion in the corresponding period in 2020. What is to blame for these declines? Covid-19!
The Covid-19 pandemic triggered a nationwide lockdown for most of 2020 that has negatively impacted demand for petroleum products across the country. The lockdown has grossly affected volumes for downstream oil and gas companies hitting their margins and profitability.
READ: Why listing of oil companies will stimulate industry growth – NCDMB
Businesses across the country such as manufacturers, airlines, restaurants, schools, the transportation sector and motor vehicle owners have all reduced their demand for fossil fuel.
The downstream sector has also struggled to take advantage of the drop in oil prices as they still need to deal with the multiple devaluation of the naira and being able to gain access to foreign exchange. Their inability to access the forex market leaves them with little choice but to continue to rely on NNPC, the sole importer of petroleum products for their inventories.
READ: Jitters as Nigerian banks brace up for more loan provisioning
In a recent comment, the Chairman of Depot and Petroleum Products Marketers Association of Nigeria (DAPPMAN), Mrs. Winifred Akpani, lamented that “the inability to source FOREX from the official CBN FOREX window by independent marketers is continually hindering the effectiveness of the principles of DEMAND and SUPPLY market forces to correct the current inefficiencies in the pricing mechanisms adopted in the deregulation process.”
Mrs. Akpani also explained that inability of marketers to source FOREX creates a situation which can be described as “pseudo subsidy” in the market, suggesting that being forced to sell petroleum products at fixed prices means they cannot recover their importation cost, most of which is paid for in US dollars.
READ: FG gives reason oil marketers are not yet importing petrol, stops monthly price fixing
This is further exacerbated by the fact that the federal government regulates pricing irrespective of the unique operating costs of these private oil companies. Also, being the sole importer of petroleum products means the NNPC will likely pass on inefficiencies in managing cost to petroleum marketers, eliminating any chances of efficient pricing that can be obtained from increased competition. The effects of these are low profit margins and ‘never-shifting’ revenue positions, except for exceptional cases.
READ: Has petroleum product deregulation finally come to roost?
Last December, the Federal Government revealed it was ending its subsidy programme, increasing fuel to reflect its market cost. However, it balked after pressure from the labour unions, reducing prices without recourse to sector players.
Despite these challenges, the sector will likely eke out some profits largely due to cost cutting initiatives and income from ancillary businesses. However, dividend payment might be a challenge as it will be advisable for these companies to set aside cash for what could be a pivotal year.
READ: Nigeria to import petroleum products from Niger Republic, sign MoU on transportation, storage
The Petroleum Industry Bill (PIB) will likely be signed into law this year and will produce new investment opportunities for the downstream sector if things go as planned. The government will likely relinquish its hold on the sector and fully deregulate the downstream before the end of the year.
When it does, those with a strong balance sheet will be winners.
Blurb
Notore Chemicals is swimming in debts – company to access equity market in Q2 2021
Notore is swimming in debts and this will stifle any chances of profitability at least in the short to medium term.
The story of Nigeria’s 24-year privatisation journey cannot be complete without mentioning the National Fertilizer Company of Nigeria (NAFCON), established in 1981 to produce and sell fertilizer.
The company began fertilizer production 6 years after it was incorporated, followed by years of mismanagement and corruption which forced the company to shut down 11 years later in 1999. The company resurrected again in 2005 following its privatisation, resulting in a sale of $152 million to new owners and then rebranding itself to Notore Chemicals.
READ: Agriculture: AfDB to invest $25 billion in Nigeria, Senegal, 3 others
Today, the company manufactures, treats, processes, produces, supplies, and deals in nitrogenous fertilizer and all substances suited to improving the fertility of soil and water. The Company has a 500,000 metric tonne Urea Plant in Onne, Rivers State, Nigeria, generating circa N18.7 billion (2019: N21.4 billion) in revenues as reported in its 2020 audited accounts for the period ended September 30, 2020.
In 2020, the company embarked on a massive Turn Around Maintenance (TAM) programme for its plants, which it targets will help boost its production levels to 500,000MT nameplate design capacity. The company further claims that 70% of the revenue earned from the operation of the plant post TAM filter into its bottom line, hence boosting profitability.
READ: FG announce registration of 5 million farmers for fertilizer subsidy
The importance of its TAM cannot be overemphasized. Notore earns 97% of its revenues from fertilizer sale of Urea and other chemicals. About 17% of the revenues are generated from export, thus the potential is there to improve sales and perhaps bottom line locally and within Africa.
But to achieve its TAM plans, Notore has doubled down on its debt binge. Total borrowing for the year spiked from N79.9 billion in 2019 to N108.3 billion in 2020. Whilst most of the loans came from new loans, the rest was due to a devaluation. Notore is swimming in debts and this will stifle any chances of profitability at least in the short to medium term.
READ: Dangote’s world biggest fertilizer plant starts production in February next year
Out of its N108 billion loan, it owes Afrexim $38 million (N14.75b); $5.1 million is due within a year as it reported in its audited financial statements. The dollar facility came at a steep 12.7% interest rate and is repayable over 84 months (7 years). There is also another $72.86 million (N29.08b) facility, out of which $5.85 million is due this year – also at an interest rate of 12.7%.
Thus, the company will have to find at least a whopping $10.9 million (excluding interest rates) to fund all its external loan obligations that fall due in one year. How it intends to achieve it this year is anyone’s guess.
READ: Egbin Power Plant generated the highest total energy output in Q1 2020, 14.82%
Another N16.79 billion are BOI-CBN loans obtained at concessionary rates of about 7%, add commercial bank loans of N44.46 billion at an interest rate of 23%, you start to understand how much debt the company is swimming in. These are unsustainable figures and is weighing down negatively on its balance sheets and profitability.
Interest on loans is now the company’s highest cost driver coming at N23.4 billion last year alone, topping cost of sales and operating expenses of N21.6 billion and N5.9 billion, respectively. In fact, finance cost was higher than revenue in 2020.
READ: Taraba to get free economic zone – NEPZA
Notore recognizes this challenge and restructured some of its loans in 2020. There are also plans to raise capital in 2021 through a rights issue or public offer. Whilst that seems like a plausible route to go this year, the size of equity it will require will depend on its share price and how far it wishes to go in terms of being diluted.
At the current price of N62.5 per share, it will have to sell equity worth half its market capitalization of N100b to pay down just 50% of the debt. This will be a significantly expensive offer for potential investors considering that it has negative retained earnings of N29.1 billion and is unlikely to return to profitability anytime soon.
READ: Food and agriculture market in Africa to rise above $1 trillion by 2030 – AfDB President
The company can, however, take solace in the fact that its outlook for its mainstay, Fertilizer, is brighter than its capital structure woes. Nigeria needs fertilizer if its to expand its Agriculture revolution plans. As the company stated “the consumption of fertilizer per hectare of arable land in Nigeria is still far below the 200kg per hectare recommended by the Food and Agriculture Organization,” buttressing the potential to grow topline. Export opportunities also exist especially with the start of the African Continental Free Trade Agreement.
Notore only needs to find a better way of financing its TAM programme and it cannot be sustained with the current capital structure.
