The latest data from the Nigerian Stock Exchange reveal transactions from local investors on the Stock Exchange 2019 year to date is about N775 billion, compared to foreign investor participation of about N689 billion. Local and foreign investor activities in the stock market are projected to fall short of N1.1 trillion and N1.2 trillion recorded in 2018 respectively.
Positively Correlated: Whenever there is a rise in local and foreign investor participation the All Share Index ended the year positively. The Nigerian Stock Exchange All Share Index has so far returned a loss of 16% year to date and is likely to close in negative territory.
The reason for the poor performance of stocks is largely attributed to the lack of demand for Nigerian stocks by both foreign and local investors. While the former has become the demand driver for stocks over the last 5 years, most analysts consider local investment appetite as a sustainable way of keeping demand alive in the stock market.
Rise and fall: According to the NSE, over a 12–year period, domestic transactions decreased by 66.68% from N3.5 trillion in 2007 to N1.185 trillion in 2018, whilst foreign transactions increased by 97.88% from N616m to N1.219 trillion over the same period. In the last 6 years (before 2019), foreign investor–led transactions were about N6.1 trillion compared to N4 trillion for the previous 6 years. This compares to N6.1 trillion and N10.4 trillion respectively for local investor inflows. The Nigerian stock market has thus relied heavily on foreign investment portfolio inflows to maintain demand and drive up market values. But it wasn’t always this way.
Banking crisis: Everything changed in 2011 after former CBN Governor Sanusi Lamido Sanusi changed the capital control rules allowing foreign investors to repatriate their inflows whenever they wanted to, provided that they had a certificate of capital importation. It also coincided with a dark period for Nigerian banking, following the collapse of several Nigerian banks including the likes of Oceanic Bank and Intercontinental Bank.
Since then, how the stock market performs has been less of fundamentals but more of foreign investor appetite for Nigerian stocks. Whenever the US cut rates, foreign investor inflow finds its way into emerging markets like Nigeria. Sometimes, demand for Nigerian stocks wanes if investors perceive that the exchange rate is overvalued, calling for a devaluation.
Most recently, it has been a combination of waning emerging market appetite, disdain for Buharinomics and geopolitical battles between Europe and Brexit, US and China, etc. For Nigeria to get out of its reliance on foreign investor demand, it will have to revisit another dark period in the history of the stock market.
Margin Lending: The major reason why the local stock market attracted trillions in investment was margin lending. Back then, newly capitalized banks lent out billions of naira to investors in the form of margin lending, driving up market valuations exponentially. Unfortunately, lack of proper credit risk management, weak regulations, and insider trading meant that investors and banks would later lose billions of naira when the bubble burst.
However, margin lending remains the key to unlocking value in the stock market. With effective regulations, the right incentives and better credit risk management, tens of billions can be poured into the stock market.
The Nigerian financial landscape is a whole lot better than it was several years ago and has improved on many fronts. Today, via the Bank Verification Number initiative of the CBN, borrowers can easily be identified making it easier for lenders and regulators to profile chronic defaulters. Also, recently the CBN granted local banks approval to set off bank account of loan defaulters from any other bank accounts they own within the country. Credit rating agencies in Nigeria have also stepped up their operational capabilities by improving their database of bank debtors including their credit rating information.
Regulators like the CBN, SEC and the Nigerian Stock Exchange are also better informed and more abreast of market dynamics and investor idiosyncrasies, making them better prepared than they were over a decade ago. Whilst risks such as insider trading and market manipulation still exist, retail investors are now better informed. Sell-side stockbrokers offer incisive research reports and the media has richer content that can better guide rookie investors.
Why bring bank margin lending: The incentive to have a more robust stock market cannot be overemphasized. Between 2007 and 2019, Nigeria recorded less than a dozen major listings. Apart from the likes of Seplat, Transcorp Hotels, CWG, Airtel Africa, Notore Chemicals, MTN Nigeria most of the listings on the exchange have been from relatively smaller companies and have all failed to boost market participation.
A major incentive for companies looking to list on any stock exchange is their ability to raise capital at an attractive price. Investors also want a considerable level of liquidity for their investment, allowing them to buy and sell whenever they want. Without margin lending, bank retail, and corporate investor participation, the Nigerian Stock Market could continue in this lull for another decade.
A robust stock market also means more liquidity for the economy as businesses can aspire to expand beyond subsistence operations and involve more private and public capital. Companies that are currently lower leveraged can also raise equity to repay their loans improving the overall financial health of the economy. As we create larger and more ambitious corporations, more jobs are created and the economy grows.
Nigerian Breweries leveraging, but stacking cash through rising input costs
The marathon continues for Nigerian Breweries with its 2020 financials.
Humanity might need more booze to survive the increasingly daunting intricacies of life, but Nigerian Breweries 2020 financial statement is proof that even the best can get caught up in the reality of changing business lifecycles.
Nigerian Breweries Plc had floored the market providing both alcoholic and non-alcoholic premium quality beverages across the nation. But with brands like Star lager beer launched as far back as 1949, Gulder lager beer launched in 1970, and even the family-friendly Maltina introduced as far back as 1976, it is only natural that both the old and new generation competition gives them a run for their market share.
Much like other old money companies, Nigerian Breweries has done its bit to remain relevant in the industry from creating new variants of existing favoured brands to paying dividends consistently annually for the past few years. Yet within the same period, the company’s financial statements have been a testament to its streamlined market share and reducing profits. The marathon continues with its 2020 financials. The industry giant may as well be setting itself up for a debt quagmire peradventure its projections do not match the true reality of events.
2020 financials: A tale of higher costs & larger debts
2020’s unfavourable financial/ business environment led to the increase in the prices of raw materials and disruptions in logistics for many Nigerian-domiciled businesses including Nigerian Breweries. Raw materials and consumables witnessed a 17% increase despite the marginal growth in revenue.
While the group’s 2020 results revealed a 4.35% increase in revenue from N323 billion in the prior year to around N337 billion, these gains were curtailed by a higher-than-par increase in cost of sales which had risen by 13.9%, from the N191.8 billion expended in 2019 to N218.4 billion as its 2020 financials reveal and interest rates going way up.
The company’s lower operating expenses were not enough to salvage the disruption caused by the raging interest expense following increased charges paid on bank loans and overdraft facilities as well as the significant increase in overall debt. Between 2019 and 2020 alone, long term loans and borrowings increased by 974% from N4.8 billion to as much as N51.8 billion. Even trade and other long term payables increased by 35%.
In its financials, the company noted that it has revolving credit facilities with five Nigerian banks to finance its working capital. The approved limit of the loan with each of the banks range from ₦6 billion to ₦15 billion (total of ₦66 billion) and each of the agreements had been signed in 2016 with a tenor of five years. The Company had also obtained Capital and Working capital finance from the BoI in 2019.
It is no news that the company is involved in diversified lease arrangements. Following reclassifications made in 2019 to some of its lease assets, the 2020 asset base also witnessed significant increase in Right of Use Assets which increased by 288%% from N11.1 billion to N42.9 billion. Yet, the fact that in one year, interest expense on Lease Liabilities rose from N19.7 million in 2019 and to a whopping N4.171 billion shows that the company is taking way more debt than its books require.
But what’s it using all the cash for?
Beyond rising material costs, borrowing costs have been huge and the annual interest payment by virtue of these loans make the possibility of higher profits for the company a mirage. That said, the overall increase in total liabilities might not have been such a bad idea if the funds were being used to increase revenue and profits. But having a huge chunk of all that money in cash creates a different kind of challenge. Cash and bank values in its statement of financial position significantly increased by 377% from N6.4 billion in 2019 to N30.4 billion in 2020.
Is the cash being held to mitigate possible challenges of the volatile economy or are they being used to pay dividends? Even at a share price of N52 per share, the company’s price-to-book value sits at 2.5816, testament of its dire overvaluation. Consequently, there is an ardent need for the company to come up with newer ways to attract the wider market and keep its book in the green with a little less external funding.
Secret behind MTN’s blistering performance
Despite COVID-19 disruptions, MTN Nigeria’s 2020 financials showed marked improvements compared to its 2019-year-end.
MTN Nigeria Communications Plc (MTN Nigeria) released its audited financial results for the financial year ended December 31, 2020.
Despite a challenging 2020 to individuals and businesses caused by COVID-19 disruptions, MTN Nigeria’s financial and non-financial information showed marked improvements compared to its 2019-year-end as well as prior quarters of 2020 results that were impacted by the COVID-19 pandemic.
Indeed, the evolving pandemic which intensified lockdown, remote working, and work-from-home procedures, appeared to have led to increased adoption of MTN Nigeria data and digital services.
Specifically, year-on-year on non-financial information, mobile subscribers increased by 12.2 million to 76.5 million; active data users increased by 7.4 million to 32,6 million while the company’s mobile money business continued to accelerate with a 269.2 % increase in the number of registered agents to over 395,000 and 4.7 million active subscribers from approximately 553,000 in 2019.
Year-on-year on financial information, service revenue increased by 14.7 % to NGN1.3 trillion driven principally by voice (with revenue growth of 5.9 %) and data revenues (rising by 52.2 % led by increased data use and traffic); profit before tax (PBT) grew by 2.6 % to N298.9 billion; profit after tax (PAT) increased by 0.9 % to N205.21 billion; while Earnings per share (EPS) rose by 0.9 % to N10.1 (N9.93, 2019).
Nonetheless, significant increases were noted in its operating expenditure as well as capital expenditure. First, there was a 2.3 % increase in operating expenses arising from the rollout of new sites and the impact of naira currency depreciation affecting the costs of MTN Nigeria lease contracts. Secondly, EBITDA margin declined by 2.5 %age points to 50.9 % (from 53.4 % in 2019) There were also other significant cost rises including a 25.4 % increase in net finance cost, and 19.4 % increase in capital expenditure which had a 11.7 % knock-on increase in depreciation and amortization costs.
On the back of the year-end result, MTN Nigeria has proposed a final dividend per share (DPS) of N5.90 kobo per share to be paid out of distributable income and brings the total dividend for the year to N9.40 kobo per share, representing an increase of 18.7 %. MTN Nigeria paid N4.97 as final dividend for the year ended December 31, 2019. This was in addition to an interim dividend of N2.95, which brought its total 2019 dividend to N7.92 per share.
The proposed dividend implies a yield of 3.4%. Having paid an interim dividend of NGN3.50 in 2020, the proposed dividend, if approved, will bring the total dividend per share to NGN9.40 or c.19% higher compared with 2019. We expect a positive reaction from the market due to the marked improvement in earnings. However, the market’s reaction may be dampened by negative investor sentiments on equities arising from the uptick in yields on fixed-income securities.
We expect that the introduction of additional customer registration requirements requiring subscriber records are updated with respective National Identity Numbers (NIN), and the continued suspension of the sale and activation of new SIM cards will affect subscriber growth.
MTNN share price remains unchanged at the end of trading yesterday at N174 per share.
Tade Fadare PhD, is an economist, and a professionally qualified accountant, banker and stockbroker. He has significant experience working or consulting for financial institutions in Europe, North America, and Africa.
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