“…for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself by the handle,” Winston S. Churchill.
The Nigerian government has been making tremendous efforts to expand and diversify its tax revenue from oil, especially following the shocks recently experienced in the global crude oil market and the projected decline in the global crude oil demand in the face of threats of substitutes caused by Shale, electric vehicles e.t.c. According to the IMF, Nigeria’s tax to GDP ratio is among the lowest in the world and the Bretton woods institution has called for an urgent and comprehensive economic reform to expand the non-oil tax revenue in Nigeria.
In October 2019, President Muhammadu Buhari submitted the Finance Bill 2019 to the National Assembly. The bill seeks to implement wide fiscal reforms and transform the government approach to tax administration. While some components introduce increments, several others are aimed at reducing taxes, especially for SMEs, thereby stimulating economic activities. This is the first time that the Nigerian Government is making an attempt at effecting a holistic change to its entire fiscal laws at one sweep.
The bill, if passed into law, will make an overwhelming change to the administration of tax in Nigeria and further support SMEs in line with the ease of doing business reforms of government. Some of the proposed changes are examined below with a specific focus on their effects on SMEs, insurance and other businesses in Nigeria.
Value-Added Tax Increase
This bill seeks to increase the value-added tax from the present 5% to 7.5%. The Federal Government argues that Nigeria’s VAT ranks among the lowest in the world. I have, however, argued that this perspective is a bit narrow as the challenge with VAT or any other tax in Nigeria is not so much about rates, but more about the poor collection, income levels, and citizens’ trust in the government’s ability to effectively utilize tax proceeds. For example, according to the IMF, the informal sector accounted for 65% of Nigeria’s 2017 GDP, and this sector is largely excluded from the tax net as they are unstructured and largely unregulated. In my earlier article titled, Nigeria’s VAT increase: Penny-wise, Pound Foolish, I posited that the proposed VAT increase might further impoverish the citizens and ultimately fail to meet its objectives of revenue increase.
It is therefore refreshing to see other provisions of the Finance Bill, some of which may cushion the effect of the proposed VAT increase.
The proposed amendment to Section 16 of the Company Income Tax (CIT) Act
This section has over the years been a pain and an inhibitor of growth to the insurance business in Nigeria. In tax practice, all expenses wholly and reasonably incurred to generate a particular amount of revenue are allowable for tax purposes in their entirety. This is not the case under section 16 as it limits allowable claims expense, commission, and other direct expenses to 25% of the total premium. Operators in the Insurance Industry have been calling for a review of this section to no avail.
With the newly proposed Finance Bill 2019 however, if passed into law, insurance companies will be assessed and taxed like other sectors in the economy. Besides, the limitation of losses carried forward to four years of assessment has been abolished. Insurance companies can now carry forward losses indefinitely, deduct reserve for unexpired risks on time apportionment bases while special minimum tax for insurance has been abolished. This is laudable and is expected to catalyze the improved profitability of insurance companies.
The proposed amendment to Section 33 of CITA – Minimum Tax
The proposed amendment to this section limits minimum tax computation to 0.5% of turnover and companies with turnover of less than ₦25 million will be exempted from minimum tax payment. Furthermore, a tax rate of 20% will apply to small businesses with a turnover between ₦25 million and ₦100 million. These amendments are laudable, as they will stimulate growth in the SME space, improve their profitability and as a result, their working cash flow, as they will now be able to retain more profits which hitherto, would have gone to the government through taxes.
On the flip side, the repeal of the minimum tax exemption granted to companies with 25% imported equity might discourage potential foreign investors into critical sectors of the economy that require foreign investment but a long time to break-even.
The proposed amendment to Section 19 – Excess Tax Dividend
Section 19 aims to prevent tax avoidance mechanisms of companies but rather became an overkill to preventing tax revenue losses. The section provides that where the dividend payment of a company is higher than taxable profits, the dividend shall be taken as the taxable profit and assessed to tax at the CIT rate. However, dividends can be paid out of retained earnings which have been taxed before or franked investment income received by the company which should not be subjected to tax.
This, therefore, invariably results in double taxation for the company. The proposed amendment to this section is that excess dividend tax shall apply to only untaxed distributions other than profits specifically exempted from tax and franked investment income. This is to discourage double taxation whereby dividend paid out of retained earnings that have been subjected to tax will be subjected to a further tax.
The proposed amendment to Section 29 – Commencement and Cessation Rule
The old basis for computing tax liabilities for the commencement of business and cessation of business poses a risk of double taxation as there are chances of overlap in the basis period of assessment. The proposed amendment seeks to correct this by replacing the old basis with a simplified actual year basis period of assessment.
Other amendments in the proposed Finance bill seek to instil more convenience into the tax regime. Examples are:
- The Bonus of 2% of tax payable (medium-sized companies) and 1% (Large Companies) for early payment of tax
- Exemption of stamp duty for bank transfer below ₦10,000 and transfers between same owner’s account within the same bank: this is specifically beneficial to MSMEs, especially those in the micro-businesses as a lot of their transactions volume fall in this category.
- Compensation for loss of employment below ₦10 million to be exempted from Capital Gain Tax
- Exemption of companies with turnover less than ₦25 million from VAT registration and filling: this removes the regulatory bureaucracy/bottlenecks that MSMEs have continuously faced in their attempt to maintain VAT compliance.
The robustness of the proposed amendments to our fiscal laws is unprecedented in the history of tax administration in Nigeria and it will provide significant support for SMEs in terms of tax benefits. However, no matter how fantastic a tax regime is structured, there will always be loopholes that will be exploited by taxpayers to avoid tax. Therefore, the government needs to continuously review and update our tax statutes to block these loopholes and ensure the government receives the right amount of tax. At the same time, the government needs to invest in critical sectors of the economy that will stimulate production, while also pruning down the over-bloated government expenses.
The government needs to find a way to effectively capture the informal sector in the tax net as it has huge potentials to drive significant improvement in the government’s tax revenue. Furthermore, there needs to be a conscious effort on the part of the government to plug leakages in tax collection to ensure the taxes that are collected are not funnelled into the private pockets.
The proposed amendment in the Finance bill 2019 for banks to request Tax Identification Number (TIN) for account opening for individuals and for existing customers to provide their TIN to continue operating their accounts, is a move in the right direction. If the current Financial Inclusion drive of the CBN successfully capture a sizeable number of the informal sector, and the FIRS can collaborate effectively with the banking sector, a good number of the players in the informal sector can be captured in the tax net and invariably increase government’s revenue from taxes.
This bill, if passed, will definitely be a big win for Buharinomics and a very laudable effort at overhauling the nation’s fiscal laws, especially around taxation. As highlighted, most of the elements are clearly aimed at easing business operations and alleviating the regulatory burdens for SMEs. This is expected to stimulate growth in the SME space and ultimately drive increased growth rate for the economy.
Analysis: Access Bank’s valuation highlights merger blues
Access Bank is valued much less than its peers and this is why.
From green bonds to foreign listings and a determination to plant its seeds across various nations on the African continent, Access Bank over the past few years has shown its desire to grow across its triple-bottom-line.
On the people front, the bank has a reputation for offering arguably the best incentives to its employees in the banking sector even though last year’s plan to cut down salaries threatened to dent this reputation.
It has also introduced some of the sector’s most innovating products aimed at driving financial inclusion and protecting the bank’s market share from FinTechs. The bank has also supported small businesses through loans and financial advisory in line with the CBN’s quest to improve private sector credit.
On the environmental front, it’s spending big bucks on CSR, making a name for itself as a leader in Sustainability, and in terms of dominance, its merger with Diamond Bank and other expansionary measures have turned it into Nigeria’s largest bank and one of Africa’s top banks.
While these moves have shed a positive light on the bank, investors are left to play catchup as the benefits of the mergers and acquisitions are yet to result in improved return on investment for anyone who bought the shares over a year ago.
Its low Return on Investment (ROI)
While Access Bank has many strides to its name, a lot more needs to be done to make it a winner with investors. Its share price has struggled to gain the same momentum achieved by its rivals in the banking sector, particularly the FUGAZ.
Year to date 2020 Access Bank stock has performed poorly when compared to its peers. While the likes of Zenith Bank (33%), UBA (21%), Fidelity (23%), and FCMB (80%) posted double-digit returns, Access Bank fell by 16% in 2020.
In terms of value, the market prices the stock lower when compared to its earnings, making it one of the cheapest stocks in the sector. This is buttressed by its 2.9x (as of January 22nd) price to earnings ratio, one of the lowest in the sector.
In the same vein, the Tier 1 bank also has a lower dividend yield compared to its contemporaries and has not been able to breach its 52-week high of N10.90. One reason for this is that investors are wary of the bank’s loan book mostly inherited from its merger with Diamond Bank. Investors will rather go with some Tier 2 banks that have better upward trends in price appreciation than getting stuck with low valuation multiples.
Access Bank merger blues
As mentioned, one Achilles heel to its valuation problems could be its aggressive expansion strategy, driven by acquisitions. Since its acquisition of Diamond Bank, its valuation has plummeted piling on paper losses for investors who have held the stock since then.
Access Bank is currently valued at N325.2 billion in market capitalization less than half of its N679 billion suggesting a price to book ratio of 0.47x.
While being large provides the benefits of economies of scale, it needs to be nimble and focussed to milk the opportunities provided by the synergies
The bank recognizes this challenge, recently holding an investor call where it explained its move towards a HoldCo structure.
Access Bank will maintain four core subsidiaries under the holding company. They are Access Bank Group – focussed on commercial banking services, Payment Business – its mobile money and payment services business, Lending & Agency Banking – microfinance and microlending services, and Insurance.
Its efforts in restructuring into a HoldCo structure as well as expansions to other African regions – from Kenya to South Africa, is expected to further enhance its overall returns, and perhaps drive up valuations.
Fundamental analysis of recent financials
Access Bank has recorded positive strides in terms of its fundamentals. In its latest 9 months results, net interest income decreased by 6.6% year-on-year, but profits increased by 15% to N102.3 billion.
Access Bank also implements one of the most aggressive recoveries of bad loans in the banking sector pulling in N38.9 billion in recovery in 2019 and N24.7 billion in the first 9 months of this year. These recoveries filter into the bottom line and bolster confidence about its ability to confront its challenges and win.
How Access Bank got Japaul to pay up N37 billion loan that had gone bad
Brute force, Courts, quid quo pro are hallmarks of Access Bank’s debt recovery schemes.
In 2018 when Access Bank took over Diamond Bank, in what is the largest merger in Nigeria’s banking history, they knew it was not a match made in heaven like their PR agencies will make you believe.
In merging with Diamond Bank and taking over their juicy assets, they had also taken over the lemons that had for years bedeviled the bank who had pioneered mobile banking applications well ahead of its time.
When Access Bank merged with Diamond Bank, the latter had total loans and advances of N787.8 billion out of which N219.9 billion in loans were impaired. Oil and gas-related loans made up a significant chunk of the loans and were estimated at about N302.6 billion, most of them distressed.
Included in the oil and gas loans was a $66.4 million in loans owed to the bank by Japaul Oil and Maritime, as they were referred to at the time. The loans had gone bad accumulating unpaid interest of about $11.2 million. By the time Access Bank took over the loans, Japaul agreed to a restructuring rolling over both the principal and interest.
This is typical of most Nigerian companies burdened with debts they cannot pay. To avoid being run over by the bank, the debtors will negotiate a restructuring, extending the loans by one to three years and if lucky, reducing the interest rates. In return, the bank books new fees (which are often paid in advance of the restructuring) and then gets to avoid huge provisioning mandated by the central bank.
It is often a ‘win-win’ situation that essentially kicks the can down the road until, like in the case of Diamond Bank, the chicken comes home to roost. But Access Bank is not new to slugging it out with debtors, particularly those who do not pay up. Upon takeover in 2019, Herbert Wigwe, the CEO of Access Bank announced that his bank was going to go after Diamond Bank debtors. In an interview in 2019 he maintained that “we recovered N2.2 billion bad debt in the year under review. Access Bank will intensify effort to ensure that it recovers the debt owed to Diamond Bank. We will go out for Diamond Bank’ debtors and if they are not ready to redeem their debt we will publish their names in the newspapers.”
In 2019, Access Bank swooped on Japaul Plc seeking repayment of their Diamond Bank loans which was now about N37 billion. The bank took over Japaul’s trading assets and integral to the going concern status of the company. Before now, Japaul made money rendering marine services, dredging, mining and construction mostly for the oil and gas companies.
But business has been bad for years now leading the company into net accumulated losses of over N50 billion as of 2018. For the 5 years leading to 2018, the company posted back to back losses with revenues going from N5.3 billion in 2015 to about N85.8 million in 2019. External loans had also ballooned from about N18.8 billion to about N38.8 billion. Its share price had also fallen to about 20 kobo per share by the end of 2019. It was nearing bankruptcy and something had to give.
They began a court battle with Access Bank over the loans and the threat of a liquidation eventually settling for a deal. Sources inform Nairametrics that Access Bank is one of the most aggressive banks in the business when it comes to playing dirty with debtors. Unlike Diamond Bank, Access Bank is ready to battle in the courts and is ready to deploy any legal means necessary to recover their loans even if their actions are viewed as uncanny.
Recently, the bank obtained a Mareva injunction sealing the offices and taking over the assets of Seplat due to a related party loan owed by the latter’s Chairman, ABC Orjiakor. Just like Japaul, the loans owed by ABC Orjiakor were also obtained from Diamond Bank. According to sources, when Access Bank swoops in for their loan recoveries, they deploy all tactics in the books to ensure all or most parts of the loans are recovered from chronic debtors.
Eventually, Access Bank and Japaul agreed to settle the matter outside the court. In exchange for repaying the N38 billion loan, Access Bank settled for a repayment of N30.9 billion. The deal involves Access Bank taking over two of Japaul’ s Dredgers (12& 13) for N5 billion and a Barge (Beau Geste) for N25.9 billion. Japaul also gave up its land in exchange for working capital of N1.5 billion from the bank.
In return, Japaul gets to clean up its balance sheet erasing what is left of its debt, booking a profit of about N40 billion and wiping off its negative equity of N35.5 billion. However, in one fell swoop. From negative equity of N35.5 billion, the company’s net assets are now N4.69 billion. A win-win for everyone.
We are not exactly sure what Access Bank plans to do with dredgers and barges it took over from Japaul. Interestingly, in the deal, Japaul also gets to lease back the two dredgers for a period of 6 years from Access Bank for a sum of N1 billion paid annually from 2021 – 2026. Japaul got a one-year moratorium on repayment expiring in December 2020.
Japaul has since changed its name to Japaul Gold and Ventures citing the dwindling oil and gas sector for its reasons. The company believes gold mining and technology are the future and is seeking to raise N25 billion in equity to pursue this course. Its share price has ostensibly risen by 150% since the turn of the new year, the best performing on the stock exchange.
For Access Bank, aggressively going after bad loans have paid off immensely. In 2019 the bank recovered N38.9 billion in bad loans barely a year after taking over Diamond Bank. In the first 9 months of 2019, a total of N24.7 billion was captured in bad debts recovered. It is a strategy that is working and there is no betting against Access Bank doubling down on aggressive recovery this year.
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.
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.
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?
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.
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.