The Federal Government of Nigeria (FGN) has reintroduced a request to the National Assembly to borrow up to $22.74 billion from the international markets.
The government’s case has many merits which we can summarize as follows:
The Federal Government’s organic cash flow is exceptionally weak
Bloomberg reported that since 2015, the fiscal revenues flowing to the FGN has underperformed by 45%. The FGN crude oil and gas revenues, make up about 45% of the total revenues but 70% of foreign exchange earnings; however, the obligations of the FGN, including mandatory obligations e.g. Salaries and Debt Service, have eaten up 100% of the crude oil revenues. The FGN thus must run a deficit budget to fund capital projects and other obligations; the 2020 annual budget, for instance, is budgeted at N2.18 trillion deficit financing.
The FGN tax collection is also very weak
The GDP to tax revenues ratio of the FGN, according to the Organization for Economic Co-operation and Development (OECD), a grouping of the world’s leading market economies, was put at 6% as at 2016 (The World Bank measures at 3.4%). Compared to Kenya and Ghana at 18% each, and South Africa at 29%. This leaves the government with borrowing as the only real solution to raise revenues.
Why borrow externally in foreign currency?
The FGN has been financing her fiscal deficits by issuing Treasury Bills for shorter durations and Bonds for longer durations. These instruments have interest costs from 9% for Treasury Bills to almost 15% for long-dated bonds. The FGN, however, has issued Eurobonds at much lower interest cost, e.g. the 2025 Euro bond was issued at a coupon of 7.62% but payable in USD not Naira, thus incurring foreign exchange risk. However, the FGN is also looking at concessionary and bilateral loans which are not issued at commercial rates.
To summarize, the FGN needs to borrow for capital projects, because her tax revenues are low and oil revenues are already spoken for. The FGN also seeks to borrow in foreign currency because cost of foreign currency obligations is lower than locally issued debt instruments. Good so far.
So, the FGN borrowing of $22b is justified? Not quite.
Questioning the amount and cost of the loan is the wrong debate. The real debate is why the FGN should be borrowing on her balance-sheet to build a railway. The debate is should the FGN own and maintain railways, or should the private sector? If you agree that the FGN should build, own and operate railways then sure, the $22 billion borrowing is apt. However, if you take the view that railways can be built, owned and operated by the private sector, with strong government support, then there is no need to add $22 billion to the FGN balance sheet.
Nigeria has a corruption problem, but I posit that a bigger problem Nigeria has is the entry of the FGN into commercial business. You will struggle to find an asset owned by the FGN or State Government that is being successfully run.
Examples abound. Let’s look at Nigeria’s number one forex earner, crude oil and gas. Consider the Nigerian National Petroleum Corporation (NNPC) and Nigerian Liquified Natural Gas Company (NLNG). The latter is 49% owned by the FGN, thus FG is a minority shareholder. The FG does not manage NLNG, which, in a strong show of financial strength, offered the FGN N60 billion as “contribution” to build a road in Bonny.
However, NNPC is owned and managed 100% by the Nigerian Federation. In June 2019, NNPC reported Group operating revenue of N518.18b with a trading surplus of just ₦3.92 billion, that’s a net position of just 0.75%, (less than 1%).
Let’s talk about steel, which is essential for industrial development. Quantity of steel produced is an indication of national strength. Nigeria has about two million metric tons of iron ore reserves, the second-largest iron ore deposits in Africa and 12th largest in the world (iron Ore is used to make steel). So how have we fared with making steel? The Federation built the Ajaokuta Steel, the Delta Steel and three steel rolling mills in Jos, Katsina and Oshogbo… they were all dead when owned by the Federation.
Yet, a Nigerian owned company, Kamwire Industries Ltd, has built a cold steel mill in Kwara. African Foundries Ltd, a flagship of the African Steel Mill group, commissioned in 2011 and located in Ogijo, Ogun state is a steel complex. That complex began export of about 5,000 metric tons of TMT rebar to Ghana in 2013. Dana Steel bought the moribund Katsina Steel rolling mill and turned it around.
I can go on and speak about the Eleme petrochemical plant, or the ports in Lagos recently concessioned to private operators both now with improved efficiency and productivity, paying taxes to the FGN. The point is simple, the federation has not managed the oil industry, steel or ports, this is the economy of Nigeria. But there’s more… the Federation has not been able to stop cholera or conduct a census without controversy. It cannot even maintain its own national stadium. The Federation has shown repeatedly that it is incapable of delivering results.
Now, does it mean all privatized assets managed by the private sector have been successful? No! Air Nigeria comes to mind. But you can’t point at any federally owned asset, company or enterprise, that is delivering as planned. That is telling.
What to do? It’s simple
The Federation should lay off business …the business of government is not business. How can we do this? Models already exist. I like the model we currently have in the pension industry, with the private sector as the OWNER and OPERATOR, and the government as REGULATOR.
Such a model applied to the loan will see the FGN simply put out proposals to the private sector to enter partnerships to develop these projects on Public-Private Partnerships. This means only projects that have a revenue basis will be approved. Loans may come, but not on the FGN balance sheet.
Analysis: Airtel Nigeria is winning where it matters
Airtel has left no stones unturned in ensuring that its provisions are top-shelf – subscribers to the network, of course will have their own ideas.
Airtel might have won our hearts over with internet-war adverts starring our favourite tribal in-laws, but its fundamentals are what will make us the bucks that keep us happy. Airtel Africa Ltd is a subsidiary of Indian telecoms group, Bharti Airtel Ltd; the group has left no stones unturned in ensuring that its provision of prepaid plans, credit transfers, mobile internet services, messaging, roaming facilities and more, are top-shelf – subscribers to the network, of course, will have their own ideas.
Since last year when Airtel Nigeria became the second telecommunication company in Nigeria listed on the NSE, the company has experienced a steady level of growth. With a presence in 14 African countries, the group’s strength lies in its diversity with stronger companies mitigating the poor performances of others.
Performance Overview: Airtel Africa
Airtel Africa’s report for the year ended March 2020, revenue jumped by 10.9% from $3.1 billion at the year ended 2019 to $3.4 billion in 2020. The consolidated profit before tax also jumped by 71.8% from $348 million in 2019 to $598 million in 2020. However, profit for the period dropped by 4.23% with earnings of $408 million in 2020 from the $426 million it had earned in 2019. A reason for this is the tax figure that moved from a credit of $78 million in 2019 to tax payments as high as $190 million in 2020. Total assets also jumped by 2.41% from 2019’s value of $9.1 billion to $9.3 billion in 2020 primarily as a result of their acquisition of more property, plant, and equipment (PPE). The total customer base grew by 9.3% to 99.7 million for the year ended.
Full Report here.
Revenue growth of 10.9% was driven by double-digit growth in Nigeria and East Africa. However, the rest of its African operations experienced a decline in revenue. Its success in Nigeria is especially commendable, considering the fact that the company lost more than 100,000 subscribers in Nigeria between December 2019 and January 2020. Raghunath Mandava, Chief Executive Officer, remarked that the results which were in line with the group’s expectations, “are clear evidence of the effectiveness of our strategy across Voice, Data and Mobile Money.”
Behind The Numbers – Nigeria
Airtel Nigeria’s performance indicates the company is making the right calls in a very competitive industry. Nigerians are fickle when it comes to data and voice but will spend if the service is right. The company grew its data revenue by a whopping 58% to $435 million a sign that its strategy to focus on data is working. Voice Revenues for the year was up 15% to $850 million. In total, Airtel Nigeria’s revenue was up 24.4% to $1.37 billion. Ebitda margin, a number closely watched by foreign investors 54.2% from 49% a year earlier. Operating profit for the year ended also jumped by 52.6% for the year from 2019 and 32.4% from Q1 2019. Total customer base in Nigeria also grew by 12.5%.
Nigeria is surely critical to Airtel Africa’s future seeing that it contributes about one-third of its revenue. Recent results thus indicate it is winning where it matters most and it must continue to stay this way if it desires to survive a brutal post-COVID-19 2020. Telcos are expected to be among the winners as Nigerians rely more on data to work remotely but there are other players in this game. Concerning the impact of the pandemic, he explained that at the time of the approval of the Group Financial Statements, the group has not experienced any material impact arising from the impact of COVID-19 on its business.
On cash flows…
The group has also taken measures to enhance its liquidity. The CEO explained that it is moving its focus to enhance liquidity towards meeting possible contingencies.
“Having considered business performance, free cash flows, liquidity expectation for the next 12 months together with its other existing drawn and undrawn facilities, the group cancelled the remaining USD 1.2 billion New Airtel Africa Facility. As part of this evaluation, the group has further considered committed facilities of USD 814 million as of date authorisation of financial statements, which should take care of the group’s cash flow requirement under both base and reasonable worst-case scenarios.”
To this end, they have put in the required strategies to preserve its cash as its cash and cash equivalents, consequently, jumped by 19.1%.
Investors looking at this impressive result will be wondering if this portends a buying opportunity. Airtel Nigeria closed at N298 on Friday and has remained at this price for about a month. The stock is quite illiquid and is not readily available to buy.
It’s the price to earnings ratio of 4.56x makes it quite attractive. Further highlighting this opportunity is its price-to-book ratio which is as low as 0.5273, suggesting that the stock could be undervalued. Whether it is available to be bought, is anyone’s guess.
Analysis: Nestlé strong but exposed.
Being a market leader is great, but in times of economic despair, it can quickly turn you into prey.
With about six decades of being the choice companion for families within Nigeria and the diaspora, Nestlé Nigeria Plc has positioned itself as one of the largest food and beverage companies on the continent. Owing to the expansive growth of Nigeria’s population – one projected to reach 300 million by the year 2030, as well as the growing middle class, the FMCG sector has a very positive outlook.
Consequently, Nestle’s leadership in the industry and its huge market size expectedly gives it a huge advantage. However, with the global economy barely racing against the impact of the Covid-19 pandemic, even the brimming FMCG sector will experience its own level of disruption.
Nestle’s recently released Q1 2020 financials reveal a revenue decline of 0.9%, as it dropped to a marginal ₦70.33 billion from the ₦70.97 billion turnover it garnered in Q1 2019. The profit before tax also experienced an 8.7% drop while the profit after tax had a 12.84% drop, both yielding ₦17.5 billion and ₦11.2 billion respectively, for the first quarter of this year. This is predominantly owing to its increased losses from its overseas activities.
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The company procures all of its raw materials on a commercial basis from overseas and local suppliers; consequently, the percentage of its supplies dependent on international suppliers had a negative impact on its Q1 2020 financials. Its profits were plagued by a foreign exchange loss of ₦154.7 million from ₦18.9 million, an even higher loss of 720.6%. While the company did not disclose the value of its export revenue, we believe it too might have suffered from reduced exportation in the latter part of the quarter.
The group has since been taking on expansionary projects, such as its launch of a second beverage production plant in Ogun State in February of 2018. The company, on a continuous basis, explores the use of local raw materials in its production processes, contributing its own quota to the Nigerian economy.
Just last week, Nestlé’s stocks went up 2.56% to close at ₦1000, a price it still currently holds today after markets closed. Its price to earnings ratio is 18 and its earnings per share (EPS) of 55.54, signal an investor sentiment of confidence. However, its high price to book ratio of 13.9865 reveals that the company is slightly overvalued and its price of ₦1000 makes it attractive primarily to institutional investors that can afford to purchase large volumes of the stock enough to benefit from its steady growth in value. The company had proposed a dividend payout of ₦45 per share. This also comes after paying ₦25 per share interim dividends earlier. Its dividend yield at the time of writing this is 7%, further heightening the possibilities for the income investor.
While the company has strong fundamentals governed predominantly by its position as a market leader, its years of experience, and its existence in the FMCG sector, it too might not have a smooth sail in the coming quarter. Its overseas business from both the supply and the demand sides are expected to experience a further decline, ultimately resulting in an even lower relative turnover and lower earnings.
We also expect the decline in average disposable income of Nigerians from loss of jobs and an overall wariness of the economic impact of the pandemic, to further drive down turnover; however, sound operational efficiencies and cost control/ profit strategies by the group could ease the burden. The company fundamentals remain strong but its exposure to consumer disposable income remains a major concern. There is always a cheaper alternative and when your pocket empties your choice for cheaper substitutes swells.
Analysis: MTN’s blow out Q1 profit vs Covid-19 headwinds
Covid-19 does posses some risk for the company, particularly in the Nigerian context.
If there is any network that has grown with its audience in Nigeria, it is MTN. With its most active users covering a demography of age 18 to 27, it is the network for the tech-age youth. From keeping them up all night with friends for Extra Cool calls to the nostalgic adverts, the network has had its fair share of growth – and signals show no sign of it slowing down.
Just like its brand, the company has strategically positioned itself and made expansionary decisions to get it to where it is – the second most capitalized stock in the NSE. MTN Nigeria’s (MTNN) Q1 2020 financials show that the company has it good and we’re not surprised.
Its results reveal a great quarter for the telecommunications giant with a 16.7% gain in revenue, making ₦329.1 billion in the first quarter of this year in comparison to the ₦282.1 billion it made in the comparative quarter, Q1 2019. The telecommunication industry has naturally enjoyed a spike in usage since the last month of the quarter owing to the enforced lockdown, and its streak is still in motion.
With a ₦51.1 billion profit for the period in comparison to Q1 2019 of ₦48.4 billion, it disclosed profits 5.9% higher than last year – even with increased finance costs of 25.3% percent revealing the capital-raising measures taken by the group to stimulate its operations. It was also in line with this that the company recorded a jump of 103.5% in interest expense on borrowings from ₦7.9 billion in Q1 2019 to ₦16.1 billion in Q1 2020. Total value also recorded a jump as there was a 35.3% growth in the group’s net asset from Q1 2019’s ₦145 billion to Q1 2020’s ₦196 billion.
Its revenue figure is defined by a jump in voice calls of 6.14% from the ₦182.8 billion earned in Q1 2019, to its Q1 2020 ₦194 billion turnovers. However, it is nothing compared to the 58.84% increase in revenue derived from local data usage (excluding roaming data) in the quarter from Q1 2019. Value-added service and digital services also witnessed a jump of 33.93% and 12.11% respectively. Having settled the $2 billion claim for back taxes it was plagued with last year that swayed investor confidence, it certainly came back strong this year.
Naturally, the lockdown has contributed its fair share to the performance of the stock though most of this will reflect in its second-quarter results. With more people using their phones, we expected a spike in revenue governed by increased data usage. This trend is bound to be higher in the second quarter as more Nigerians choose to work from home relying on internet data to power their tasks. And for those without jobs, the internet serves as a perfect companion in both times of need and despair.
The telecommunication industry itself is a growing one; Nigerian Communications Commission (NCC) reveals that as at Q4 2019, the telecoms industry contributed 10.60% to the GDP of the country and the total active telephone subscribers in Nigeria as at January stood at 185.7 million. With MTNN holding the largest market share of active telephone subscribers – 38% of GSM subscribers and 43% of internet subscribers, there is no doubting its growth trajectory.
Covid-19 does posses some risk for the company, particularly in the Nigerian context. In times past, the government looks for who to prey when its revenues are faltering. MTN was once a prey and it paid a huge price for falling into the government’s trap. As the economy falters more eyes will focus on organisations that are posting monstrous profits. Taxes, penalties, donations should interest the government and MTN would be careful to protect investor interest while giving to Ceasar its due.
MTNN and the Market
MTNN’s share price has had a turbulent 2020. The stock is up 6.6% YTD and fell to a year low of N90 in March. At a price-earnings ratio of 11.3x investors are bullish about its ability to continue to deliver impressive growth. MTN has had a nice ride since its listing about a year ago. The first wave was observed within 48 hours of its being listed on the NSE for the first time in May 2019 when it was immediately ranked amongst the NSE top 5. It also didn’t take a couple of months before it shook the market by becoming the first on the NSE, temporarily surpassing Dangote Cement.
Having settled its tax disputes, its shares hit an all-time high of N159 per share before pulling back as investors worried about the faltering economy. MTN share price is still a bit off its 2020 high of 127 and could well be on its way there.
The price closed at ₦112 on Monday 11th May with a 52-week range of ₦90 and ₦159.3.