One of the industries set to experience the downsides of the Covid-19 pandemic is the construction industry. Given the slowdown in construction activities as a result of the lockdowns and constrained economic activities, the reasons are not farfetched.
Prior to the outbreak of the pandemic, Globe Newswire had predicted an accelerated growth pace of the global construction industry from 2.6% in 2019 to 3.1% in 2020. This growth has now been revised to 0.5%. What is even more daunting is that the revised growth rate is based on the assumption that the outbreak will be contained across all major markets by the end of the second quarter of 2020.
It is only after that (including freedom of movement in H2 2020) that events could facilitate reverting to the normal course of activities to foster businesses in the industry like BUA Cement or those that depend on it to restart activities.
Nigeria’s third-largest cement company, BUA Cement Plc, however, still has its 2019 victories in order. Involved in the manufacturing and sales of cement, BUA Cement has 3 major subsidiaries and plants in Northern and Southern Nigeria.
With a market capitalisation of N1.18 trillion ($3.3 billion), BUA is the third most capitalised company on the NSE. Its recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
The company’s profits also increased by 69.1% from N39.17 billion in 2018 to N66.24 billion in 2019. Core operating performance was strong, and this was supported by strong cement sales in the domestic market, impairment writes back, and other income.
The main reason for the company’s increased earnings is from the cost synergy and increased revenue as a result of the merger that took place between CCNN Plc and Obu Cement Company Limited.
There was also a striking jump in its income statement on its tax for the year. For FY 2019, it incurred a tax expense of N5.6 billion, in comparison to the N24.9 billion tax credit it received in FY 2018.
This was as a result of a reversal of previous tax provision made on Obu Line 1; it received approvals for an extension of the company’s pioneer status on Obu line-1 and Kalambaina line-2 in February 2020, to leave effective tax rate at just over 8% in 2019. The pioneer status will help the company save funds that will otherwise have been spent on higher taxes.
(READ MORE:Dangote Cement to access more debt funding)
BUA reported an impressive FY’19 result. Its performance shows the growing strength of the company and its increasing market share. On the back of the strong performance, management declared an N1.75 dividend per share that translates to a dividend yield of 5.5% on current prices.
Cash flow position was also robust with a strong closing cash balance – from N2.8 billion in 2018 to N15.6 billion as at year ended 2019. The company’s growth, as well as the impact of its merger, present a great buy opportunity of the highly capitalized, low-cost stock. As of today when the market closed (21st May) its share price stood at N35.60 from a 52-week range of N27.6 and N41.
What we see is a great growth stock further heightened by the population expansion and increased urbanization. However, we expect the impact of the Covid-19 pandemic to be felt from the Q1 results of the company.
The industry could slow down for the year as the level of commercial construction also slows down. Yet the best part of holding stocks like this is that even with stalled operations for a period, a resurgence will always emerge.
Unity bank wants to be seen, but time is running low
Over the past few years, a negative string of events have left Unity bank in a precarious situation.
Intercity Bank, First Interstate Bank, Tropical Commercial Bank, Pacific Bank Limited, Centre Point Bank, Societe Bancaire, NNB International Bank, Bank of the North, and New Africa Bank; these are all the banks that died for Unity bank, as we know it, to be birthed. In 2006, following a consolidation exercise in 2004, the bank was founded, and it has since become a name in banking that we are all familiar with. Over the past few years, however, a negative string of events have left the bank in a precarious situation, struggling to find its footing.
First on the list of the company’s burdens is its negative shareholders’ fund – a phenomenon caused by higher liabilities than assets. Issues like accumulated losses and large borrowings are some of the things that could lead to this. For three consecutive years between 2017 and 2019, the bank has maintained negative shareholders funds above N250bn annually, signaling major operational instability. The CBN/AMCON is ostensibly why they didn’t go bust. If they pull the plug, the light goes off, but the CBN has “sworn” not to allow any more failed banks.
Another issue that has plagued the bank is the increased loan to deposit ratio (LDR) of 65% that was set by the Central Bank of Nigeria last year. As of 2018, the company’s LDR was at a significantly weaker 17.8%. It has, however, grown marginally quarterly from 23.7% in Q1 2019 to 29.15% in Q2 2019 and 34.95% in Q3 2019. Even though the rise has been consistent, the CBN with its many levies could make the process to growth even more stressful. With high impairment losses juxtaposed with the current uncertain economic landscape, the odds had been against the bank.
But in a commendable turn of events, owing largely to it being proactive to the point of desperation, the company has taken stringent measures to ensure that its growth is visible enough to potential investor suitors, enough to bag the funds required for recapitalization. One of the first things it did was to cut down its costs. Its 2019 financials reveal a decrease in the bank’s total operating expenses to N19.57 billion in 2019 from N20.71 billion in 2018. In order to expand its business beyond corporate and investment banking activities, it intensified its activities in the Agriculture sector to leverage the growth of the sector as well as the increasing attention of the government in it.
It concluded arrangements to launch a healthcare product known as UnityCares to leverage the credit support intervention scheme for the health sector as put in place by the CBN to support businesses in the healthcare sector; it launched a USSD code in local languages of Yoruba, Hausa, and Igbo, to make the feature more flexible for its customers and heighten competition, and even brought in one of the best audit firms in the game, KPMG, all in a bid to ensure that it is well-positioned to attract the right investors. Critics will say these are attempts to paper over the cracks and meant to give the impression that management is working.
So far, its progress has been visible. The company’s asset base increased from 210 billion to 293 billion, a 39.5% growth, and its PAT soared from a loss of N7.7 billion to a profit of N3.38 billion. Yet, shareholders’ funds further deteriorated in Q1 2020 to a negative of N279.09 billion in Q1 2020. Another notable revelation is that while the bank’s loans to customers increased by 135.93% in 2019, its deposit from customers increased by only 40.63%, begging the question of how it was able to fund the increased lending. It borrowed more. Borrowings jumped by over 45% from N126.21bn in 2018 to N183.3bn in 2019. A bank exists to create loans right?
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In a media briefing, Mr. Ebenezer Kolawole, an Executive Director of the bank, explained that the company has commenced negotiations with prospective investors. While the bank is working out diverse ways to become a prospective candidate for investors towards attaining its recapitalization dream, it’s going to need a lot of help for its growth to be attractive enough to achieve its stated objectives. It is unclear how long the CBN can continue to stop the gaping hole in its balance sheet. A stitch in time saves nine.
Analysis: NNPC and its refining losses
The madness behind the numbers
Once upon a time, Nigeria discovered oil. Soon enough, it became our main source of livelihood, the foundation upon which our national budget rests, and the one commodity that provides most of our forex inflows. To be able to extract value from this oil, we created refineries – all of which are government-owned and managed. Sadly, the rest of the story includes heavy bouts of politicking, lots of bloodshed, corruption, explosions, and billions of Naira in losses. Oil might have been one of Nigeria’s biggest blessings, but it also undoubtedly doubles as its biggest curse.
On Monday, the Nigerian National Petroleum Company (NNPC) released its audited financial statements for 2018, noting that its refineries recorded losses of N154 billion. As embarrassing and disappointing as it sounds, it is not as surprising. The nation’s 3 refineries located in Port Harcourt, Warri, & Kaduna, reported combined losses of N154 billion. Kaduna Refining and Petrochemical Company (KRPC) incurred a loss of N64.5 billion, Port Harcourt Refining Company (PHRC) recorded a loss of N45.6 billion, while Warri Refining and Petrochemical Company (WRPC) recorded a loss of N44.4 billion. The losses also aren’t new as all refineries performed better than the preceding year 2017. The only thing more confounding than the billions in losses is the convenience with which Kaduna refinery conveniently recorded zero revenue for 2018.
The madness behind the numbers
Many issues feed into the wreckage that has become Nigeria’s refineries and most of these issues date as far back as decades prior to now with the last of the nation’s refineries built 40 years ago. For a recap, here’s an overview of some of the problems that have led us this far.
1. The 3 incapacitated refineries
As far back as the 1970s, Nigeria, Norway, and Malaysia set up national oil companies for the exploration, production, and refining of oil. So when Norway came up with Statoil (now Equinor) and Malaysia, Petronas, Nigeria created NNPC. Today, while Malaysia and Norway boast of having the biggest state-owned oil and gas companies in the world, NNPC has a long list of excuses and mind-boggling losses to show for it. While PH and Warri and in oil-producing states, Kaduna does not produce any oil. For the sake of balance and to have a national spread, some of the crudes are moved to Kaduna via pipeline. Hold that thought.
The capacity of all three refineries is also insignificant, compared to the required consumption of the nation. Hence, most of our oil is still imported because we cannot produce enough. This rate of importation is over 80% of our consumption. The existing refineries also operate significantly below capacity. Sometime last year, the refineries operated as low as 5.55 percent capacity. To increase capacity, the country carries out turnaround maintenance periodically and not only does it cost an arm and a leg, it takes months – but barely anything ever changes. Production stays low and cost stays high. Even if we turn all 3 around successfully, we have shown that we are incapable of increasing their capacity. Essentially, Nigerians will still need to import. Other factors contributing to the losses are spillages, explosions, and theft.
Yet in the midst of this, salaries and employee benefits are huge. KRPC, WRPC, and PHRC reported 13.8 billion, 13.8 billion, and 9.2 billion in employee wages and salaries, excluding directors’ remuneration, staff pension and other benefits. Given the inefficiency of the operations of the refineries, the only thing that could have been done asides creating better refineries is to have an overhaul of the entire thing and shut down the refineries. But that’s a different problem.
2: The politics of it
The first thing you’ll learn about oil in Nigeria is that everybody wants it. All of our refineries were built in the Military regime – as far back as that. Given the failure of the refineries, the first attempt to sell them off was made by former president Olusegun Obasanjo. When Umaru Yar’ Adua became president, he reversed it citing that the process lacked transparency. The fears of the unions in the oil and gas sector was also palpable as they saw the sale of the refineries as a ploy by the government to award the deal to its cronies. In November 2012, former President Goodluck Jonathan also recommended that the refineries be sold as a result of inadequate finance and under-performance, but they still remained. It didn’t take long before more issues emerged.
With developments going on in non-oil producing northern parts of the world like the State’s capital and barely any developments in the south, Niger Delta Militants sprung up and swore to wreak havoc on the entire nation. Also worthy of note is that today, President Buhari still remains the minister of petroleum.
3: The scam that is fuel subsidy
One of the most confounding things is the fuel subsidy saga. With the cost of import landed cost high, the government had thought it a great idea to subsidize fuel for the average Nigerian. Forget the question of whether we should be paying subsidies or not, how much in subsidies is the government really paying? Subsidies are based on the volume of petroleum consumed, but one unconfirmed information is how the subsidy is being calculated. Even today, NNPC and PPRA cannot agree on the volume of petrol being consumed daily in Nigeria.
If DPR says Nigeria is consuming around 38 million litres in a day and NNPC suggests that the country’s daily petrol consumption is around 50 – 60 million litres, it means there are significant discrepancies. As it is, no one knows how much subsidies Nigeria is actually paying every day and where the money is going to if we’re not actually consuming as much.
Yet, the king of all the problems is corruption
Of the series of challenges the refining space is plagued with from theft of petroleum products, to poor maintenance and a series of operational challenges, corruption ranks tops – and it isn’t news. Corruption in the downstream sector was also exposed during the subsidy probe. It revealed that some of the companies that took money for subsidy did not even import refined products at all. With marketers preferring to import, our refineries stay dormant. The funds used in Turn Around maintenance (TAM) annually also does not also contribute to any meaningful and could also be another avenue for exploiting the industry.
While Nigerians sit and watch the decay in the system fester, one billionaire is on course to provide an alternative that both the government and the private sector are basing all their hopes and dreams. Aliko Dangote’s 650,000 barrels a day refinery which is set to be one of the world’s largest, is due to start operations in less than a year’s time. Even as we hope that the refinery brings some sanity to the modus operandi and reverse the decades-old rot in the system, it too isn’t bereft of flaws. Yet, it is the only foreseeable hope we have to put an end to the joke that is our refining system and commence the process of recovery.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- 2020 FY Results: Guinea Insurance Plc reports a loss of N227.7 million.
- 2020 FY Results: Unity Bank Plc posts profit after tax of N2.09 billion.
- Guinea Insurance Plc reports a loss of N142.13 million in 9M 2020.
- Unilever Nigeria Plc set to hold Annual General Meeting on 6th of May.
- UBA Plc posts profit after tax of N38.16 billion in Q1 2021.