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Okomu Oil and its multifarious related party transactions
For Okomu Oil, its majority shareholder holds the aces when it comes to related party transactions.
Okomu Oil is one of Nigeria’s oldest and largest agriculture-based companies. It is majorly owned by SOCFINAF SA, a Belgian company with 62.69% controlling stake in the company’s 953.9 million ordinary shares. No Other shareholder owns more than 5% of the company. SOCFINAF also owns several oil palm plantations across Africa especially in countries like Ivory Coast, Cameroon, Congo, Ghana, Liberia, and Sierra Leone. It also has business interest in Indonesia and in Europe.
The company recently reported a pre-tax profit of N3 billion in the first quarter of 2020 representing an impressive 150% jump from same period 2019. The result is also in line with analysts expectation that Nigeria’s agricultural sector will reap bountifully from the 2020 covi-19 pandemic. Its impressive results have helped catapulted its share price from below N60 to over N70 per share in three months. The relationship between performance and share price is easy to comprehend.
READ MORE: What bad stocks have in common with bitter relationships
However, looking beyond the company’s impressive first quarter result, one observes another interest relationship, that between its majority shareholders and Okomu Oil. In accounting, this term is called related party transactions. According to IAS 24, the accounting standard that governs related party transactions, a related party is a person or entity that is related to the entity that is preparing its financial Statements. For Okomu Oil, its related party transactions with its majority shareholder is worthy of mention.
Okomu Oil sells two main products, Crude Oil Palm and Rubber. It exports the latter, while COP is mainly sold locally. To export rubber Okomu Oil relies heavily on its related company, SOGESCOL FR SA . It sells all of its rubber to SOGESCOL FR SA who then goes on to sell to buyers in the world market. Total sales for 2019 alone was N2.9 billion. Okomu Oil claims this transaction is at arms-length.
Okomu Oil also reports that SOCFINCO FR another related party “has exclusive rights to know-how and manages the affairs of the company”. It also reveals that in exchange for obtaining this know-how from SOCFINCO FR, Okomu Oil pays technical fees “at an aggregate rate equal to 3% of the company’s net sales and management fees are 3% of profit before tax”. These fees cost the company about N882 million and N933 million in 2019 and 2018 respectively. The figures are net of taxes. These are all contained in page 65 of its 2019 annual reports. We are not done.
READ: Banking related phishing up 9% in 2019, e-stores down 10%
SODIMEX FR another related party of Okomu Oil also sells “a large amount of its equipment and spare parts” to Okomu Oil in a transaction value worth about N380 million in 2019 (N688 million in 2018). It also claims these transactions were all at arms-length. Another interesting related party transactions is the sale of palm seeds from SOCFINDO SA, yet another related company. In 2018 Okomu Oil boughtN20.3 million of palm seeds but zero in 2019. It also purchases mucuna seeds from another related company, SOCFIN Agricultural Company, though zero sales were recorded in the last two years.
Two Nigerian owned related companies, INDUSERVICES FR and Perfect securities sell internet services and building construction services respectively to Okomu Oil. On its website, PERFECT SECURITY SERVICES LIMITED says it provides a wide range of security and other security related services, consultancy, risk management, training services to organizations, institutions and private individual and those in the public sector. In 2019, Perfect Securities carried out “building construction services” for Okomu Oil worth about N13.9 million.
READ MORE: Okomu Oil Palm Company Plc. announces AGM and dividend payment of N2.00 per share
It is important to note that the entirety of these transactions are legal and permissible provided it is all at arms length as the company confirms they are. However, the breadth of the related party transactions if for nothing reveals just how much control SOCFINAF, its Luxembourg based majority ultimate shareholder has over the entity.
Should shareholders be worried? Well, considering that the company pays dividend every year and has a knack for issuing bonus shares once every decade, there is little to be worried about from a shareholder’s perspective. Suffice to add that its share price has risen more than 170% in the last 5 years and seem poised to deliver on capital gains.
Thus, for now, we can only watch in awe as the company continues to foster its relationship with its majority shareholders and hope that all that starts well ends well.
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Dangote Sugar records revenue boost despite inflation and Apapa gridlock
Dangote Sugar has revealed it increased prices in the first quarter of 2021 to mitigate the problems of rising inflation and depreciation.
One of Nigeria’s largest Sugar manufacturers, Dangote Sugar revealed it increased prices in the first quarter of 2021 to mitigate the problems of rising inflation and depreciation.
In a note to investors, the company revealed its recent 41.5% surge in revenues was due to an increase in sales volume as well as an uptick in price. In the first quarter of 2021, Dangote Sugar posted a revenue of N67.39 billion compared to N47.6 billion, the same period in 2020. The increase in price was driven by 5.7% pop in sales volume as the company sold 200,510 tonnes of sugar in the quarter compared to 189, 724 the same period in 2020.
But while sales value surged by 41.5%, volumes only rose 5.7% suggesting that price increase was a catalyst for the growth in revenue and the company alluded to this in its statement.
READ: Dangote set to earn N13 billion in dividend from his sugar business
Dangote Sugar’s performance
“Group sales volume increased in the quarter by 5.7% to 200,510 tonnes (2020: 189,724 tonnes). Growth continued to benefit from the sustained efforts to drive customer base expansion, several trade initiatives and investments. Group production volume also increased by 4.3% to 200,783 tonnes (2020: 192,584 tonnes) due to our operations optimization strategy despite the challenges of the Apapa traffic situation. Group revenue increased by 41.5% to N67.39 billion (2020: N47.64 billion). Growth in revenue advanced ahead of volume growth due to pricing benefits. Gross profit increased by 41.8% to N18.04 billion (2020: N12.72 billion) on account of better topline performance. EBITDA increased by 34.7% to N17.02 billion (2020: N12.64 billion) on account of increased earnings. Group profit after taxation for the period increased by 30.3% to N8.30 billion (2020: N6.37 billion) reflecting management’s unrelenting drive to deliver consistent shareholder value.”
The company also explained it had no choice but to increase prices because of the impact of the 2020 devaluation, higher inflationary environment, port congestion issues and a rise in global sugar prices. The company imports raw sugar from Brazil, under the government’s backward integration plan.
“We have continued to witness high cost of raw materials, energy costs and other input costs due to rising inflation and FX rate fluctuation. Further cost escalation is anticipated in the year as inflationary pressure mounts,” the company said.
READ: Dangote Sugar yearly revenue surge by 33%, announces a dividend of N1.50
Dangote vs BUA Sugar Scarcity Controversy
Just last month, the company’s adversary and competitor BUA Group accused Dangote Sugar of conniving with Flour Mills of Nigeria (FMN) in price-fixing and arbitrary collusion to create sugar scarcity and keep the price of the commodity high.
This triggered Dangote Sugar and FMN into issuing a joint press statement denying the accusations.
The allegation made by BUA was triggered by a joint letter written by John Coumantaros of FMN Plc and Aliko Dangote of Dangote Industries Limited, reporting key developments in the Nigerian Sugar Industry to the Minister of Industry Trade and Investment, Niyi Adebayo.
The duo in the letter dated January 28, 2021, pointed out how BUA’s new sugar refinery in Port Harcourt may lead to a spike above the import quota as stipulated in the National Sugar Master Plan (NSMP), and how BUA’s investment in the sugar industry via the new refinery is non-compliant to the undertakings under its Backward Integration Programme, in line with local production.
READ: Dangote’s stakes in his sugar enterprise has earned him N90 billion in 365 days
BUA’s response however led to an immediate reply by the duo of Dangote Sugar and Flour Mills of Nigeria.
“In line with this, the Dangote Sugar Refinery wishes to vehemently refute the allegations and assertions made by BUA Sugar Refinery as they are not only false but defamatory, malicious and libellous, as they were geared at tarnishing the good name and brand of Dangote Sugar Refinery Plc and Dangote Industries Limited.”
The Group Managing Director, Mr Ravindra Singhvi, explained that the Dangote Group is socially responsible and considers price-fixing to be unethical and disastrous to the nation’s economy, and as such, the allegations made by BUA is highly mischievous and defamatory and should be considered a malicious attempt to smear the reputation of DSR.
“DSR does not engage in artificial price manipulation of its products, either during the Holy month of Ramadan or at any other time. We have never ever increased the price of our food items or commodities during the Holy month of Ramadan in the history of our operations,” Ravindra Singhvi said.
Outlook for Dangote Sugar
Despite the operational headwinds, the company insist it is on track to improve its operations and seek growth in its sugar sales volumes. It also recently received approval from the government to revise its local sugar production targets to 550,000 metric tonnes annually from over 1 million metric tonnes annually.
“Despite these uncertainties, achievement of our Sugar for Nigeria Backward Integration Project goal remains a key priority, though we anticipate increase in cost to completion in Naira-terms and some delays in Letter of Credit establishment for the importation of plant and equipment. The focus is to achieve the Federal Government’s revised sugar production target of 550,000 metric tonnes annually by 2024. We remain confident of the huge benefits the Backward Integration Programme would deliver and the positive impacts it will have on the economy.”
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GlaxoSmithKline in big trouble as losses mount
The results were less than impressive with several key indicators showing a year-on-year decline.
GlaxoSmithKline Consumer Nigeria Plc (“GSK Plc” or “the Company”) is a public limited liability company with 46.4% of the shares of the Company held by Setfirst Limited and Smithkline Beecham Limited (both incorporated in the United Kingdom), and 53.6% held by Nigerian shareholders.
The ultimate parent and controlling party is GlaxoSmithKline Plc, United Kingdom (GSK Plc UK). The parent company controls GSK Plc through Setfirst Limited and SmithKline Beecham Limited.
The Company recently published its unaudited first quarter (Q1) 2021 consolidated financial statements for the period ended 31 March 2021.
READ: GSK Consumer Nigeria Plc records 3.34% increase in 2020 9M revenues
The results were less than impressive with several key indicators showing a year-on-year decline. For example, Group revenue (turnover) declined from ₦4.99 billion in Q1 2020 to ₦3.46 billion in Q1 2021 a drop of over 30.66%. The revenue drop was due to a sharp decline in the local sale of its healthcare products.
Total loss after tax as of Q1 2021 was ₦238.07 million compared to a profit after tax of ₦113.47 million for the same period to Q1 2020.
The company is essentially divided into two segments viz: Consumer Healthcare and Pharmaceuticals. While the Healthcare segment was largely profitable in Q1 2021 (making a profit before tax of ₦ 8.73 million by March 31, 2021, the pharmaceuticals segment made a loss of ₦262.93 million in the same period.
READ: GlaxoSmithKline Nigeria announces changes in its board
The Consumer Healthcare segment of the company consists of oral health products, digestive health products, respiratory health products, pain relievers, over the counter medicines, and nutritional healthcare; while the pharmaceutical segment consists of antibacterial medicines, vaccines, and prescription drugs. While goods for the consumer healthcare segment are produced in the country, the pharmaceuticals are all imported.
The largely imported pharmaceutical products are thus exposed to the vagaries of foreign currency fluctuations coupled with a negligible to no revenue from the foreign sale of its healthcare products (same as in Q1 2020) as it barely exports its products out of the country.
The cost of importing the antibacterial, vaccines and prescription drugs, and the significant local operating expenses wiped off the marginal gross profits made by the pharmaceutical segment of the company. In effect, the gross profit of ₦508.12 million made by the pharmaceutical segment of the company was eliminated by an operating expense of ₦735.7 million and this resulted in a net loss for the pharmaceutical segment of the business.
READ: Nigerian Breweries posts N7.66bn as Q1 2021 profit, shares gain 2.2%
Apart from the impact of imported pharmaceutical products as already discussed, other issues that affected the company’s Q1 2021 results and are likely to continue to affect its performance in future include:
- A limited product mix that has only the likes of Macleans and Sensodyne (Oral Healthcare); Pain relievers (Panadol and Voltaren); Digestive Health (Andrews Liver Salt); and Respiratory Health (Otrivin and Panadol Cold and Catarrh) all within the Consumer Healthcare segment.
- Increased competition, particularly from local pharmaceutical manufactures of similar over the counter medicines and other prescription medications and vaccines.
In addition, in October 2016, GSK Plc divested its drinks bottling and distribution business that manufactures and distributes Lucozade and Ribena in Nigeria, and other assets including the factory used for the drinks business to Suntory Beverage & Food Limited. The loss in revenue from these popular brands continues to impact its topline.
GlaxoSmithKline (GSK) is a global healthcare company and is well-known and acknowledged for its pioneering role in discovering and distributing vaccines for the likes of hepatitis A and B, meningitis, tetanus, influenza, rabies, typhoid, chickenpox, diphtheria, whooping cough, cervical cancer and many more.
It is also renowned for its manufacture and distribution of prescription medicines such as antibiotics and treatments for such ailments as asthma, HIV/AIDS, malaria, depression, migraines, diabetes, heart failure, and digestive disorders.
Perhaps GSK Plc’s fortunes may change if the company is able to obtain the parent company’s licence to manufacture GSK-owned vaccines and prescription medicines within the country while also exploring the possibility of extending the sale of its products outside the shores of the country.
Since different expertise is required for vaccines and prescription drug manufacture and distribution as compared to manufacture and sale of consumer healthcare products, perhaps another alternative may be for the company to create two separate companies with one company being a 100% vaccines and prescription drug pharmaceutical manufacturing and distribution company while the second company specializes entirely in the manufacture and sale of consumer healthcare products.
As a result of the Q1 2021 performance, the company’s earnings per share (EPS) dropped to -20 kobo compared to the 9 kobo earnings per share reported in Q1 2020. At the start of 2021, GSK Plc’s share price was ₦6.90 but the company has since lost over 10% of its price valuation as the company’s share price closed at ₦6.20 on April 30, 2021.
