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VAT collection edges higher but indicates weaker economy

VAT collection for Q2 2020 climbed higher by 0.8% q/q and 4.9% y/y to N327.2bn.

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Yesterday, the Nigerian Bureau of Statistics (NBS) published data on Value Added Tax Collection (VAT) collection for the first half of 2020. According to the data, VAT collection increased by a modest 8.5% y/y to N651.8bn in H1 2020 from N601.0bn in H1 2019.

Suprisingly, VAT collection for Q2 2020 climbed higher by 0.8% q/q and 4.9% y/y to N327.2bn. The biggest contributing sectors to VAT collection, Professional services (up 40.9% y/y) and Other manufacturing (up 2.7% y/y) remained resilient during H1 2020. In addition, VAT collections on Breweries, Bottles and Beverages increased 12.0% y/y in H1 2020 although on a q/q basis, we observed a deep contraction of 27.3% in Q2 2020.

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Further analysis of the data provided some indication on how weak economic activities were in H1 2020 given the disruptions brought by the global pandemic particularly in Q2 2020 when there was full lockdown in Lagos, Ogun and FCT in April. We recall the VAT rate which was increased by 50% from 5.0% to 7.5% kicked off in February 2020 and must have provided a significant buffer for VAT collections in H1 2020. If we adjust for the increase in the VAT rate, we think economic activities must have slowed heavily given that the impact of a 50% increase in rate translated to a relatively meagre 8.5% y/y increase in absolute collections.

The numbers confirm our view that the steep rise in prices of goods and services nationwide occasioned by high inflation and a steep currency depreciation in the face of stagnant wages and a pandemic has tightened the squeeze on consumer spending and as such raising taxes in this setting would only do little to improve government revenues. Thus, the Federal government needs to do more from a policy perspective to improve business operating environment, as well as consumer conditions, post the pandemic. In our opinion, this would have a multiplier effect on companies’ revenue as well as consumer demand which would not only boost VAT collections but also other taxes such as Company Income Tax.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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Telecoms sector remains resilient as broadband subscriptions climb

Broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May.

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Despite the adverse impact of the global pandemic on various sectors in the economy, the Nigerian telecommunications sector has remained resilient. According to recent data on key industry fundamentals published by the Nigerian Communications Commission (NCC), the total number of broadband subscriptions grew 23.9% y/y and by 2.8% m/m in June 2020 to 78.8m subscriptions.

Similarly, broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May. In addition, the number of internet subscribers continued to grow in June 2020, up 1.8% m/m and 17.2% y/y to 143.7m subscribers. We believe the m/m uptick in broadband penetration could be due to gradual reopening of the economy.

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We recall that subscriptions declined on a m/m basis in April but showed recovery in May & June, reflecting the resilience of the sector. Industry players in the telecommunications sector continue to invest heavily in internet infrastructure in a bid to improve 4G LTE coverage across the country. Heightened competition among industry players for market share has also forced bundle prices lower, making internet usage very attractive to the average Nigerian.

With the advent of the global pandemic, we believe the growing use of digital channels for daily routine activities ranging from telecommuting, entertainment and social engagement bodes well for continued growth in internet penetration. This will be further supported by increasing smartphone penetration, favourable country demographics and a fledgling social media culture. Nevertheless, we believe the sector still requires more investment to bring it at par with more developed climes. With internet penetration still below 50% (39.58% as at April 2020), we think significant potential exists for telecom and internet service providers in Nigeria.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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COVID-19 and its impact on the cement industry

Our outlook for the cement industry is mixed due to a plethora of factors…

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The impact of the restrictive measures put in place during the second quarter to contain the global pandemic was apparent in the financial performance of two of the major players in the cement industry (Dangote Cement and Lafarge) as Revenue was pressured. Specifically, the industry leader, Dangote Cement recorded a decline of 15% in Sales volume in its Nigerian Operations while Lafarge reported a decline of 10%. Notably, the CBN Manufacturing PMI showed that demand for new orders in the cement subsector slowed to 63.6 points at the end of Q2 from 70 points in Q1.

READ: Measures introduced by Nigeria to ensure transparent use of the $3.4 billion IMF loan

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In our view, the lockdown in the month of April in three key states across the federation (Lagos, FCT and Ogun) coupled with heavy rainfall in June led to the decline in the industry’s sales volumes during Q2. Furthermore, we think the increased level of government attention on the healthcare sector amidst revenue challenges led to the suspension of most construction projects across the nation. Meanwhile, we highlight that the FG reduced the amount budgeted for capital expenditure by 20% in the revised 2020 budget following the downturn in oil prices which undermined oil revenue. Based on the recent presentation made by the Minister of Finance on budget implementation, the sum of N253.3bn has been spent on CAPEX as at end of May, which pales in comparison to the pro-rated revised budgeted capital spending of N816.70bn and translates to a performance ratio of 31%.

READ ALSO: COVID-19: Abuja Sheraton suffers 88% drop in revenues

Looking ahead, our outlook for the cement industry is mixed due to a plethora of factors ranging from subdued private investment in gross fixed capital formation, rising inflationary pressures on essential food items (which could dampen the quest for capital goods such as housing), increased energy costs due to the devaluation in the local cuurency amidst heightened competition in the industry that may limit industry players from hiking prices to preserve margins. Although, we expect pressure on volume growth to persist in the short term until there is a significant pick up in economic activities, we note that the relaxation of lockdown measures and the low interest rate environment are positive factors that will support the earnings of industry players.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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The “new normal” in business and economy

In the new normal, business owners are faced with overwhelming, competing challenges.

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The "new normal" in business and economy

As the COVID-19 pandemic continues to ravage the world, leaving citizens of the world a new world order, businesses need to navigate their financial and operational obligations. They are also expected to meet the needs of their greatest assets – customers and suppliers.

The crises may have paved way for uncertainties, but it has also created opportunities for sectors to emerge and grow, while some will fall and vanish if not properly managed and strategized as the companies who will stand firm in this era will be those that implemented risk management as part of their business strategy.

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While this crisis is first and foremost a public health issue, which has claimed the lives of thousands of people worldwide and still counting, the economic would no doubt be overwhelming and is likely to create major economic meltdown in both the formal and informal sectors

READ ALSO: Airtel Africa’s profit up 12.9%, customer base reaches 111.5 million

The train must be primed to chug along now! In the new normal, business owners are faced with overwhelming, competing challenges. They are surrounded by treacherous waters now darkly infested with COVID-19 sharks. Still, they must continue to dive into the deep end of the global pandemic.

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A business’s success depends in part on the economic systems of the countries where it is located and where it sells its products. A nation’s economic system is the combination of policies, laws, and choices made by its government to establish the systems that determine what goods and services are produced and how they are allocated. The resources of a person, a firm, or a nation are limited. Hence, economics is the study of choices—what people, firms, or nations choose from among the available resources. Every economy is concerned with what types and amounts of goods and services should be produced, how they should be produced, and for whom. These decisions are made by the marketplace, the government, or both. In the United States, the government and the free-market system together guide the economy.

READ ALSO: UPDATED: Inflation rate jumps to 12.40%, highest in over 2 years

Business owners therefore should have their priorities clearly mapped out; providing support and being a backbone to their people, customers and suppliers. They must achieve all this, whilst simultaneously addressing supply chain disruptions, maintaining stable profit margins, aligning their businesses with evolving demand and changes and identifying potential pitfalls and new growth trends.

Businesses in the new normal require a new mindset to recover from the crises, thereby identifying, analyzing and addressing effective strategies that would help the business return to normality and grow. This is the time to build organizational relationships with strategic partners for proper execution of effective strategies.

Management personnel and stakeholders are quickly turning their attention to the ‘next’; that moment of unpredictable and probably muted economic recovery with newly identified threats and opportunities. This is a new era defined by fast-changing initiatives to shift the cultural norms, societal beliefs and values, such as renewed brand purpose.

READ MORE: IMF expects Nigeria’s GDP to shrink by 5.4% in 2020

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Leaders, corporate and political, are faced with the urgency to reopen their businesses.

To bridge the gap of uncertainty, reopening would require a series of ‘reinventive’ thinking. The pandemic offers a big opportunity to have companies invest in areas they wish they’d paid more attention to before the crisis. Now, to be more digital, data-driven, and in the cloud; to adopt a variable cost structure rather than fixed, to find its root in e-commerce and security are no longer deferrable agendas.

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Consequent to the pandemic, organizations globally are experiencing an unfamiliar change in their workflow processes and harnessing their workforces optimally. Companies are yet to fully understand and determine how working remote working will help achieve corporate objectives beyond the survival hump. Profitability and business models are being cautiously reviewed. Teams and workforces try to function and perform in line with expected deliverables whilst struggling to cope with even more sombre personal and existential challenges in the new normal.

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Organizations, teams and workforces need new and bespoke fitting plans today. They need to formulate strategies and drive policies that can position them advantageously to work out and around the emerging challenges as the state of global health and economic unfolds. All stakeholders have critical roles to play in developing and establishing systematic approaches that promote shared workforce resilience, flexibility and intelligence.

Similarly, the ongoing COVID-19 pandemic has changed customers, employees, citizens and humans’ experiences, attitudes and behavior forever. The norms of behavioral consumer psychology are deviating from the expected curves. Results, though displaying expected changes, are creating sweaty anxiety for boardroom decisions. The crisis has caused a fundamental change in human-human interactions and behavior. In the new world order, companies would necessarily need to review and redesign operational flow and operating models. These changes would impact greatly on design, communication, running expenses, remunerations, investments etc. The definitions of that people need and want has been reshaped and businesses need to blend into the new, emerging ecosystem so they can properly reposition for sustainability and profitability. The global pandemic has created uncertainties and forced companies to reevaluate and reinvent how business operations units are leveraged. It has redefined how digital platforms can be used in supporting and ensuring continuity in the business through and beyond the crisis.

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The state of the economy affects both people and businesses. How you spend your money (or save it) is a personal economic decision. Whether you continue in school and whether you work part-time are also economic decisions. Every business also operates within the economy. Based on their economic expectations, businesses decide what products to produce, how to price them, how many people to employ, how much to pay these employees, how much to expand the business, and so on.

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The crisis has fundamentally changed supply chain management economics and dynamics; we are in uncharted waters. Routes to market are evolving which would inevitably kick some companies off the market and make some others tether on balance. In response to the pandemic, leaders have been mandated to increase their adoption of value chain transformation to help outrun uncertainty. For those who are able to successfully navigate to the other side of this new normal, it becomes imperative to establish strategies for greater resilience and apply lessons learnt to create systems and models that would better prepare companies and stakeholders for further future disruptions.

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