Lafarge Africa Plc took a stance to shed its dead weight and it has paid off well. Just a year ago, it cut off its South African subsidiary, Lafarge South Africa Holdings (LSAH), which had been making billions of naira worth of losses for years. Lafarge then restated its accounts by adjusting figures from the discontinued operations and set off on a positive growth trajectory. It also experienced a series of changes in leadership over the same period.
The company’s recent performance indicators
Following these moves, the cement maker’s Q1 2020 financial result showed significant improvement. In Q1, total debt reduced, short term loans and long term loans also dropped by 79% and 75% respectively in comparison with the first quarter of last year.
Also in Q1 2020, the company had noted that the COVID-19 pandemic “will adversely affect the company’s results in Q2, 2020” owing to the loss in demand for cement from restrained construction activities. True to its word, the company reported a revenue of N56.8 billion for Q2 2020, representing a 5.1% drop in revenue year-on-year. Profit after tax for the quarter, however, was N15.3 billion, up 160.27% from N5.9 billion in Q2 2019. This revealed the effect of the loss from discontinued operations and may not be a good representation of Lafarge Africa’s level of growth. Yet, the company’s many cost-cutting measures played a huge role in this.
The strategy that is cost-cutting and its limitations
Having successfully witnessed the effect of cutting down its ailing subsidiary, the company seems to have embraced new cost-cutting methods as its turnaround strategy.
- Cost of sales dropped by 13.79% from N38 billion in Q2 2019 to 32.8 billion in Q2 2020
- Selling and marketing expenses declined by 11.62% from N804 million to N711 million
- Administrative expenses declined by 46.40% from N6,040,244 to N3,237,568
- Finance costs also declined by a whopping 68.61% from N6,208,802 to N1,949,238
Note that these reductions in cost are part of what prompted the more than proportionate increase in profit for the quarter despite a drop in revenue. There were also reductions in CAPEX.
Lafarge Africa’s commendable efforts
In a press release explaining its latest earnings reports, Lafarge Africa noted that its core strategy is a “Health, Cost and Cash cutback initiative,” which involves cutting back on CAPEX, fixed costs, and focusing on the health and safety of staff and its customers. Consequently, its cash position was bolstered. The company had N39.7 billion in cash at the end of the quarter compared to N20.8 billion at the end of March. It also has little debt with just 0.16 debt-to-equity ratio, meaning it has less pressure on profits. The impact of its strategies has been immense as its operating profit margins for the quarter was much better than that of market-leader, Dangote Cement. For a company that had been declaring losses just a few years ago, its efforts are commendable. Given the challenges in demand for cement owing to the pandemic, this couldn’t have come at a better time.
There are some concerns…
However, there are two key things to consider. The first is that it is one thing to cut costs, and it is another thing to cut costs efficiently. Efficient cost-cutting takes place where not-so-relevant costs are taken off in order to focus on the areas that yield greater value. Cutting costs across board on the other hand, will ultimately do more harm than good.
The second thing to consider is that as far as the company’s bottom-line is concerned, cutting cost is only sustainable in the short to medium term. For a company like Lafarge which still has tough competitors like Dangote Cement and Bua Cement working tirelessly to expand their shares of the market, growth strategies simply must be deployed to stay in the game. Currently, Lafarge does not control market prices in the North, Middle belt, or South West and these are three major markets already being proliferated by its competitors.
The company has a low return on average equity (ROAE). Lafarge’s ROAE, was just 6.5% last year and it is a major challenge impacting on its valuation. At its current pace, it is highly unlikely that it will achieve higher double digit from profitability growth and even it does, sustaining it will be a challenge. For context, it will need to deliver profits of over N70 billion to achieve a return on equity of just 20%. Its current share price stands at N12.20, barely midpoint of its 52-week average which is between N8.95 and N17.60. Its earnings per share which is low at 1.43 and its price-to-book of 0.5535 reveal that the company has more than enough room for growth. What it needs right now is to deploy the right combination of strategies to get to its Eldorado, and its investors will certainly be happier for it.
Fidelity Bank Plc must cover the chink in its curtains to keep rising
Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years.
The Nigerian banking sector has consistently been one of the most profitable sectors in the Nigeria Stock Exchange market. However, in 2020, Deposit Money Banks (DMBs) have faced a flurry of impediments, which may have affected their solidity.
With reduced income from fee and commission implemented at the start of the year by the Central Bank of Nigeria, the paucity of foreign currency for international transactions, the resulting economic contraction from dire effects of the coronavirus pandemic, and the consequent operational constraints of keeping employees safe, 2020 is obviously fraught with numerous disorders for banking institutions.
For most, it hasn’t exactly been a year for growth at all, more like a walk in the woods, where improvements to bottom-line is almost unexpected. This period, many banks seem content with simply surviving and fundamentally matching their previous feats.
Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years. The bank generated a 2020 9M PAT of N20.4billion, rising 7.08% from the corresponding figures last year, but drilling solely into its results in Q3’2020 and its exact comparative period in 2019, the bank suffered reduced interest revenue, reduced fees and commission, reduced profit before tax, and reduced after-tax profit.
Fidelity Bank Plc concluded Q3 with a profit position of N9.1billion, 13.7% decline compared to its position in 2019 y/y. PBT reduced by 12.9% from N10.8billion in 2019 to N9.4billion this year. Gross earning in Q3 was only N49billion as against N57billion in 2019 – plummeting 14%.
The Group Chief Executive Officer of the bank, Mr. Nnamdi Okonkwo, commenting on the result said: “Our 9 months results reflect our resilient business model, particularly in a very challenging operating environment. We worked closely with our customers to gradually recover from the economic impact of the pandemic and the attendant effect of the lockdown. The drop in gross earnings was due to the decline in interest and similar income, caused by lower yields and drop in fee income.”
True cause of the reduction in earnings
DMBs generate gross earnings under three primary subheads: Interests earned, Fees and commission, and Other operating income. Fidelity Bank Plc generated a combined total of N150.8billion for the period ended September 2020 from these three categories, compared to the N158.5billion in the corresponding period last year.
Deeper analysis reveals that this rising tier-2 bank has seen more deficit in revenue from fee and commission compared to the other aforementioned gross-earnings’ generating-sources within this period. Interest earned dropped by a difference of N4.3billion, while revenue from fee and commission saw a decline of N4.8billion from N14.5billion in 2019 to N19.3billion YoY.
Fee and commission as a component of gross earnings
Card maintenance fees, account maintenance fees, commission on remittances, collect fees, telex fees, electronic transfer fees, amongst others, represent the plethora of channels that makes up income from fee and commission.
The real insight this particular component of gross earnings provides is that a spike in revenue generated indicates increasing/increased customer account activity. The more a customer maximizes the usage of an account’s product and facilities, the more the revenue earned from this segment. Thus, earnings from fees and commissions are so overriding due to their apparent controllability.
For example, a bank could make the decision to purely pursue and aggressively drive the usage of its ATM debit card and promptly see the revenue from commission rise. Furthermore, an increased rate of card production and collection necessitates usage and consequently means more money is earned as card maintenance fees.
The fact that gross earnings reduced mostly from fees and commissions should be a telling concern for the Management of Fidelity Bank Plc. Post covid-19 would birth the dawn of a new era for business processes. The management must guarantee the usability of its electronic banking channels, promotion of its cards, and with urgency, implement improved service delivery mechanisms to ensure that it is the first port of call to customers for general payments and remittances.
These measures are of grave significance in the bid to bridge its widened fee and commission income gap.
Holistically, in the 9 months ended September, it is worthy of note that the bank made certain advancements. Customer Deposits, Net Loans and Total Assets all grew in double digits. Customer Deposits grew by 22.3% from N1.2billion to N1.5billion, Total Assets also rose by 21% from N2.1billion in 2019 to N2.5billion, and Net Loans rose by 12.9% to N1.3billion from N1.1billion.
Airtel is paying up its debts
Airtel’s annual report revealed that the company has a repayment of $890 million due in May, as well as, an installment of $505 million due in March 2023.
Airtel’s presence in 14 countries from East Africa to Central and West Africa would have been impossible without relevant financial investments. But, while the funds have been key to its growth in the past few years, many of its financial obligations are starting to mature quickly.
The Covid-19 pandemic has had negative economic effects on different sectors of the economy; however, the resilience of the telecom sector is evident in an increase in Airtel’s income. The overall performance of Airtel increased with a revenue growth in constant currency of 19.6% in Q2 compared to 16.4% recorded in Q1, while revenue on reported basis increased by 10.7% to $1.82 billion, with Q2 revenue growth of 14.3%.
Unilever Nigeria Plc: Change in management has had mixed impact
9 months into the change of management, Unilever Nigeria Plc’s performance in Nigeria has been largely underwhelming.
Change in the management of a company is never a walk in the park. Transitions usually take time to yield the desired results. Organizations can look to past successful managerial transitions for inspiration, but not for instruction because there is no defined playbook. The decision to replace Mr Yaw Nsarkoh, who served as the Managing Director of Unilever Nigeria Plc until the end of 2019 was plausible, but adjustments were never going to be an easy task.
Mr Nsarkoh had served as Managing Director of the company for 5 years and steered the course of its proceedings with remarkable skill up until the financial performance disaster which culminated in his resignation on November 28th, 2019.