Inflation wipes out profit growth from Nigerian agro firms

Three quoted Nigerian agricultural companies posted an aggregate profit after tax of N3.5 billion in the third quarter of 2022, a 39.6% decline from N5.79 billion in Q3 2021 and 76.3% lower than the N14.8 billion posted in the previous quarter.

The net profit of the three companies declined significantly as a result of the high cost of sales, which eroded their margins in the period under review. This is according to data compiled by Nairalytics – the research arm of Nairametrics from the financial statements of the companies.

The three companies under consideration are Livestock Feeds, Okomu Oil, and Presco Plc, all of which operate in the Nigerian agricultural industry. They generated an aggregate revenue of N30.91 billion in Q3 2022, a 32.7% decline from the N45.92 billion recorded in the previous quarter, although it is 32.7% higher than the N23.9 billion recorded in the corresponding period of 2021.

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Margin Drops: Despite the year-on-year increase in their top line, their net profit dropped significantly in the review period, hampered by the disproportionate increase in the cost of sales and operating costs.

Specifically, a sum of N17.58 billion was spent on the cost of sales, which is 69.8% higher than the N10.35 billion spent in the same period of last year, and 11.1% higher than the previous quarter (N15.82 billion).
Businesses operating in the country have had to deal with the high cost of raw materials, diesel, and other operating expenses, which has affected the bottom line of the firms.
The high cost of sales may be attributed to the depreciation of the naira against the US dollar, which has fallen over 35% year-to-date. The exchange rate has been impacted by the increased demand for FX in the country, amidst sustained low supply.

Russia-Ukraine – We also opine that the high cost of goods and services across the globe, following the Russia-Ukraine war earlier in the year, which saw the cost of energy soar to a record level, triggering a chain of inflationary pressure across most economies.

Inflation Check: Nigerians have been grappling with the high costs of goods and services over the years, and even worse in recent times.

The headline inflation rate hit a 17-year high of 20.77% in September 2022, while the three months moving average for Q3 2022 accelerated to 20.31% from 17.71% recorded in the previous quarter.
Food inflation is also at a high of 23.3% and has been the major driver of inflation rate in the country.

Breakdown of the numbers: Cursory review of the results of consumer goods firms surveyed by Nairametrics also reveals a pattern of widespread cost-induced margin drops.

Presco Plc posted a net profit of N2.4 billion in Q3 2022, a 34.1% decline from the N3.6 billion printed in the corresponding period of 2021.
Revenue grew by 37% to N17.49 billion from N12.77 billion, however, a 57.5% surge in the cost of sales to N9.09 billion saw both operating profit and net profit decline in the review period.
Okomu Oil Palm in the same vein posted a 27% year-on-year growth in its revenue, posting a top line of N9.42 billion in contrast to N7.42 billion recorded in the corresponding period of 2021. Meanwhile, the cost of sales quickened by 289% from N1.21 billion recorded in Q3 2021 to N4.72 billion in the review period.
As a result, Okomu Oil posted a net profit of N1.21 billion in Q3 2021 as opposed to the N2.07 billion recorded in the previous year, which represents a 41.3% profit decline.

Just like the others, Livestock Feeds managed a 7.3% marginal revenue growth in the period under review, while rise the 12% increase in the cost of sales and operating cost led to a N114 million net loss in the period as against the N83 million profit recorded in Q3 2021.

Food Manufacturers also suffer: Consumer goods companies that rely on agricultural products also suffered a significant dip in their margins on the back of the excessive cost of production and operating expenses.

A cursory review of the financial statement of Honeywell Flour Mills showed a net loss of N4.96 billion between July and September 2022 from a profit position of N203 million recorded in the corresponding period of 2021.
This is despite a marginal increase in its sales revenue from N34.85 billion to N35.83 billion year-on-year. Similarly, Cadbury Nigeria saw its net profit for the period drop substantially by 76.6% to N474.8 million from a N2.03 billion profit recorded in the same period last year, despite an increase in revenue.

A combination of the surge in the cost of sales and distribution expenses hampered the performance of Cadbury Nigeria in terms of profitability. Meanwhile, the likes of Nestle Nigeria and BUA Foods were able to print profit growth despite incurring a large expense on their cost of production.

Flooding concerns: The recent incidents of flooding in the country have clouded the financial performance of several farms across the nation, casting a doubt on food supply as many farmlands have been submerged by floods.

Olams Farm, which operates the largest rice farms in the country, reported last month that it lost over $15 million worth of rice farms due to the flooding, while many citizens have been displaced, others have lost their lives.
Several businesses have been impacted by the flooding incidents in the country, most especially farmlands. This could have a negative effect on the financial performance of businesses that operate in the agricultural sector.