Consumer firms reduce leverage with finance costs down to 3 year lows

by | November 20, 2017 1:00 am



Nigerian consumer goods firms have reduced leverage by paying down loans and swapping debt for equity leading finance costs to drop for the first time in 3 years.
Analysts say the reduction on interest expense combined with strong sales and improved gross margins could bolster future profit amid a volatile and tough operating environment.
“Nestle had borrowed money from parent company in 2010. These loans have matured. Finance cost will continue to dip unless they borrow more to finance future expansion plans,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham Limited.
“Flour Mills may still borrow more money. They have put on the NSE that they want to borrow money. You will see lower interest expense that will boost profitability. It is in the initial stage they obtained those loans that they have high interest expense,” said Ibrahim.
The cumulative finance costs or interest expense of 13 largest consumer good firms quoted on the floor of the bourse fell by 4.25 percent to N57.71 billion while total loans (long and short term) fell by 18.56 percent to N341.44 billion as at September, 2017.
This compares with a 25.25 percent increase in interest expense recorded in the previous period of September 2016.
The firms are: Unilever Nigeria Plc, Cadbury Nigeria Plc, Nestle Nigeria Plc, Seven Up Nigeria Plc, Flour Mills Nigeria Plc, Nigerian Breweries Plc, Guinness Nigeria Plc, International Breweries Plc, Honeywell Nigeria Plc, PZ Cusssons Nigeria Plc, Dangote Sugar Nigeria Plc, Dangote Flour Nigeria Plc and Nascon Allied Nigeria Plc.
Combined interest coverage ratios, a measure of corporate leverage, for the 13 firms increased to 3.29 times earnings in September 2017 from 1.87 times earnings the previous year.
The lower a company’s interest coverage ratio is, the more its debt expense burden. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.
Modest leverage is also a lynchpin of corporate quality, along with high profitability and stable earnings and investors rightly look to corporate quality for protection during downturns.
Nestle Nigeria’s finance costs reduced by 32.28 percent to N14.88 billion in the period under review while interest coverage ratio stood at 2.89 times earnings the same period.
Flour Mills Nigeria Plc has an interest coverage ratio of 1.87 times earnings while total debt in the balance sheet fell by 23.54 percent to N147 billion.
The Nigerian millers’ estimated weighted average cost of borrowing is 2.53 percent on the N147 billion total loans in the balance sheet.
Flour Mills had unsecured borrowing amortised costs of 8.50 percent, 9 percent and 9 percent for loans received from the Bank of Industry (BOI) Central Bank of Nigeria (CBN) Commercial Agriculture Credit Scheme (CACS) and Real Sector Support Facility (RSSF), which are cheaper than commercial bank facilities.
“Flour Mills has started a N70 billion Medium Term programme to refinance debt and lower the cost of borrowing,” said Jacque Vauthier, Chief Financial Officer (CFO).
Consumer goods firms in Africa’s largest economy were hard hit in the past 18 months by a severe dollar shortage brought on by a sudden drop in the price of oil as these firms were forced to buy dollars at the inaccessible parallel market.
The devaluation of the currency in mid-2016 as a result of the adoption of a flexible exchange rate by the central bank ballooned dollar denominated debt of these firms.
The debt-to-equity ratio for 13 of the largest consumer goods firms fell to 43.04 percent in the period under review from 66.26 percent as at September 2016.
The cumulative profit of the 13 firms rose by 182.20 percent to N100 billion in the period under review while the Return on Capital Employed (ROCE) increased to 8.40 percent in September 2017 from 3.30 percent as at September 2016.
“If expenses are going down given the fact that the economy has picked up, it is expected that there will be improvement at the bottom line,” said Ayodele Akinwunmi, head of research at FSDH Merchant bank Limited.

 

BALA AUGIE

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