FMCG firms’ debt pile eats deep into margins
by BALA AUGIE
February 20, 2017 | 1:02 pm| | | Start Conversation
Fast Moving Consumable Goods (FMCG) Firms debt pile has eaten into profit margins, raising concerns as to whether free cash flows will cover obligation and dividend payments.
This means firms may have to deep into their cash to pay debt, sacrificing expansion plans such as the acquisition of new technologies.
Gearing, a measure of indebtedness for Flour Mills Nigeria Plc, Guinness Nigeria Plc, Vitafoam Nigeria Plc, International Breweries Nigeria Plc, and Seven Up Bottling Plc increased to 169.15 percent in the period under review from 96.05 percent the previous year.
Cumulative total debt in the balance sheet rose by 57.48 percent to N291.15 billion. Combined Interest coverage ratio stood at 1.03 times earnings, raising concerns on the ability of these firms to meet interest payment on debt.
Analysts attributed the high gearing to the devaluation of the naira that saw firms tap into the bond market in order to cover the rising costs as imported raw materials soared on the back of a weak currency.
“One of the companies squeezed was Flour Mills. The major source of raw material is wheat, which is imported. The price of wheat has gobe up since the devaluation,” said Ayodele Akinwunmi Head of Research at FSDH Merchant Bank.
“Therefore, the cost element has almost doubled. The company couldn’t raise capital from to cover raising cost hence it had to borrow,” said Akinwunmi.
The central bank adopted the flexible exchange rate in june last year that saw the naira lose 40 percent of its value against the US currency.
The naira has remained relatively calm at N305/$ at the interbank market while It trades at N500 at the parallel market.
Return on capital employed for the 5 firms fell to 2.48 percent in the period under review as against 14.28 percent as economic downturn undermines efficiency.
Some firms are intensifying efforts to reduce the debt in the balance with the introduction equity capital or rights issue.
Flour Mills plans to issue N40 billion rights issue for the purpose of reducing the huge debt in its capital structure. Cost of capital will increase to 20.02 percent as against 17.75 percent previously held, post rights issue, data gathered by BusinessDay shows.
Guinness plans to raise N40bn via a rights issue this year as it seeks to reduce foreign exchange liabilities. The company’ debt-to-equity ratio for FY2016 was 120%, according to analysts at FBNQuest.
Nigeria’s economy has been hit by a sharp drop in oil price since mid-2014 and a severe dollar shortage that saw GDP contract by 2.2 percent in the third quarter of the 2016.
Inflation for the month of January accelerated to 18.70 percent, the highest in 11 years. The spiraling was caused by increased price of gasoline and food stuff.
“Although 2017 may be the year that sees the economy moving away from recession, the overall picture for consumer spending remains bearish and a potential turnaround is hard to see at this stage,” said analysts at CSL Limited.
“Moreover, we see the consumer continuing to face headwinds, chiefly on the back of the possibilities of another round of of petrol pump price hikes and/or naira devaluation and lower revenue allocations to state governments resulting from lower oil receipts caused by renewed militant attacks on oil pipelines,” said analysts at CSL Limited.
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