Nigerian conglomerate’s suppressed margins, rising costs and ballooning interest on borrowings pose a threat to growth and calls for urgent reorganization and restructuring.
The market weaknesses and tough operating environment has exacerbated the already anaemic position of firms like UAC of Nigeria Plc (UACN), Transnational Corporation of Nigeria Plc (Transcorp), A.G Leventis Nigeria Plc and John Holt Nigeria Plc.
The cumulative net income of these four giants, with wide interests accross housing and real estate, foods and beverages, agriculture, hotels and hospitality, energy, transportation and consultancy services fell by 15.78 percent to N1.91 billion as at March 2017.
There are concerns about efficiency due to rising cost of production, fuelled by spiralling inflation and currency volatility.
Combined net margin fell to 4.25 percent as against 6.64 present the previous year.
The economy of Africa’s most populous nation have been squeezed by a sharp fall in oil price and a severe dollar shortage that bled the external reserve and culminated in rising inflation.
Rising rates of unemployment reduced the purchasing power of consumers while the shortage of dollars hindered firms from importing raw materials and machines.
The economy contracted by 0.52 percent in the first quarter of 2017, though lower than the 1.50 percent figure in the last quarter of the last year, is the country’s worst recession in 25 years.
Worrisome is the level is level of debt in the capital structure of conglomerates.
This is because huge interest payments undermine a firm’s bottom line while eroding shareholder returns.
Cumulative finance costs of the firms under our coverage increased by 72 percent to N4.40 billion in the period under review. Total debts stood at N176 billion.
While Transcorp recorded a double digit growth in sales and profit in the period under review, the largest conglomerate by value is highly indebted.
It has a debt to equity ratio of 110.88 percent and total borrowing in the balance sheet stood at N97.48 billion.
Analysts have urged conglomerates to either shrink operations by deleting segment that no longer fit into their strategic plans or opt for schemes of mergers and acquisitions.
The aforementioned strategy helped bail Europe’s conglomerates in 2014 as German’s AG Siemen led the charge by reducing its businesses to five and focused on units that contribute more to Group revenue.
There are efforts by Nigerian diversified firms to bolster the working capital and overall performances of units.
UACN plans to raise capital via a right issue in order to inject cash into its struggling subsidiaries as the operating environment created challenges stunting growth.
The company’ food and nutrition segment- Grand Cereal and Livestock Feed-, buffeted by rising prices of seasonal raw material, will get a capital injection of N7.75 billion.