Torrid Third Quarter Just the Beginning of Nigerian Firms’ Woes

(Bloomberg) -- Some of Nigeria's biggest companies lost money in the third quarter as the naira plunged and the economy slumped in Africa's most populous country, crimping consumer spending and limiting access to foreign currency for essential imports. 

Nestle Nigeria Plc, Guinness Nigeria Plc, Cadbury Nigeria Plc, GlaxoSmithKline Consumer Nigeria Plc and Lafarge Africa Plc made losses in the three months through Sept. 30. Nigerian Breweries Plc, majority owned by Heineken NV and the country's biggest beer producer, posted net income of 1.04 billion naira ($3.28 million), its lowest profit since at least 2008.

With the economy set to contract this year for the first time since 1999, weighing on consumer demand, businesses are also battling shortages of foreign-exchange, which they need to pay overseas suppliers of raw materials and equipment. The naira has weakened 37 percent against the dollar since June 20, when the central bank ended a dollar-peg that analysts blamed for deterring foreign investment and exacerbating the crisis. Many investors have remained on the sidelines because they say officials are still manipulating the exchange rate.

“Most companies, particularly consumer ones, have found it very challenging,” Robert Omotunde, an analyst at Afrinvest West Africa Ltd., said in an interview in Lagos Nov. 3. “We don't think there'll be much improvement this quarter. As long as the foreign-exchange market is inflexible, we won't see a major earnings surprise on the upside.”

Dangote Cement Plc, the biggest company on the Nigerian Stock Exchange by market value, avoided a loss, unlike its main rival, Lafarge. Still, its net income of 32 billion naira was down 27 percent from the same period a year earlier, making it the worst third quarter since 2010, data compiled by Bloomberg shows. The firm, controlled by Africa's richest man Aliko Dangote, saw costs soar as militant attacks on pipelines in the southern Niger River delta hit its gas supplies and forced it to switch to other sources of energy, Omotunde said.

Some businesses were forced to book losses on dollar-based loans they had taken on from their foreign parent companies after the devaluation of the naira, according to Ayodele Salami, chief investment officer at Duet Asset Management in London. And those without access to such funding may have been forced to buy foreign-exchange on the parallel, or black, market, where the exchange rate is around 470 per dollar versus 316 on the official interbank market.

“With the likes of Nestle, Guinness, Lafarge, a lot of the losses have come from the fact they have foreign currency loans,” Salami, who manages about $450 million of African stocks, said by phone Nov. 1. “We suspect quite a few other companies are buying dollars at off-market rates, and they're not able to push the full impact of the cost on to their customers. Their margins are being squeezed.”

Faring Better

Nigeria's banks fared better. While mid-tier lenders Skye Bank Plc and Diamond Bank Plc made losses during the quarter, all of the others were profitable. Guaranty Trust Bank Plc, the biggest lender by market value, made net income of 42 billion naira, up 94 percent from a year earlier. Zenith Bank Plc, the second biggest lender, generated profit of 55 billion naira.

Some of them benefited from the devaluation because they had more dollar-denominated assets than liabilities, allowing them to book gains, according to Ronak Gadhia, an equity analyst at London-based Exotix Partners LLP. They may find the last part of the year tougher, especially if Nigeria continues to hold the naira, he said.
--------------

“I think we'll see a weaker quarter for the banks,” he said. “It seems that after making positive moves on the currency in June, the central bank has gone back on that, so the revaluation gains probably won't recur in the fourth quarter. Additionally, there may be a slight pickup in provisions” for bad debt, he said.

To contact the reporter on this story: Paul Wallace in Lagos at pwallace25@bloomberg.net. To contact the editors responsible for this story: Robert Brand at rbrand9@bloomberg.net, Antony Sguazzin