Manufacturing, Service Firms Face Currency Devaluation Headwinds
An inexorable surge in foreign exchange losses after floating the Naira, Nigeria’s local currency, has eaten deep into the financial earnings of blue chips, exposing them to foreign exchange uncertainties in the country’s battered economy.
Worse hit is manufacturing as well as service firms, which are at the mercy of the exchange rate since Wednesday, June 14, when the Central Bank of Nigeria (CBN) floated the Naira at the official Investors’ and Exporters’ Window in deference to President Bola Tinubu’s desire to unify the nation’s multiple exchange rates.
Since then, the Naira has dropped in value by over 40 percent, leaving manufacturing and service firms to pay more for the differentials in foreign exchange obligations as the Naira plunged from about N465/dollar to about N780/dollar.
In the manufacturing cadre is Nestle, which recorded a net FX loss of N123.77 billion in H1, 2023. In the corresponding period in 2022, the food and beverages company recorded an N2.13 billion net FX loss, reflecting the high impact of the naira devaluation.
Consequently, the finance cost pressure triggered a pre-tax loss of N86.22 billion in the half-year period compared to a profit before tax of N15.89 billion in the corresponding period of 2022. Accordingly, NESTLE recorded a post-tax loss of N58.69 billion as against a N9.77 billion profit after tax in Q2, 2022. Thus the unaudited results showed an H1,2023 loss per share of N63.06 as against earnings per share of N35.01 in Q2-22.
“Despite the resilience of Nestle’s operating performance, the company experienced a significant downturn in earnings due to the substantial finance cost resulting from a grave impact of the Naira devaluation,” a dealing member of Nigerian Exchange told InsideBusinessNG.
The stockbroker said that the company’s earnings would remain negatively affected by the recent devaluation of the Naira through 2023, and advised investors to be more cautious.
Unilever, one of Nigeria’s biggest consumer goods manufacturing firms is another at the receiving end having booked a N14.36 billion FX revaluation loss in the first half of 2023. Unilever stated that the revaluation loss arose from foreign currency-denominated balances related to trade loans.
In the second quarter (Q2) 2023, Nigerian Breweries Plc lost N70.62 billion in FX exchange, higher than N5.40 billion recorded in the corresponding period in 2022. Consequently, the brewer’s net finance cost saw a significant jump of 967.3 per cent year on year to N76.90 billion as against N7.21 billion in Q2, 2022.
Guinness Nigeria Plc, in its full-year 2023 financial statement filed with the Nigerian Exchange, the brewer disclosed an FX loss of N49.10 billion (compared to N1.43 billion in full-year 2022).
“This loss was driven by various factors, including remeasurement of other foreign currency balances (17.5x increase to NGN21.44 billion), as well as substantial increases in exchange differences on foreign currency letters of credit (N19.61 billion) and foreign currency intercompany loans (39.8x increase to N8.05 billion),” the company explained in the statement filed with the Exchange.
Consequently, net finance costs surged (201.4x increase year-on-year) to N45.50 billion in full year 2023 as against N2.13 billion in the full year 2022. As a result, the company recorded a loss before tax of N22.14 billion in the full year, 2023 as against a profit before tax of N23.67 billion in 2022.
Services companies were not left out of the headwinds. Highlighting the impact of the FX devaluation on the finance charge of MTN Nigeria Communications Plc (MTNN), the company reported a net foreign exchange loss of N126.82 billion in Q2, 23. This was over ten times higher than the N12.02 billion FX loss reported in Q2, 2022, and consequently, net finance costs rose sharply by 256.1 percent.
Commenting on the grave impact of the Naira devaluation on the earnings of the South Africa-based mobile telephone company, analysts at Cordros Capital noted that “While MTNN’s key fundamentals remain strong, we acknowledge the supernormal increase in net finance costs, which we believe was unavoidable following the revamp of Nigeria’s FX policy.
“For the rest of the year, we are quite concerned about the impact of the foreign exchange liberalization policy on the earnings margin, given that the costs of MTNN’s tower contracts – renewable at the beginning of each quarter – which are priced in US Dollars will be adjusted to reflect the new reference rate. Our estimates are under review,” the analysts at Lagos-based Cordros Capital wrote in an emailed note.
Airtel Africa Plc also reported that it lost $151m due to Nigeria’s unification of its multiple foreign exchange rates. The telecom company said, “Profit after tax was negative ($151m), driven largely by a foreign exchange loss of $471m recorded in finance costs before tax and $317m after tax, because of the devaluation of the Nigerian Naira in the month of June 2023. This impact has been classified as a non-operating exceptional item.”
In the accompanying notes to the financial statement, Airtel’s chief executive officer of Airtel said, “This quarter saw the announcement of the change to the FX market in Nigeria which resulted in significant naira devaluation.”
“We have welcomed this reform as very positive for the medium and long-term development of our business in Nigeria, our largest market,” Ogunsanya said.
Seplat Energy reported a 51.7 percent decline in operating profit to $118.4 million in six months of 2023 from $245.3 million in the six months of 2022. “This decline in operating profit was attributed to a combination of lower oil prices and foreign exchange (FX) losses due to changes in exchange rates,” Seplat Energy said.
According to Seplat Energy, the revaluation of financial assets arising from exchange rate devaluation resulted in a net (non-cash) loss of $33.8 million.
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