BY Mike 'Uzor
The final results of how companies traded in 2015 will be trickling in a few weeks and not many companies are likely to show figures that can excite shareholders for the year. The ability to grow profit and pay reasonable dividends is the key indication of whether company directors are able to grow wealth for shareholders. Fiscal 2015 looks more like a year in which most company directors and their managers lost much wealth for shareholders.
Despite the general operating difficulties, earnings prospects differed across sectors and industries. While loss of sales revenue, profit drops and inability to pay dividends would be the summary of the 2015 company operations, a few companies and industries can be expected to defy the general picture.
Agricultural sector experienced a recovery in earnings growth in 2015 after a period of slowdown. The companies here are expected to show reasonable improvements in revenue and a strong growth in profit for the year. Revenue performance depends on product yields – which favourable weather improved last year.
Improved revenue capacity is accompanied with a major gain in profit margin. Agric companies command some of the highest profit margins in the entire group of listed companies. This is explained by their local dependence on raw materials. Exchange rate-induced cost increases, which hurt profits of most companies last year, did not affect companies here.
The sector is unable to satisfy product demand due to limited operating capacity. Local output of palm products, for instance, meets about one-third of total domestic demand. Importation has been restricted under the Central Bank’s foreign exchange conservation measures.
Airline service sector promises good earnings results for 2015, being a service sector in which changes in the level of economic activity do not register directly. The impacts of economic prosperity and decline tend to be prolonged in this sector. This means it does not slow down at the same time with other sectors and also takes a while to pick up when prosperity returns. It is therefore still running with the strength of the economy in the prior years and the operators here also applied cost cutting measures to improve profit capacity. Revenue growth was marginal in the sector in the preceding year but strong improvements are expected from the 2015 financial year.
The banking sector came under increased regulatory and operating pressures in 2015, which weakened revenue capacity and constrained profit growth. Liquidity tightening by the Central Bank forced liquidation of investment assets in most banks and consequently the ability to grow revenue was limited. In response, banks frantically engaged in all forms of cost reduction in order to defend profit.
Two major cost areas could not be controlled however ad these are interest expenses and loan loss provisioning. Generally, interest expenses grew well ahead of interest income in banks 2015, resulting in a decline in net interest income. Rising credit losses cut across the banking industry in 2015, which reflect the difficulties facing business and industries in the year. Loan repayment constraints meant weakening risk asset quality and loss of earnings capacity in banks.
Banks devoted significantly increasing proportions of revenue to both interest expenses and impairment for credit losses, which hurt profit margin significantly. Most banks however succeeded in reducing the proportion of revenue devoted to operating expenses, which slightly moderated the impact on the two other major rising cost lines.
The cost-income ratio increased in the banking sector last year and profit margins declined generally for the second year. The ability of banks to grow profit and pay dividends from their 2015 operations was weakened by a slowdown in revenue and loss of profit margins.
The total brewed products market moved from two years of stagnation since 2013 to a decline in 2015. The breweries sector therefore faced slow growth in sales revenue last year, as low consumer spending affected the market for consumer goods generally. Consumer demand weakened under the sustained cash and credit squeeze. Rising consumer prices and growing volumes of unpaid workers’ salaries in the public and private sectors registered adversely on sales of consumer goods.
Increased use of suppliers’ credit by companies and the resulting slowdown in paying creditors generated adverse multiplier effects on demand for even basic necessities. Competition intensified in the sector and companies incurred greater costs to generate a naira of sales revenue than previously.
The slowdown in revenue limited profit growth in breweries, as companies were unable to cut costs to defend margins. The business runs on considerable short- and long-term borrowings and high and rising interest charges constricted profit margins. Fiscal 2015 was definitely not a year for prosperity for breweries. Consolidation seems to be the right corporate therapy to strengthen operating muscles and defend market share in a weakening marketplace. The ability to extend product distribution networks is reckoned to be the key determinant in who makes the sale.
Building materials sector appeared to have a good foundation for earnings growth in 2015 after a slacken performance in the preceding year. The performance of the operators here reflects the state of the real estate and construction industries. Building and construction activities have slowed down in reflection of the general slide in economic activities but still remains better than most other sectors.
The operators have succeeded in expanding operating capacities in recent years, which involves substantial cost saving. With improved operating capacity, sales revenue showed a general trend of accelerated growth in the sector in 2015. Strong recovery and growth in profit can be expected from the leading building materials companies from the 2015 operations. Some gains in profit margin will permit a stronger growth in profit than revenue.
Chemical and paints companies are likely to continue to paint a picture of inability to grow sales revenue but a good strength to defend profit for the 2015 financial year. Major paint makers didn’t appear to have received the boost expected from the activities in the real estate business, as low cost competitors continued to rule the market.
A slowdown in construction and real estate industries added to the constraint in sales revenue for the chemical and paints sector in 2015. The companies here could only count on their ability to save cost and defend profit margin. This represents the hope for either profit recovery or growth to happen for chemical and paints companies in 2015.
To be continued…
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