FMCG firms consider right issues to ease currency woes  

 

Fast Moving Consumer Goods Firms (FMCG) in Africa’s most populous nation are increasingly planning on raising capital through right issues after a weak currency ballooned dollar denominated debt in their capital structure.

The cumulative planned right issue of consumer goods giants: Flour Mills Nigeria Plc, Guinness Nigeria Plc and Unilever Nigeria Plc stood at N143 billion as these firms continue to seek funds to clear the backlog of unpaid dollar denominated obligations to suppliers.

Analysts say money raised from the right issue could be used to fund the completion of ongoing projects, support management’s plan and provide flexibility to pursue opportunity.

The combined total accounts payable of FMCG firms under our coverage spiked by 70.74 percent to N584.96 billion in 2016 from N335.96 billion in 2015, following the devaluation, data gathered by BMI shows.
The management of PZ Cussons Nigeria (PZ) and Flour Mills of Nigeria Plc (FLOURMILL) for instance, say that 100 percent of their payables are dollar-denominated, and the companies risk significant FX losses if unsettled in the event that the NGN devalues further from current level, according to analysts at Cordros Capital Limited.

The cumulative total loans of these firms increased by 51.35 percent to N465.44 billion in 2016 from N307.52 billion in 2015.Finance costs increased by 61.28 percent to N75.48 billion.

Foreign exchange (FX) losses in the books of consumer names summed to 45.12 billion, Nestle Nigeria’s N16 billion FX losses make up 35.46 percent of the total figure.

Analysts are of the view that consumer goods firms may face fresh headwinds in 2017 because of the possibility of another round of petrol pump price hike or currency devaluation.
The International Monetary Fund (IMF) said that the naira is overvalued by about 10 percent to 20 percent and urged policy makers to look into its foreign exchange policies.

The consumer goods firms are one of the hardest hit from an economic recession fuelled by a severe dollar shortage, weak consumer spending power and rising production costs.
Nigeria’s economy shrank by 1.50 percent in 2016 on the back of lower oil price, according to the National Bureau of Statistics (NBS).
Annual inflation in Nigeria stood at 17.26 in March compared to 17.78 percent in February, according to a recent report by NBS
Unilever is also considering a debt to equity swap that could eliminate the impact of foreign exchange volatility from its balance sheet.

 

“In terms of impact on company fundamentals, despite the scope for downside in share price, given that Unilever converts its $59.7million facility into equity via the rights, gearing levels should reduce from 1.8x to 0.1x by our estimates—translating to lower interest expense going forward,” said analysts at ARM Securities Limited.

 

BALA AUGIE