Firms Groan as High Financing Cost Impacts Profitability

The hope of investors reaping higher returns in form of dividends is being threatened by high financing cost that is hurting the profitability of some companies.

THISDAY gathered that while companies strive to overcome the tough operating environment, the high cost of funding is also posing a big challenge going by the interim results just reported by some firms.

For instance, THISDAY checks showed that the profitability of Total Nigeria Plc, Unilever Nigeria Plc, Honeywell Flour Mills Plc and Guinness Nigeria Plc among others, were depressed by high cost of financing that arose from huge charges paid on loans and advances.

Although one of the benefits of listing on the Nigerian Stock Exchange (NSE) is access to relatively cheaper equity funding, THISDAY gathered that the weak investor demand in recent years, has reduced companies’ ability to raise fresh capital through sale of shares.

In the absence of equity capital injection, some companies have been relying on bank borrowings to remain afloat with attendant high charges.

This, according to findings by THISDAY has been negatively affecting companies’ bottom-line, which may invariably reduce the take-home of shareholders in form of dividends.

For instance, petroleum marketing firm, Total Nigeria Plc, reported a decline of 69 per cent in profit after tax (PAT) for the year ended December 31, 2019. Its financing cost jumped by 193 per cent from N2.86 billion in 2018, to N6.706 billion in 2019, thereby depressing profit after tax (PAT) to N2.422 billion, down from N7.969 billion in 2018.

While the company posted a revenue of N290.883 billion in 2019, down marginally by 5.6 per cent from N307.987 billion in 2018, gross profit stood at N33.827 billion as against N34.785 billion in 2018.

Other income rose on the back of N2.763 billion realised from sale of property, plant and equipment to hit N4.597 billion in 2019 compared with N1.451 billion in 2018. The company ended with an operating profit of N10.358 billion, up from N9.812 billion in 2018.

However, net financing cost jumped from N2.286 billion to N6.706 billion in 2019. Consequently, profit before tax fell from N12.098 billion to N3.652 billion. A reduction of 70 per cent in taxation from N4.137 billion in 2018 to N1.231 billion in 2019, made PAT to print at N2.422 billion, down from N7.961 billion in 2018.

Similarly, a leading beverage and alcohol company in Nigeria, Guinness Nigeria Plc, suffered a decline of 49 per cent in PAT for the half year ended December 31, 2019 following increase in financing cost.

The company’s revenue increased marginally from N67.796 billion to N68.327 billion, PAT fell from N2.579 billion to N1.315 billion driven by an increase in net financing costs related to short term loans. Specifically, financing cost rose from N845 million to N1.743 billion.

Also, consumer goods and personal care products manufacturing firm, Unilever

Nigeria Plc reported a loss of N4.224 billion for the 2019 financial year as against PAT of N10.1 billion in 2018. The company’s revenue fell 34 per cent to N60.758 billion, from N92.023 billion, while gross profit fell faster by 75 per cent from N27.42 billion to N6.67 billion. Financing cost rose by 82 per cent to N824 million from N452 million in 2018. Loss before tax stood at N8.322 billion in 2019, compared with a profit before tax of N13.56 billion, while loss after tax stood at N4.224 billion compared with PAT of N10.1 billion in 2018.

Unilever posted impressive performance in 2018 partly due to the injection of equity capital through a right issue.

However, the company is currently relying on bank borrowings to fund its business restructuring in order to survive the challenging operating environment.

On its part, the high cost of financing its foods and agro-allied complex affected the profitability of Honeywell Flour Mills (HFMP) Plc for the nine months ended December 31, 2019.

The foods manufacturer reported a revenue of N58.230 billion in 2019, up six per cent from N55.03 billion in the corresponding period of 2018. However, an increase of about 60 per cent in finance expenses, which rose from N2.648 billion to N4.246 billion made the company to end the period with a loss of N925 million, compared with a profit after of N143 million in the 2018.

While some of the companies have switched to raising bonds and issuance of commercial papers, which comes at cheaper rates than banks loans, some shareholders of Total Nigeria Plc had decried the firms’ continued reliance on borrowings.

A shareholder of the company had told THISDAY on the condition of anonymity, said it was worrisome that despite the huge cost paid on overdrafts and loans, Total Nigeria had not considered it timely to source for cheaper funds to operate.

According to the shareholder, the chairman of Total Nigeria Plc had personally complained about the high cost of doing business due to heavy reliance on debt financing.

“But we wonder why the continued reliance on bank loans. Total Nigeria should come for equity funding. It can raise relatively cheaper funding via rights issue, if at all it feels a public offer will not be a very good option for now. The company can even capitalise some of its reserves by issuing bonus shares to shareholders.

"Total Nigeria Plc has a share capital of N169 million and retained earnings of N30.561 billion. Why can’t they capitalise part of the retained earnings and give script issues to the shareholders instead of continually borrowing from the banks and pay heavily for that,” the shareholder said.

The Chairman of Total Nigeria Plc, Stanislas Mittelman, had last June told shareholders that the company had continued to experience sustained pressure on its cash flow due to late payment of subsidies resulting in huge financial expenses.

“All of these add significant costs to doing business, had negative impact on our sales and affected our profitability,” Mittelman reportedly said.