Ecobank’s impairment losses were governed by 3 core elements in Q2 2020.
Published 5 days agoon September 1, 2020
The most innovative bank in Africa – at least according to Global Finance – Ecobank Transnational Incorporated (ETI), has done its bit to hold its fort on the continent’s financial landscape. From being awarded by Global Finance for its prompt identification of new tools and its many unified integrated apps that cater to its customers across 33 African countries – the largest footprint of any bank operating in West, Central, East, and Southern Africa, to Euromoney’s prize of Africa’s Best Bank for Corporate Responsibility, the year 2020 has had its own streaks for the bank. However, it too has had its fair share of the year’s madness, evident primarily in its Q2 financial statements – the peak period of the COVID-19 pandemic and the lockdown by virtue of it.
Even with many companies across the world grappling to at least make the same level of revenue from previous years, Ecobank’s Net Interest Income recorded an impressive increase of 24% from N68.5 billion in Q2 2019 to N84.8 billion in Q2 2O20. This can be attributed to both an increase in interest income as well as a 21% decrease in interest expense – a combination of strategies that will leave any company well within its books. While its operating lines were relatively impressive, there is only so much the company can control by itself. For Ecobank, the impact of the ailing macroeconomic conditions is a 101% increase in impairment losses on financial assets from N10.3 billion in Q2 2019 to N21 billion in the period under review. But it might not be as bad as it seems.
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Impairment and its impact on the company’s financials
Impairment occurs when the fair value of a company’s financial assets falls below its book value. Before now, companies were only expected to provide for bad debts at least from the point where they become doubtful. However, since the movement from IAS 39 to IFRS 9, companies have been required to book an expected credit loss on all their financial assets.
In order to account for this expected credit loss, there is a range of factors that are considered particularly the company’s Probability of Default (PD) and Loss Given Default (LGD). And as far as the probability of default is concerned, a wide range of relevant forward-looking information (FLI) – that is things that could happen to the company based on its assessment of macroeconomic indicators, are used to form its assumptions. What this means is that if the probability of default in Q1 was high, Q2 naturally had a storm coming with an increased possibility of the bank’s obligors defaulting.
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Ecobank’s impairment losses were governed by 3 core elements in Q2 2020. The first was a 40% increase in impairment charges on loans and advances, then a 4% decrease in impairment charges on other financial assets, and finally, a 21% decrease in recoveries. The company had noted in its books that the period’s net impairment losses were higher compared to the previous year, mainly because recoveries of non-performing loans in the six months to June were lower compared to recoveries in the prior year’s period.
This can be attributed to the stringent financial position of many of the company’s debtors. So even though it had taken the much-needed steps to reduce its non-performing loans, its cost-of-risk for the period was 1.7% compared with 0.7% for the previous year. It also noted the impact of monetary and fiscal policies, in the central banks of countries where ETI operates, all of which have been aimed at mitigating market concerns and providing liquidity to the market.
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In explaining the impairment increase, it revealed that, “the management team has taken appropriate steps to assess the impact on the Group’s financial statement based on the information available as of date.” It, however, noted that it is currently reviewing the key parameters for the impairment model.
“This would be finalized during the second half of 2020. In the meantime, we accounted for an additional collective assessment impairment of $36 million to cope with the expected potential risk of this pandemic in our financial structure and the various current uncertainties in the markets.”
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The resultant effect on its income statement is an 18% decrease in profit for the period from N59.5 billion in Q2 2019 to N48.5 billion in Q2 2020. The company can only hope that the actual impact is far less than predicted.
With significantly increased customer deposits in Q2, boosting its liquidity in the unsettling economic times together with its strengthened operational position, Ecobank is undoubtedly on a good course. While its stock price is still at its 52-week low of N3.90 amongst other unfavorable stock market trends, it is only a matter of time before its operational growth catches up with the stock market and it commences its journey to an upward trend.
CAP plc’s Q2 2020 result was marginally worse than its Q1 results.
Published 2 weeks agoon August 22, 2020
Makers of the Dulux paint brands, Chemical and Allied Products (CAP) Plc, have come a long way since the company’s listing on the NSE in 1991. With almost 30 years in the game, the leading brand in the manufacturing and merchandising of paints has deployed a myriad of strategies throughout its growth lifecycle towards attaining its strong brand name while also keeping its head above water despite the volatile economic conditions and marginal revenue growth.
Over the past few years, the fight for survival has been even stronger, particularly following its choice to spend its entire 2018 profit after tax (PAT) of N2.03 billion on dividend payout. At the time of its announcement mid-2019, the company’s board of directors had expressed their optimism that an improved economy would yield increased returns in the year, while also assuring its shareholders that it would leverage emerging opportunities to improve performance in the current year. With hopes of an improved economy dampened, the company has set off on a course to redemption using a combination of strategies – and we’re not very sure about some of them.
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Two ends of a rope
Like most companies that have been caught up in the unfavorable conditions owing to the COVID-19 pandemic, CAP plc’s Q2 2020 result was marginally worse than its Q1 results. From a 10% increase in revenue in its Q1 results (comparative to Q1’19), its Q2 results revealed a 35% decrease in revenue from N1.8 billion in Q1 2019 to N1.2 billion in Q2 2020. Its profit for the year also showed a 59% decrease from N367 million to N151 million in the same periods respectively.
Yet, those were far less noteworthy than the 92.3% decrease in selling and distribution expenses as well as its increase in trade and other receivables as at June 2020 of 121%. The company’s selling and distribution expenses significantly reduced from N127 million in Q2 2019 to N9.8 million in the quarter last-released, while its trade and other receivables had increased to N822.8 million in the period from the N371.7 million in the same 2019 period.
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While, on one hand, the company appears to be strategically reducing its operating expenses as all expense items were lower, excluding administrative expenses which increased by 4.8%, the real culprit might be the restrictions in movements posed by the pandemic. With revenue curtailed, the lower expenses is great as it weeds out inefficiencies and maintains a level of profitability with the lower revenue. So, increasing its trade receivables at another stretch might not be the best support strategy for the company.
Possible causes of its increased credit
The normal reason for businesses relaxing their credit policies is that it makes it easier for the company to make more sales – or at least record more revenue in its income statement. However, in this case, the company might have had little choice. With businesses closed for 5 weeks during the quarter, CAP Plc’s clients too might have suffered from reduced Cash Flow thereby holding on to their limited cash resources.
The only way the company will have earned its revenue is by offering good credit to its regular customers. Another possibility is that given that business’ operations had been curtailed, until late May, short term credit given during the period will not have been made in Q2 but paid up in Q3. For example, with schools at home, renovations will have paused until further notice, thereby reducing demand from retailers/ wholesalers of the company’s products.
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The increased credit, of course, means a reduction in the company’s actual cash generated within the period. Its statement of Cash Flow reveals a decline of 66.4% in its cash generated from operations from N550 million to N184.9 million. The implication of this, asides the fact that it casts doubt to the existing revenue figure disclosed by the company for its Q2 revenue, is that it increases the company’s chances of incurring bad debts – a situation that occurs where credit facilities extended are deemed uncollectible. This is even more so as many businesses struggle to get their feet back on the ground.
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Even as the company finds its way out of the quagmire, its share price of N15.30 is currently trading at a 52-week low which is between N15.25 and N27.50 making it a potential growth stock for long term investors who can wait the turn for the company to restart its lifecycle while also hanging on to whatever dividends they receive in the short to medium term.
Julius Berger’s construction portfolio includes infrastructure, industry, building, and facility services solutions.
Published 3 weeks agoon August 14, 2020
Due to the COVID-19 pandemic as well as the economic impact of the measures put in place to slow the spread of it, many industries have experienced slower growth. The construction industry was not left out. According to reports by GlobalData, the construction output growth forecast for Sub-Saharan Africa (SSA) has been revised to 2.3%, down from the previous projection of 3.3% (as of mid-April) and 6.0% in the pre-COVID-19 case (Q4 2019 update).
The reason for the contraction was noted by GlobalData to be as a result of the global slowdown and the outbreak of COVID-19 in the region. Other factors responsible include economic headwinds such as inflation, spending cuts, widening fiscal slippages, suspension of certain projects and more that could disrupt the construction sector. This contraction is projected to be 4.3% in South and Southeast Asia while France is expected to shrink by 9.4% in 2020.
Leading Construction Company, Julius Berger, had foreseen the contraction in the industry and commenced efforts to mitigate its impact and cushion the blow. One of such efforts was the reduction in dividend pay-out. After initially announcing a dividend pay-out of N2.75K per 50K share for the financial year ended December 31, 2019 and a bonus of 1 (one) new share for every existing 5 (five) shares held, the company eventually recommended a final cash dividend pay-out of N2.00K per 50k share.
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It noted that the Group had “carefully considered the emerging social, operational, financial and economic impact of the COVID 19 pandemic, the outlook for Nigeria for the financial year 2020, and the impact on the business and cash flows of the Group.”
The company’s fears have been confirmed by its recent financials which, among other negatives, showed huge foreign exchange losses of N3.102 billion in the first half of 2020.
Q2 was the hardest
Julius Berger’s construction portfolio includes infrastructure, industry, building, and facility services solutions. With companies and nations alike revising scheduled capital expenses as a result of the shrinkages in product demand (owing to global quarantine measures), uncertainties around supply logistics as well as supply of materials, the company had gotten hit. Q1 had its own issues, but Q2 birthed a new dimension of challenges for the company.
Revenue was down 33% from N68.9 billion in Q2 2019 to N46.1 billion in 2020. There was also a huge loss in profit after tax of around 200% from a profit of N2.3 billion in Q2 2019 to a loss of N2.3 billion and this can be attributed to lower revenue, and increased losses from the company’s many investments.
Exchange difference on translation of foreign operations for the quarter alone increased by 227% to N1.4 billion in Q2 2020 from N438.5 million in the comparative quarter.
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Outlook for the company and for investors
The disruptions the construction industry is currently experiencing is expected to continue for the medium-long term. Reports by Beroe Inc., a procurement intelligence firm, reveal major concerns that companies in the industry will witness profits being hurt and may even incur losses on a number of projects.
Companies having worldwide supply chains could see tier 2 and tier 3 suppliers highly affected by disruptions related to the pandemic. Worse off, it explains that construction materials like “steel, wood, plaster, aluminum, glazed partition systems, cement and cementitious products, paints, HVAC equipment, electrical equipment, and light fixtures from China are expected to be delayed.”
For the company, cost-cutting has never been more important. While there are a series of strategies it could explore to augment the challenges, its growth right now depends largely on the speed of global economic recovery. This is because both the company’s input needs as well as its output in terms of the recommencement of projects, depends on the speed with which business as usual commences and the amount of time it takes for the industry to find a new balance for its operations.
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For investors, however, this presents a long term opportunity. Julius Berger currently trades at N15.05, falling 44.26% just within the last 3 months. The share price is also on the downside of its 52-week range (N14.42 and 22.92) and its price-to-book ratio of 0.6331 shows that the stock is undervalued.
While the company’s EPS is currently low at N2.52, investors who are willing to wait the time could find a gem in the stock particularly with the increased infrastructural needs born out of the population expansion which is taking place in many parts of the world in the years to come.