23 Manufacturers incur N1.30 trillion in costs in Q3

While manufacturers are spending less to produce each unit of product this year, the  downside risks are that ebbing disposal income and decrepit infrastructure will hinder them from delivering a higher return on investment to shareholders.

Of course investors should fret because revenues are not growing at a blazing speed to cover operating and production expenses, while recent rise in yield on short term government security could balloon interest expense.

The above negative scenario means an erosion of shareholders value is inevitable, and to further compound the woe of consumer goods firms, third quarter employment report by the National Bureau of Statistics (NBS) showed more Nigerians are jobless. This means consumers will not open the purse string.

According to the statistics body, 20.93 million Nigerians are actively searching for jobs but cannot find any to do while unemployment rate increased to 23.40 percent in the period under review from 18.80 percent the previous period.

However, amid the tough and unpredictable macroeconomic environment, manufacturers’ production cost are stable while analysts see next  year’s inflation rate remain benign.

For instance, the cumulative average cost of sales ratio of 23 quoted manufacturers quoted on the floor of the bourse fell to 63.94 percent in September 2018 from 82.89 percent the corresponding period of 2017.

This means on average firms spent N0.63 on input cost to produce each unit of product; a lower ratio shows a firm is efficient in using input costs to produce each unit of product.

The combined production and operating expenses- Administration and distribution expenses plus input cost-of the 24 firms under our coverage was flat at N1.30 trillion in the period under review from N1.31 trillion as at September 2017.

The reduction in costs was largely due to significant reduction in production cost of consumer goods firms.

Combined input costs of 13 largest consumer goods firms fell by 6.61 percent to N801.85 billion as at September 2018.

“Costs have been stable for the most part of 2018 and we do not expect strong inflation in 2019 and we expect operating expenses to be stable,’’ said Ifedayo Olowoporoku, consumer goods analyst at Vetiva Capital Management Limited.

However, there are indications federal government could hike tariff on electricity and fuel, which means consumers wallet remain squeezed, a double whammy for manufacturers who are grappling with decrepit infrastructure and low consumer purchasing power.

“There are concerns as that there removal of petrol subsidy and devaluation of  naira next year and if it happens could offset the gains from minimum wage increase,” said Christian Orajekwe, equity research analyst at Cordros Capital.

Nigeria’s economy has been growing but sluggishly as GDP expanded by 1.8 percent in the third quarter of 2018, but lower than 2.10 expansion when the country existed recession in the fourth quarter of 2017.

The gridlock at the Apapa ports has made it practically difficult for firms to ship goods to
warehouse, hence stoking high stock turnover.

The number of production we have lost due to the Apapa gridklock is staggering. It affects your efficiency and profitability; some workers will have been laid off due to weak marginsAccording to Nnamdi Okafor the managing director and CEO of May and Baker Nigeria Plc.

                                            Manufacturers’ Cost of Sales Ratio.Source: Companies Financials; M and I

Little wonder the cumulative cost of sales of the largest drug markers quoted on the floor of
the bourse increased by 8.17 percent, albeit lower than November inflation figure.