Afrinvest Examines Four Disquieting Issues in the Market

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Wednesday, October 28, 2015 03:20PM / Afrinvest Research              

Flash Note| Four Disquieting Subjects in the Market... Calls for Concerns?

The Nigerian capital market and business community have been hit with a string of "bad news" in last few days, as unimpressive earnings releases - including the monumental loss reported by OANDO Plc - filtered into the market.

The sequence of negative press was further amplified by regulatory sanctions on select listed and unlisted companies for alleged regulatory breaches. The actions and reactions that have trailed these events have brought to fore questions on regulatory compliance, corporate governance and risk management practices of companies operating in Nigeria.

These have also raises concerns -- rightly or wrongly -- on the business friendliness of Nigerian regulators to foreign investors. Expectedly, investors' sentiment on the companies involved have ebbed, resulting in major sell-offs on both the Nigeria and South African bourses.

We examine some these issues and provide our perspectives:
1. Oando's Monumental N184bn loss... the Risk Management & Corporate Governance Question
OANDO Plc -- Nigeria's Integrated Oil and Gas operator -- listed on the Johannesburg and Nigeria stock markets finally released its audited FY:2014 earnings result last week, more than 7 months after the regulatory deadline of 31st of March 2015. The company reported a monumental post-tax loss of N183.9bn, the highest loss ever recorded by any NSE listed company.

The company attributed the massive loss to provisions made for the inability of its Joint Venture partners (JVs) to make payments for over lifted oil, the currency devaluation which led to foreign exchange losses in its downstream division as well as impairment and write-downs on its upstream assets - consequent on the decline in crude oil prices.

Nevertheless, the inability of the company to efficiently manage shareholders fund -- as reflected in bloated administrative expenses, non-issuance of a loss warning and long delays in releasing the 2014 annual reports and Q1 & Q2 2015 results have also raised questions about compliance levels within the company as well as corporate governance practices of the firm. OANDO Plc's shares have since tumbled 36.6% and 23.0% in two trading days following the announcement of the result on the JSE and NSE respectively.

2. US$5.2bn Fine on MTN by the NCC
MTN Nigeria, the Nigeria subsidiary of MTN Group ("MTN" or "The Group") was slammed a US$5.2bn fine for failing to meet a deadline set by  regulators -- Nigeria Communications Commission (NCC) -- for the disconnection of 5.1m (8.5% of MTN's 59.9m subscribers in 2014) unregistered SIM cards. The fine represents 37.5% and 48.1% of the Group's 2014 Revenue (US$13.6bn) and 2015 analyst estimate (US$10.6bn).

Although MTN has issued a statement to the effect that it is still studying the regulators letter, investors have reacted to the news with the shares of the Johannesburg listed MTN Group recording a 16.8% loss yesterday.

3. Stanbic IBTC Holdings' Indictment by the FRC
In an unrelated but similar development, the Financial Reporting Council of  Nigeria (FRC) after concluding its investigation of NSE listed Stanbic IBTC Holdings Plc for alleged regulatory breaches involving concealment, accounting irregularities and poor disclosures; ordered the company to withdraw its financial statements for years ended 31st December 2013 and 2014 and restate them in accordance with relevant provisions of the FRC guidelines.

The Council also suspended the four directors of the company for alleged  negligence and further reported the company to the CBN and the EFCC.

Although the two regulatory sanctions may have appeared to put a sheen of "Nigeria hates South Africa" on the actions as a clampdown affects two South African businesses in Nigeria, we view the issues as unrelated and  coincidental that both regulators reached their decisions on the same day.

However, we anticipate further legal actions challenging these sanctions. Stanbic IBTC's shares listed on the NSE have recorded a 9.7% decline in two days of trading following the release of the FRC report.

4. Regulatory Sanctions on FBN Holdings and UBA for TSA Non-compliance

In line with earlier notification by the Central Bank of Nigeria (CBN) to sanction Banks that failed to fully comply with the directive of the federal government of Nigeria to remit all deposits relating to the Federal Government MDAs by 15th of September into the Single Treasury Account (TSA).

The market was hit by yet another discomforting news, as the CBN slammed FBN Holdings and UBA with a fine of N1.9bn and 2.9bn respectively. In a swift reaction to this, investors dumped the shares of both Banks as the Tickers fell 3.0% (FBNH) and 2.0% (UBA) each at the close of trade on Monday.

While the loses sustained by UBA may have been moderated by its impressive Q3:2015 earnings release which indicated that the Bank's Gross Earnings expanded by 17.3% to N247.2bn even as PBT and PAT surged 34.8% and 44.4% to N57.4bn and N48.6bn respectively for the 9months period, that of FBNH was compounded by the Bank's Audited its 9months earnings numbers which indicated that Gross Earnings expanded 16.9% to N390.0bn but PBT and PAT declined significantly by 19.2% and 9.7% to N59.6bn and N50.2bn respectively.

Based on the 9 months result already released by both Bank, a N1.88bn fine on FBN Holdings implies a 3.7% drag on Profit after tax (PAT) while N2.9bn fine on UBA will slash PAT by 6.1%.

On the basis of our FY:2015 Gross Earnings and PAT forecasts for both Bank, we expect the sanction of FBN Holdings to represent 0.3% of N575.4bn forecast gross earnings  and 2.5% of forecast PAT of N74.7bn. Meanwhile our forecast suggests the sanction may have a greater impact on UBA as the sanction represents 0.9% of Gross Earnings forecast of N341.4bn and 5.1% of forecast PAT of N57.4bn.

Looking at the 9months performance and Outlook of both Banks in 2015, we are of the opinion that this sanction cast a veil on the seemingly impressive FY:2015 performance for UBA, but further worsens the already impaired outlook for FBN Holdings given the very challenging macroeconomic environment experienced so far in the year that has impacted its operations

Conclusion
Putting all this together, should foreign investors stay well clear of the Nigerian investment environment? Although we believe the timing of the above unsettling news flow is rather bad for the market given the mammoth of macroeconomic headaches besetting the capital market at the moment.

We opine that the series of regulatory sanction dished out on Monday (26/10/2015) is positive for regulations and corporate governance in Nigeria if these companies are found liable as indicted.

Thus, we expect this to increase investment confidence in Nigeria rather than repelling investors. We are yet to fully understand the role of FRCN and its power to suspend the management of a company hence we expect the management of Stanbic IBTC to go all out to contest the allegation levied against it.

While we understand the circumstances surrounding the monumental loss posted by OANDO Plc, we believe the Oil and Gas firm should have submitted this result earlier in accordance with the guideline of the Exchange as waiting for over 7months post - regulatory deadline raises a number of corporate governance questions.

By the NSE rule, contravention of the rule on timely release of accounts attracts a fine of N100,000 per week from the due date until the date of submission. By our estimation, OANDO's 206 days, 176 days and 85 days delays of the three reports would have implied a paltry cumulative fine of N6.7m but the cost in terms of investors' confidence in regulators and corporate governance of quoted companies poses a greater challenge to the capital market performance. 

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5.      OANDO Releases Q4 14 Q1 15 and Q2 15 Results Declares N35.13bn Loss in Q2 SP N10.14k 

6.      Market Records Improved Optimism as CMOs Re-capitalization Process Winds Down –Sep ’15 SSS Report 

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