Thursday 12 November, 2015, 05:18PM /Cordros Capital
Is it the Brewers' Turn?
This morning, newspapers reported that the National Agency for Food and Drug Administration and Control (NAFDAC) has ordered Guinness Nigeria Plc (GUINNESS) to pay N1 billion (US$5 million) as "administrative charges" for various clandestine violations of rules, regulations and enactments over a long period of time.
Given the onslaught facing the banking sector i.e. 3 banks (FBNH, UBA and SKYEBANK) fined a total of N7.8 billion (for non-compliance on TSA), and with the Central Bank of Nigeria still conducting on premise inspections and reconciliations, there is an expectation for more TSA related fines in that sector.
Furthermore, in the advent of MTN's record breaking (more like backbreaking?) N1.04 trillion fine (US5.2 billion) for failure to comply with the deactivation of customers' lines following registration deadline, other major telecoms operators have began deactivating customers' lines for insufficient registration, thus raising the spectre for more fines in the telecoms space as well.
If either case pans out, we suspect that the last of fines in the brewery industry may also not have been heard. Under the current environment, there appears to be no sacred cows. Who among the brewers would be next? Is it Nigerian Breweries Plc (NB) or International Breweries Plc (INTBREW)? Only time would tell!
Regulators; Why Now? What's the Motivation?
We agree that regulatory fines are not new in the Nigerian corporate clime. In our view, past regulatory sanctions (aside the sacking of banks' executives by the CBN in 2009) didn't draw so much investor interest – compared to the last one month – due to the infrequency of indictments and the amounts (mostly considered immaterial) involved.
The above questions therefore quickly come to mind. Could it be that the regulators are fast aligning with the Federal motto ("NO to corruption", "abuse of office", etc) via this new campaign against corporate abuse? Are there no more sacred cows going forward? Could this measure be part of the channels (including the TSA and taxation) via which the Federal government plans to extract as much non-oil revenues as it can?
From our count, three (except SKYEBANK) out of the four companies (including UBA, FBNH and MTN) that were recently indicted for corporate abuses have admitted to the infractions. Assuming the four companies pay their fines (note that MTN and SKYEBANK are still negotiating), total proceed from the penalties would be US$5.24 billion (N1.05 trillion), equivalent of c.24% of 2015 fiscal budget.
Vulnerable Sectors – Investors Watch Out!
We believe the FMCG sector is still very much potentially vulnerable - under the two regulatory motives cited above – to fine (for similar reason for which GUINNESS has been fined).
The fines could also extend to the oil & gas (e.g violation of oil spillage laws) and health care (e.g quality control abuse) sectors.
We expect regulatory hammer to fall on the cement (as well as other huge domestic producers) companies by way of stricter terms on pioneer tax holidays.
What Does this Hold for the Market?
The shares of UBA and FBNH respectively shed 13.6% and 14% the week news of their infractions hit the market. STANBIC's shares fell by 17.8% the week the bank's directors were sanctioned by the FRCN. At the Over-the-Counter market, the shares of MTN traded on full offer the week the company was sanctioned by NCC.
While acknowledging that corporate sanity is positive for the market in the long term, we are of the view that the frequency of the sanctions (and the impact on earnings, in a challenging business environment) would further add to investor risk aversion in the immediate.
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