As Nigeria’s economic landscape continues to shift, the debt profiles of some of the nation’s largest and most capitalized companies are climbing to high levels.
By the end of the first half of 2024, eight companies under the SWOOT (Stocks Worth Over One Trillion Naira) umbrella have amassed a combined debt of N4.6 trillion. This marks a 15% increase in just six months, compared to their debt levels at the close of 2023.
The companies include Dangote Cement, BUA Foods, MTN Nigeria, BUA Cement, Transcorp Power, Transcorp Hotel, Geregu, and Seplat Energy.
As of the close of trading on Wednesday, August 21, 2024, these companies have a market capitalization of over one trillion Naira.
It is important to note that while Airtel Africa, GTCO, and Zenith Bank also have market capitalizations exceeding one trillion Naira, they were not included in this report. GTCO and Zenith Bank have yet to release their Q2 2024 results, and Airtel Africa follows a different financial year calendar
The combined market capitalization of these companies has declined from N47.6 trillion in Q1 2024 to N43.14 trillion as of the close of trading on August 21, 2024.
Notwithstanding, the average year-to-date (YtD) gain of these stocks remains strong at 44%.
One key point is that despite the seemingly high debt profile, the companies’ average interest coverage ratio remains healthy at 6.8x, indicating a margin increase of 0.71%. This indicates that the companies are generating sufficient earnings to cover their interest expenses multiple times over.
But what matters to investors is the impact on profitability and returns.
Dangote Cement has seen its debt profile climb by 57% to N1.6 trillion in just six months. This surge in borrowing led to the highest interest expense among the SWOOT companies, reaching N130 billion. The debt-to-equity ratio soared to 73.5%, while its interest coverage ratio fell to 4.24x.
Despite these hurdles, Dangote Cement managed to generate robust earnings per share (EPS) of N11.26, with a profit after tax standing at N189.9 billion. However, the strain of its high debt became evident as the company’s net profit margin plunged by 43% year-on-year to 11%.
The return on equity (ROE), a key measure of profitability, also took a hit, declining to 9%. This decline in profitability despite rising leverage suggests that the increased debt has not effectively enhanced returns.
MTN Nigeria, on the other hand, saw its debt decrease by 19.7% to N945 billion, but the company still struggled with a significant increase in interest expenses, which rose to N183 billion. This resulted in a sharp decline in its interest coverage ratio to 1.7x.
Additionally, MTN Nigeria faced a substantial foreign exchange loss of N887.7 billion, contributing to a loss before tax of N751 billion. The combined impact of high-interest expenses and foreign exchange losses has severely affected MTN’s profitability.
Seplat Energy also saw a substantial increase in its debt profile, which grew by 60% to N1.1 trillion. This led to a 199% surge in interest expenses, but the company’s robust operating performance, driven by gains from underlift and foreign exchange, helped it maintain a strong interest coverage ratio of 5.7x.
However, Seplat’s net income was significantly reduced by deferred tax liabilities, leading to a net profit margin of 12%, a 22% year-on-year decline, and a lower ROE of 2.6%.
While the low return on equity might suggest that the increased debt has not led to a proportional rise in profitability, it is important to note that this is primarily due to the impact of deferred tax liabilities rather than inefficiencies in the company’s operations or ineffective use of leverage.
Seplat’s core operations remain robust, and the low ROE should be attributed to external tax factors rather than inefficiencies in the company’s debt strategy
BUA Cement’s debt profile increased by 32% to N553.48 billion, pushing its debt-to-equity ratio to 132%. While the company managed to maintain an interest coverage ratio of 7.5x, its profitability has been under pressure, with a 6% decline in operating profit and a reduced return on equity of 8.2%.
The elevated debt levels raise concerns about the company’s long-term financial stability, especially given the declining profit margins and increased leverage.
BUA Foods, on the other hand, managed to reduce its debt by 44% to N364 billion, improving its liquidity and financial stability. However, the company still faced challenges, with a significant foreign exchange loss of N54 billion impacting its profit margins.
Despite a 25% increase in profit before tax, the company’s profit margin declined by 40%, and its return on equity decreased by 8% to 33.3%. This suggests that while debt reduction has strengthened financial stability, it has not fully shielded the company from rising costs and currency fluctuations.
Despite these pressures, BUA Foods maintains a robust interest coverage ratio of 10.32x. This means that BUA Foods earns over ten times the amount needed to cover its interest payments, indicating that the company is in a strong position to handle its debt, even in the face of financial pressures like increased costs, lower profit margins, or economic challenges.
Geregu Energy saw its debt profile rise to N58 billion, resulting in a 21% increase in interest expenses.
However, the company’s strong operational performance allowed it to maintain a healthy interest coverage ratio of 6.26x and achieve a 145% YoY increase in pre-tax profit. This translated into a higher profit margin of 37% and a robust return on equity of 44%.
Geregu’s ability to leverage debt effectively without undermining its profitability appears to have been reflected in its share price, which has gained 150% year-to-date.
Transcorp Hotel has a modest debt of N20.675 billion, showing a slight 0.10% increase over six months.
With an interest expense of N1.98 billion, the company maintains a solid interest coverage ratio of 6.12x, indicating it can easily cover its interest payments. Its low equity multiple of 1.86x and debt ratios (15% debt-to-assets, 28% debt-to-equity) reflect a conservative approach to debt.
The company reported a profit after tax of N6.6 billion and a strong net profit margin of 22%. However, its current ratio of 0.77 suggests potential liquidity issues.
Despite these challenges, Transcorp Hotel’s share price has risen 42.5% year-to-date, reflecting positive investor sentiment.
Transcorp Power’s debt rose by 28% to N47.6 billion, but the company managed to maintain a strong interest coverage ratio of 12.85x.
The company’s return on equity stands at an impressive 39%, indicating that it has effectively managed its increased leverage to enhance profitability and returns.
Transcorp Power’s share price has also benefited, with a year-to-date gain of 41%, reflecting strong investor confidence in its financial strategy.
Overall, while the rising debt levels among the SWOOT companies have presented challenges, including higher interest expenses and pressure on profitability, many of these companies have managed to maintain or even enhance their market positions through effective debt management and operational performance.
However, the long-term impact of these rising debt levels on profitability and returns remains a critical area to watch.