SOUTH AFRICA – Tiger Brands’ effort to turn around its struggling Dangote business has been dealt a blow by the fall in the oil price and subsequent devaluation of the Nigerian naira.

Results released by Dangote for its six months to March 31 show the flour, pasta and noodle maker’s revenue rose a healthy 18% to N21.97 billion (R1.3 billion) in the period from N18.58 billion in the previous comparable period.

Plunging dollar

At the same time, the naira fell 20% against the US dollar, pushing the cost of sales up 10% as all of Nigeria’s wheat is imported and priced in dollars. Gross profits rose over 200% to N2.393 billion (R144 million) in the current period.

However the ongoing volatility and constrained liquidity in the Nigerian foreign exchange market resulted in increased raw material input costs, exacerbating Dangote’s inability to recover costs through pricing. Dangote’s 25% jump in distribution and administration costs as well as a N3.5 billion loss on currency devaluation saw operating losses (after abnormal items) increase 57% to N5.2 billion or R312.5 million.

“Tiger’s Nigerian business is still sustaining unacceptably high losses and we think it will be a long, hard slog until consistent profitability is evident,” said Investec Securities analyst Anthony Geard. “However we were pleasantly surprised by the underlying trends evident in DFM’s H1 results.”

The business has sustained “healthy” volume growth and underlying margins have improved significantly, he said. Sales growth is well ahead of competitors.

Geard adds he does not expect forex losses to be repeated in the second half. In a February trading update for the quarter to December 2014, Tiger noted the short-term prospects for the Nigerian businesses were extremely challenging but it remained committed to its long-term prospects and was prepared to back the company.

In February 2014 Tiger Brands (which owns 63% of the company) extended up to R650 million in loans to Dangote. This has contributed to a 25% increase in finance costs. Long- and short-term borrowings have risen from N25.8 billion to N38.2 billion, the equivalent of R2.29 billion between March 2014 and March 2015.

As a result of the higher finance costs the company announced a pretax loss of N7.04 billion compared to N4.74 billion in the same period a year ago. The cash situation is dire. Cash and cash equivalents decreased from N3.1 billion at the beginning of the period to N1.1 billion at the end of the period.

Liabilities outweigh

While total group assets exceeded total group liabilities at March 31 by N2.827 billion (2014: N11.578 billion), group current liabilities exceeded current assets by N11.146 billion (2014: N11.002 billion).

The share price has fallen 21.7% in the past three months. For investors prepared to overlook the difficulties in Nigeria, this could be a buying opportunity.

May 6, 2015;