The Nigerian Exchange Group (NGX) is facing a tough start to 2023 as it reported a pre-tax loss of N109.5 million in the first quarter, adding to the N1.3 billion operating losses it incurred in 2022.
NGX Group is the operator of the Nigerian Exchange connecting companies seeking capital with investors through its trading platforms. In return for this service, it generates revenue from various sources, such as transaction fees, listing fees, data and penalty charges, and rental income. It also invests its surplus cash in treasury bills, bonds, and fixed deposits.
Transaction fees and listing fees account for about 51.4% and 13.4% of its revenue, respectively.
Its revenue declined by 18.75% year-on-year to N1.3 billion in the first quarter of 2023, breaking its trend of annual revenue growth of around 10%. This was mainly due to a sharp drop in transaction values on its platforms, which fell from N692 billion in the first quarter of 2022 to N530 billion in the same period this year.
The reason for this decline was the challenging macroeconomic environment in Nigeria, which was marked by cash and energy shortages, political uncertainty ahead of the 2023 elections, and naira scarcity that deterred portfolio investors. The participation of retail investors also reduced from 38% in the first quarter of 2022 to 23% in the first quarter of 2023.
The group CEO, Oscar Onyema, explained that despite these difficulties, NGX claimed it managed to increase its net profit by 109% through cost-saving measures that minimized the impact of revenue reduction. It also explored new and innovative ways to capture more value from its existing and potential customers.
- “Despite the challenging macroeconomic environment during the quarter, amidst cash and energy scarcity, and political tension from the 2023 elections, the Group remained resilient. We are pleased to announce a 109% increase in net profit, achieved through the implementation of cost-saving measures that minimized the impact of revenue reduction, just as we are exploring new and innovative ways to capture more market share and appeal to a broader demographic.”
Mr. Onyema’s suggestion that the company reported a 109% increase in net profits due to the “implementation of cost-saving measures” could not be further from the truth.
Further analysis of the results shows that the company did report a higher year-on-year profit after tax, but not due to cost-cutting measures, but by including profits earned from its subsidiary in its books.
NGX’s ability to still post profits after tax is due to its subsidiary, CSCS, which contributed N521.6 million to profits in Q1. The company did cut costs, but it was only by 5.9% year on year in the quarter under review and not huge enough to impact pre-tax profits.
NGX is synonymous with high operating expenses as a percentage of revenues, making it very vulnerable to losses. Last year, it also reported an operating loss of N1.3 billion, largely due to an increase in operating expenses and finance costs.
At N1.1 billion, the company spends 73% of its income on operating expenses, which provides a limited buffer to absorb finance costs and still deliver profits. NGX carries a term loan balance of N13.8 billion, which it obtained at an interest rate of 12.5% per annum.
It used the money for “strategic investment” and is liable to pay at least N1.7 billion in interest on the full amount this year. It has already paid N565.6 million in Q1, which is over one-third of its total income (36%).
NGX has two options; cut costs or increase revenues. The current management is not doing enough on both ends and needs a major jolt of urgency.
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