• Thursday, March 28, 2024
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Flour Mills cuts borrowing costs to 3-year low as positives lurk amid industry-wide troubles

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Nigeria’s biggest flour miller by market value cut its borrowing costs by a third in the year ended March 31, 2018/2019, with the miller guiding towards an even steeper decline this year.

The company’s finance costs fell 30 percent to N22.9 billion in 2019 from N32.7 billion in 2018 and N32.5 billion in 2017, while the group’s Q4 2018/19 improved by N1.9 billion according to data provided in its financial statement.

Flour Mills will “continue active balance sheet management and the objective is to achieve additional reduction in finance costs in the current year,” the company said in an investor presentation on its website.

The miller will also “focus on increasing operational efficiency and ensuring cost savings on operations,” the presentation read, while it will aim to double Group EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) in five years.

Flour Mills is fresh off releasing its annual financial statement which showed it recorded revenues of N527 billion, a 3 percent decline compared to the previous year but the biggest revenue of any listed miller in the country, serving as an indicator of the company’s dominant market share.

Other players in the space like Honey Well Flour posted revenues of N74 billion in the same period while Dangote Flour Mills, which has now been acquired by Olam International, posted revenues of N112.3 billion in 2018.

Though Flour Mills has larger assets (N416 billion in the year ended March 31, 2019) than Honeywell (N137 billion in March 2019) and Dangote Flour (N120 billion in 2018), it demonstrated efficiency in sweating its assets to generate revenue. It had an asset turnover ratio of 1.26 in the period, which means that for every naira of assets, it generated N1.26 in revenue. That is higher than HoneyWell’s 0.54 and Dangote Flour’s 0.9. Asset turnover ratio measures the value of a company’s revenues relative to the value of its assets and is a proxy for how a company is able to use its assets to generate revenue.

Despite its huge revenues, Flour Mills made N10.2 billion in profit before tax, as operating costs hit a five-year high of N474 billion, it leaves the company with a gross margin of 10 percent, bettered only by Honeywell in the industry.

The company’s profit before tax however declined 38 percent to N10.2 billion from N16.5 billion the previous year while profit after tax was down 71 percent to N4 billion from N13.6 billion. The same trend was observed for Honeywell and Dangote Flour. Honeywell’s profit after tax declined 98 percent to N68 million in 2019, while Dangote Flour, according to its most recent financials, made a loss of N1.15 billion, a 92 percent decline compared to the previous year, in the first three months of 2019, the loss had swollen to N2.9 billion.

Flour millers are struggling to turn in decent profits at a time when depressed consumer demand and the fear of losing market share has meant millers are unable to pass on high costs of operations to consumers.

“The cost of production is weighing on us. Flour Millers are absorbing a lot of cost because we are conscious of the Nigeria that we live in today and the consumer purchasing power,” Lanre Jaiyeola, Vice President of the Flour Milling Association of Nigeria told Business Day.

“There are issues of wheat prices which account for most of our production cost, cost of interest rate and exchange rate and all of these dynamics affect the eventual cost of production,”

Despite the decline in profit, Flour Mills’ board of directors recommended an increase in dividend payout by 20 percent, based on its future projections to lower capital spending. Shareholders will receive a dividend per share of N1.20 for the 2019 business year as against N1 paid for the 2018 business year.

In a statement, the group expressed optimism that it will witness continuous growth in key segments of its food and agro-allied businesses in the new business year, noting that targeted strategies are expected to deliver improved margins and operational efficiencies.

According to the company, continuous implementation of turnaround initiatives in the agro-allied business, accelerated expansion in the business-to-customer segment, optimal operation of its supply chain and further balance sheet management are expected to result in higher profitability.

The group noted that it undertook series of strategic actions designed to improve returns and deliver maximum gains for its investors in 2018 including the restructuring process that saw all its businesses in the agriculture sector aligned under its wholly owned holding company, Golden Fertiliser Company.

The company also pointed out that the consolidation of its agricultural businesses has started yielding appreciable contributions to the group in the areas of cost maximisation and improved operational efficiency as the businesses make the most of their competitive advantage and synergies.

The management of the company stated that cost control measures put in place during the year supported the company despite the prevailing economic headwinds and harsh operating environment, especially for businesses in the congested Apapa, Lagos axis.

According to the company, it has continued to consolidate its investments in the agriculture sector with a strong focus on innovative and efficient use of resources. As such, the group is resizing and simplifying the operations of some of the farms which form an integral part of its backward integration strategy with a few of the smaller experimental farms being scaled down, while continuing focus on key units.

Group Managing Director, Flour Mills of Nigeria Plc, Paul Gbededo, said the group has made substantial progress as growth and efficiency initiatives across various functions and businesses started to show anticipated gains.

According to him, Flour Mills has undergone several functional and structural changes within the last year, with innovation and focus on customer at the heart of the group’s strategic direction. “We are positive that we will see even greater achievements in our financials in the following quarters as we continue to focus on value creation for our shareholders,” Gbededo said.

Group Chief Finance Officer, Flour Mills of Nigeria Plc, Anders Kristiansson, noted that the group’s strategy to restructure its balance sheet base and optimise financing costs have started to yield desired results. He pointed out that in spite of ongoing pressures on consumer disposable income in many target categories, the group has continued to deliver stronger performance.

The Group’s debt-to-equity ratio also improved from 101.7 per cent in 2018 to 84.1 percent in 2019, while its net asset per share stood at N36.80, almost a triple of its current market valuation.

In the coming years, as the company continues to invest in agriculture, and with the several function and structural changes to their business direction, the general belief is to hope that some of Federal Government reforms if well implemented will truly help the manufacturing sector to take its pride of place and contribute significantly to the country’s GDP.

LOLADE AKINMURELE