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Flour Mills: Committed to long-term strategy for growth, profitability

Flour Mills issues N40bn Commercial Paper to support short-term working capital

As 2022 brings forth lots of opportunities for many Nigerian businesses, Flour Mills of Nigeria Plc, one of Nigeria’s leading Food and Agro-allied Groups remains committed to executing its overall long-term strategy aimed at maintaining growth and sustaining profitability.

Though Flour Mills has consistently prioritised operational and capital efficiency by increasing local content in its group-wide supply chains and supporting backward integration programmes through its five key value chains, in 2022, the group stays committed to its growth plans by increasing local content through product innovation across five core value chains –Grains, Oils and Fats, Proteins, Sweeteners and Starch.

Flour Mills envisions more organic growth across the group, fuelled by its expanding philosophy of putting consumers at the heart of its business. As Flour Mills continues in 2022 to execute its long-term strategy of excellence-driven growth, it is optimistic that it will meet the year-end growth targets while improving operating efficiency, lowering finance costs, and ultimately increasing shareholder wealth.

Despite the challenges businesses faced due to COVID-19 pandemic, the group in the last financial year delivered an impressive year-on-year (YoY) top-line growth with an average revenue rise of 34 percent across all business categories. Also, Flour Mills of Nigeria Plc had in 2021/2022 half-year (H1) results delivered consistent growth across top-to-bottom line figure.

To sustain this trajectory, the Group will in 2022 continue to invest in production capacity and increase aggregation/sourcing. This is in addition to increasing its operational efficiency with accelerated plans for cost optimisations across the Group to ensure competitive product offerings and profitability in the new operating environment.

To complement growth strategy, the management of Flour Mills of Nigeria Plc keeps reserves to fund additional investments in important business categories, such as local content creation and the Company B2C route to market strategy. Also, the Group’s food division is focused on the continued execution of its objective to double the operating profit in five years.

The key pillars of the Company’s strategy are the expansion of the consumer business by driving existing categories harder, accessing new ones, with an enhanced innovation capability, investment in a winning Route to Consumer, and maximizing value creation in business-to-business (B2B) and business-to-consumer (B2C) businesses.

The Group foresees the performance of its Sweeteners strengthening in 2022 with the value chain being very attractive in the long run, noting that it will continue to fill the needs of the consumers with route to market and new product initiatives across the group, especially in the B2C segment.

Read also: Northern Nigeria Flour Mill grows half-year profit by most in 6years

Combination of business operations

Recently, Flour Mills of Nigeria Plc and Honeywell Group Limited agreed to combine operations of FMN through its affiliates and Honeywell Flour Mills Plc (HFMP), a portfolio company of HGL, at a total enterprise value of N80 billion which will make Honeywell Group dispose of a 71.69percent stake in HFMP to FMN.

The proposed transaction will combine two businesses with shared goals and create a more resilient national champion in the Nigerian foods industry, ensuring long-term job creation and preservation.

A combination of FMN and HFMP will bring together two trusted and iconic brands, creating a food business that is better positioned to benefit the growing Nigerian population, further enhance National food security objectives and leverage opportunities stemming from the African Continental Free Trade Area (AfCFTA). FMN is devoted to feeding the nation while actively investing in attaining Nigeria’s food self-sufficiency goals.

Still stock to “Buy”

Flour Mills was among best-performing stocks in 2021 (+183.3percent). In the trading week ended January 7, 2022, the share price of Flour Mills of Nigeria Plc closed at N29 per share, representing an increase of 2.3percent year-to-date (YtD). Lagos-based Meristem research analysts in their January 10 stock recommendation urged investors to BUY Flour Mills of Nigeria Plc shares.

The analysts have set 2022 target price (TP) of N40.63 per share for Flour Mills, representing an upside potential of 40 percent from its last closing price of N29. Also, Vetiva research analysts in their recent outlook set a target price of N44.34 per share for Flour Mills. Justifying this target price, Chinma Ukadike, Consumer Goods analyst at Vetiva said, “We note that the company’s volume growth strategy has been quite successful so far, across its Food and agro-allied segments. In line with this, we remain positive on the impact of newer product roll-out expected in the coming quarters”.

Analysts positive on company strategy

“Producers of consumer goods have been quite optimistic on the prospects under the AfCFTA, citing a continent-wide market expansion and an increased incentive to drive investment in the manufacturing sector – and broader economy – as potential benefits of the agreement. The value strategy implemented by producers across several other segments of the fast-moving consumer goods (FMCG) market has largely influenced the resilience in the food and beverage and home & personal care (HPC) sectors.

“We see a lot of growth potential for food companies like Flour Mills …, especially those that have churned out new and pocket-friendly products. Given our outlook for stronger consumer spending in 2022, we expect food companies to capitalize on their existing value strategy. Thus, we expect increased volume roll-out from enlarged product portfolios to support this growth,” said Lagos-based Vetiva research analysts in their 2022 outlook.

“Flour Mills Group has recently entered into a combination agreement with Honeywell Flour Mills Plc, from the Honeywell Group. Although both businesses are to be operated independent of each other, the agreement would place Flour Mills as the market leader in the flour milling space and would strengthen the reformed parent company’s revenue.

“Furthermore, with Flourmills’ portfolio now more focused on value product offerings, gross margin has shrunk so far this year to 10percent as of H1’22. However, with this agreement, we expect Honeywell’s stronger margins (from its H1’22 performance) and the improved scale in operations to potentially support the Group’s margins. That said, the involved parties are still seeking regulatory approval but expect the transaction to be completed by the end of the year”, according to the Luke Ofojebe-led Vetiva research team in their 2022 outlook.

Unaudited half-year results

In half-year (H1) (2021/2022), the Group revenue of Flour Mills of Nigeria Plc was N522.8 billion, compared to N355.1billion in H1 2020/21 which represents 47percent – year-on-year (YoY) growth. Performance was consistent across all key business segments in the group with Agro-allied and support segments, in particular, showing impressive growth by as much as 35percent. In the review H1 period, the Group’s Profit Before Tax (PBT) was N15.5 billion, compared to N14.6 billion in H1 2020/21 (6percent – YoY growth).

This performance was underpinned by continued strong operating performance in the food segment; continuous improvement in Agro-allied and support segments. The Group’s Profit After Tax (PAT) was N10.5 billion, compared to N9.9 billion in H1 2020/21 (6percent – YoY growth). The Group’s solid operational performance was stimulated by strong organic growth, supported by product innovation, and continued momentum in retail sales.

“Despite prevailing economic and attendant business challenges, our Group has continued to show its resilience by achieving significant progress across operations. In keeping with our goal to continue creating value for our valued stakeholders, we will maintain a laser-like focus on achieving operational efficiency and accelerating our objectives for cost optimization across our operations,” said Omoboyede Olusanya, Group Managing Director Flour Mills of Nigeria Plc.

Operational review

In line with Flour Mills strategy, the Group has continued to sustain its growth trajectory with impressive performance and robust organic growth across all business segments, supported by product innovations and continued momentum in retail sales.

In H1 2021/2022, the Group’s food businesses recorded volume growth across flour, ball food, pasta, and noodle categories in line with projections. Also, in furtherance to Flour Mills growth strategies, the food division has commenced an expansion plan to further deepen market penetration in Northern markets through enhanced value creation and development of new point of sale outlets.

In the Agro-allied division, the Group has continued its goal of driving local content inclusion throughout the value chain. Along with gains from existing out-grower programmes and other activities aimed at strengthening local supply chain, the Group remains dedicated to responsible and sustainable raw material sourcing.

The Group’s cost-cutting initiatives continue to bear fruit as evidenced by the decline in finance costs. Over the years, deliberate actions had been taken to minimize financial leverage through debt restructuring while maintaining an appropriate debt composition, including the reduction of foreign payables during the review H1 period, to further manage foreign currency risk.