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Northern Nigeria Flour Mills growth stunted by difficult environment

Northern Nigeria Flour Mills growth stunted by difficult environment

The difficult business and economic environment in Northern Nigeria has stunted the growth of Northern Nigeria Flour Mills (NNFM), as the company continues to grapple with huge production costs that have left it with very low profit margins, analysis of the financial statement shows.

For the first nine months to December 2014, the company’s profit after tax (PAT) fell by 9.58 percent to N209.30 million from N231.50 the preceding year, while sales increased by 27.94 percent to N10.76 million.

Earnings per share (EPS) reduced by 9.95 percent to 117.45k in the review period compared with 129.91k last year.

NNFM has had profits swallowed by spiralling material costs as the recent devaluation of the naira affected the price of wheat, which is a major component in the production of flour.

Nigeria has just depreciated its currency by 8.36 percent to N168 from N155 per dollar in order to stave off the effects of the fall in the price of oil caused by the increased US shale production.

Furthermore, manufacturers in Nigeria have been challenged by poor road infrastructure, inadequate public power supply and deteriorating state of security.

The sharp rise in the price of major raw materials used in production within the period as a result of drought in some of the wheat growing areas of the world, also had a negative impact on the company’s operations, according to a statement released by the company.

Read also: Currency volatility, high input cost crimp Flour Mills Nigeria growth

As a result of some of the aforementioned challenges, NNFM’s recorded a high production costs as cost of sales margin was as high as 96.16 percent, which means the company spent N0.96 on input costs to generate N1 sales.

Similarly, cost of sales increased by 26.48 percent to N10.76 billion from N8.41 billion last year.

Net profit margin, a measure of profitability and efficiency, was as low as 1.94 percent as escalating costs continue to eat sales and profit.

Analysts say the insecurity in the North is the company’s major impediment, as it is unable to increase its share of the market.

“They cannot push their product to other countries as a result of the insurgency, meanwhile their costs are fixed,” said Saheed Bashir, an analyst at Meristem Securities Limited, in a response to questions, saying “if they can put much of their products in the market, they will record higher profit margins.”

However, some analysts believe that millers will rebound to immense growth as the resurgent middle class and growing population in Nigeria that crave for consumption will be a major driver of such growth.

For instance, the North has one the largest consumers of pasta, which is replacing the traditional food diet in that region. NNFM’s total assets were up by 104.22 percent to N6.67 billion from N3.27 billion the preceding year, as the company’s share price closed at N18.05 on the floor of the NSE, while market capitalisation stood at N3.21 billion.