Northern Nigeria Flour Mills swallowed by own costs

Northern Nigeria Flour Mills (NNFN) Plc incurred cost of production that exceeded revenue, which inevitably resulted in a loss as the company intensified effort at boosting future profit by sourcing raw materials locally.

For the year ended 31 March 2017, the miller posted N11.36 million in losses, an improvement from N175.67 million loss it recorded the previous year.

Sales fell by 3.39 per cent to N940.52 million as the company grappled with shortage of sorghum, a major raw material in their manufacturing process.

NNFM’s cost of sales of N967.78 million swallowed the entire revenue figure, which resulted in the loss recorded in the period under review.

This means the firm has deployed more resources to generate every Naira of revenue as it spent N102 to generate each unit of product.

Analysts attribute the high cost to revenue ratios to rising inflation, a shortage of foreign exchange, high energy costs and a weak currency.

A sharp drop in the price of oil since mid-2014 tipped Africa’s most populous nation in its first recession in 25 years as consumer goods firms were forced to buy dollars as the inaccessible black market.

The decision of the central bank to adopt a flexible exchange rate last year resulted in a 40 percent depreciation of the currency and stoked the cost of production of firms that imports most of raw material tom meet production demand.

The management of NNFM had initiated strategies to reduce reliance of foreign exchange for import of key input, create jobs and improve profitability.

NNFM has commenced the installation of a sorghum milling facility worth $15 million to produce flour from locally grown sorghum for inclusion in wheat flour products.

According to the company the milling facilities have a capacity of 100 metric tonnes and could save foreign exchange of $25 million yearly.

Such expansion plans is most likely responsible for the Nigerian miller’s high gearing ratio. Debt to equity ratio stood at 196.53 percent while total debt in the balance sheet stood at N2.42 billion.

“During  the  year,  the  entity  obtained  loans  from  its  parent  company,  Flour  Mills  of  Nigeria  Plc,  to  finance  its  working  capital requirements  and  the  construction  of  the  Sorghum  Mill  project,” the company said in its audited financial statement.

“These loans were obtained as short term loans pending the approval and disbursement of loans requested by the entity from the Bank of Industry (BOI) of Nigeria which will be used to repay the intra-group loan,” said the company.

Millers in the country have huge debt in their capital structure as they have borrowed money from the banks to fund factory expansion.

Flour Mills Nigeria, the largest miller by market value, has a debt to equity ratio of 102.15 per cent.

NNFM’s share price closed at N5.70 on the NSE on Monday, valuing the company at N1.05 billion.

 

BALA AUGIE