Fluctuations in the nation’s currency and restructuring costs are holding back the growth of Dangote Flour Mills plc (DFM), a major player in the Fast Moving Consumable Goods (FMCG) sector, analysis of the financial statement shows.
“There has been a lot of write offs in the past few years. They have to write off some items in the books and that has depleted shareholders investments,” according to Saheed Bashir, an analyst at Meristem Securities Limited, in a response to questions.
“Foreign exchange volatility also affects price of wheat, thus the drives input costs. Commodity prices have been falling,” said Bashir.
The naira has been under severe pounding due to fall in oil price that subsequently led to the currency’s devaluation by the Central Bank of Nigeria.
This has driven costs of firms operating in the FMCG sector as wheat, a major component in the manufacture of flour, is imported.
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DFM has been recording recurring losses since Tiger Brands, South Africa largest foods company bought majority stake in the Nigeria miller. Analysts say the acquisition culminated in restructuring costs thus a drain on the bottom line.
For the first quarter through December 2014, the company posted a loss after tax of N2.92 billion from N2.80 billion recorded in the corresponding period of Q1 December 2013, while sales increased by 27.50 percent to N10.66 billion.
Input costs were high as cost of sales ratio increased to 89.11 percent in 2014 from 94.50 percent the preceding year, while cost of sales spiked by 20.20 percent to N9.50 billion.
Despite increased price of wheat, gross margin moved to 10.88 percent as against 5.60 percent last year.
Direct costs attributable to projects also improved as gross profit jumped by 154.20 percent to N1.16 billion compared with N459.07 million the preceding year.
The sluggish growth of DFM made Tiger Brands half year profit to decline by 52 percent as the South Africa food giant wrote down its investment in the Nigeria’s miller less than two years after buying the stake.
Analysts say the company would have been in a precarious situation if it recorded slow growth in sales.
“They still have some good hold on their market as they are able to push their products to the market. It would have been double jeopardy if sales had plummeted,” said Bashir.
Nigeria millers have been operating in a tough environment such as high interest rates and security challenges in the North of the country that prevents these firms from pushing their products to the crisis region.
Additionally, they incur huge overhead costs due to the use of diesel oil, which is a more expensive source of energy to power plant for the purposes of production.
DFM’s total assets remained flattish at N55.52 billion while its short-term financial health flounders as it recorded a negative working capital of N19.06 billion.
Shareholders fund reduced by 48.26 percent to N6.68 billion in the review period compared with N12.911 billion the preceding year.
The company’s share price closes at N3.63 on the floor of the exchange, while market capitalisation stood at N18.15 billion.
“They’ve been able to weather the storm despite competition in the market,” said Bashir.