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Exceptional income spurs Flour Mills to growth as profit spikes

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significant increase in exceptional income has spurred Flour Mills of Nigeria (FMN) Plc to growth, as profit spiked amid strong macroeconomic headwinds, a tough business environment and currency devaluation. Analysts are of the opinion that investors that crave for companies with strong earnings may greet the Nigerian millers’ leap in profit.

The 2016 audited financial statement of FMN shows net income increased by 70.24 percent to N14.42 billion from N8.47 billion the previous year. The growth at the bottom line was bolstered by a 66.17 percent increase in exceptional item to N23.17 billion in the period under review. 

Lafarge Africa in November of 2015 agreed to purchase Flour Mills’ 30 percent holding in United Cement Co. of Nigeria.

Such partial divestment impacted positively on profit margins as net margins, a measure of profitability and efficiency increased to 4.20 percent in 2016 from 2.74 percent in 2015.

A 4.20 percent net margin is low. This is because the company spent over 80 percent of revenue generated on input costs. Gross profits were up 7.34 percent to N37.62 billion in the period under review from N35.36 billion the previous year. However, FMN’s operating profit took a hit from a 1026.92 percent surge in net operating loss to N7.72 billion. Operating profit fell by 11.36 percent to N9.05 billion in 2016 from N10.21 billion in 2015. Operating profit margins fell to 2.63 percent in 2016 as against 3.30 percent in 2015.

The largest miller by market value became the first company in the consumer goods space to record a double digit growth in sales despite low consumer spending and unrest in the north east part of the country.   

Sales were up 10.95 percent to N342.12 billion in 2016 from N308.15 billion the previous year.

While the Nigerian Miller has made tremendous stride at the top and bottom lines, the devaluation of the naira by 30 percent spiraled production costs as cost of sales increased by 11.55 percent to N237.38 billion. The Central Bank of Nigeria has thrown in the towel on its continued peg of the naira and adopted a flexible exchange rate in order enhance liquidity in a cash strapped economy.

Analysts say the restrictions or capital controls policy hindered companies from accessing the desired dollars to import raw materials. It is the main cause of the economic lethargy.

Consumer goods firms should brace for lower margin as shortages of gas at factories, currency risk, and high energy costs will spike production costs throughout 2016.

This is because their input costs are rising much faster than official inflation figures.

Economists across a wide spectrum opined that in a period of inflation, when costs are rising, the expense-to-sales ratio might increase because it is more expensive to produce a unit for sale.

“This is because cost of raw materials went up due to exchange rates,” according to Bismarck Rewane, Managing Director/ Chief Executive Officer of Financial Derivatives Company Limited.

“There were also productivity constrains such as power generation challenges. For instance the price of diesel increased to N215 in June from N210 as May,” said Rewane. FMN is exposed to currency risk due to the dollar denominated high debt in its capital structure. A weak currency could jerk up debt.

The company’s finance costs increased by 19.78 percent to N22.40 billion in 2016 compared to N18.70 billion in 2015. Total long term loans in the balance sheet increased by 35.91 percent to N148.83 billion in 2016 from N109.50 billion in 2015.

This translates to a debt to equity ratio (D/E ratio) of 155.42 percent in the period under review, higher than 125.27 percent recorded last year. It means the balance is mainly financed by debt. FMN said the loans were granted by lenders to enable it finance and refinance the construction of its plant and expansion of existing plants. Some of the fallibilities were also used to finance the importation of raw materials.   Nigeria, Africa largest economy has been grappling with a sudden crash in oil price that make up two thirds of government revenue and 90 percent of foreign exchange earnings. Consequently, state governments are unable to pay salaries hence dampening purchasing power workers.

Flour Mills of Nigeria will have to contend with rising inflation eating into deep into consumer wallet.

Inflation rose by 16 percent in June from 15.6 percent in May, the highest in 11 years, the highest in 11 years, according to the National Bureau of Statistics (NBS). The economy contracted by 0.4 percent in the first quarter of the year as the International Monetary Fund (IMF) have said that the economy may likely dip to 1.80 percent by the end of 2016.

The company’s shares declined 0.23 percent to N21.45 by 2:45 p.m. Friday in Lagos, Nigeria’s commercial capital. Market capitalization stood at N56.21 billion. FMN has utilized the resources of shareholders in generating higher profit as the Return on Equity (ROE) increased to 15.05 in 2016 from  10.14 as at March 2015. Return on Assets (ROA) moved to 4.17 percent in 2016 as against 2.26 percent in 2015.

Investors are willing to pay more for each naira of annual earnings of the company as its P/E ratio of 3.85x is incomparable to peer rival firms like HoneyWell Plc and Northern Nigeria Flour Mills Plc with nil P/E ratios. 

The directors of FMN are pleased to recommend to shareholders at the forthcoming Annual General Meeting (AGM) the declaration of N2.62 billion (2015: N5.5 billion) representing dividend of N1 (2015: N2.10 ) per ordinary shares of 50k each.  Flour Mills of Nigeria is one of the biggest producers of sugar in the country and according to recent  statement by the company; it has already invested N50 billion in a state-of-the-art sugar refinery in Apapa capable of refining up 2 000mt of sugar per day.

In order to reduce dependence on imported sugar the Government introduced the National Sugar Master Plan, which encouraged the company to invest in this Backward Integration programme at Sunti Golden Sugar.

BALA AUGIE