Dangote Flour Mills surmounts challenges as shares surge

Dangote Flour Mills (DFM) Plc has surmounted the monumental challenges caused by fall in crude prices, a weak naira and a severe dollar shortage as the company reverted to the path of profitability.  The shares have surged on the floor of the bourse.

For the first twelve months ended September 2016, DFM’s posted a profit of N5.12 billion from a loss position of  N12.67 billion the previous year. While other firms have had margins suppressed by rising input costs, a strong sales catapulted the company’s gross margins to 26.0 percent in the period under review as against 9.28 percent the previous year.  Net margins moved to 7.09 percent, this compares with peer rivals Flour Mills Nigeria,

Honeywell Four Mills Nigeria, and Northern Nigeria Flour Mills (NNFM)’s margins of  2.58 percent, 1.60 percent, and  4.50 percent respectively. Mr Thabo Mabe, the company’s Group Chief Executive Officer, said the return to profitability was due to several adopted initiatives to increase market share and create value for shareholders.

Experts say the stellar performance is expected since more cash were injected into the business since Aliko Dangote, Africa’s richest man, took over the company he had sold to South Africa’s food giant Tiger Brands Limited.

Late last year, Tiger Brands Ltd., South Africa’s largest food producer, agreed to sell its stake in DFM -after string of loses spurred by huge write offs- to  Dangote Industries Ltd. three years after buying it.

Dangote immediately provided the new company with a cash injection og N10 billion ($50 million) with Tiger transferring its 65.7 percent stake for a nominal $1.

The structuring move by the new management of the Nigerian miller has yielded fruit as sales increased by 62.64 percent to N78.10 billion in the period under review from N48.02 billion the previous year.

Little wonder the strong sales translated into lower inventory turnover as the Nigerian miller was able to clear goods off its shelves faster than 22 consumer goods firms, data gathered by BusinessDay shows. 

DFM had fewer inventories in the warehouse as stock turn was 7.40 while number of days stock was on shelves was 49 days.

This compares with PZ Cussons Nigeria, Vitafoam Nigeria and Guinness Nigeria’s inventory turnover ratios of 0.55, 0.57, and 0.39 while number of days it takes to sell goods was 690 days, 640 days and 337 days respectively.  Analysts say in the time of economic downturn firms sell less of finished goods because consumer spending gets beaten down.

This is on top of a severe dollar scarcity hindering companies from importing raw materials and machinery. An industry expert said some firms are holding on to goods or prefer holding on to inventory for fret that when it finishes, there won’t be dollars to replenish inventories.

A fall in oil price since mid 2014 that crippled government spending forced the Central Bank of Nigeria (CBN) to peg the naira at between N197-N199 in order to curb inflation and stop the external reserve from continued bleeding.

The policy boomeranged as dollar became sparse at the interbank market, forcing many firms to seek currency at the inaccessible parallel market.  Investors also fled because a sudden devaluation of the currency could lead to loss of significant investment.

Consequently, business started closing shops while some shed jobs to stay afloat.  Business expansions were scaled back while losses were recorded, an unfortunate situation that hit the stock market.

While the Apex bank has adopted a flexible exchange rate with a view to allowing the naira float freely and attract foreign direct investment into the country, companies still bemoan dollar scarcity.

Expectations that dollars would become available to manufacturers after the central bank abandoned its peg have been dashed, Paul Gbededo, Flour Mills managing director.

“The aspiration is that once you devalue, the people will bring in their dollars; that we are not seeing yet,” he said. “Nigeria is badly hit with foreign-exchange earnings, thereby not being able to fulfil its import bill.”

Nigerian companies have increased prices of product to break even.This will further hit consumer hard. Nigeria’s economy has contracted by 2.2 percent in the third quarter of the year, according to a recent report by the National Bureau of Statistics (NBS). The IMF said that GDP will shrink by 1.70 percent by 2016, the worst recession in 25 years.

Inflation for the month of October increased to 18.30 percent in October, stoked by high price of gasoline and food stuffs, according to NBS.  DFM’s costs of sales increased to 32.65 percent to N57.76 billion as inadequate power supply, a weak naira and shortages of gas pressured input costs.

The company’s recorded the fastest growth in terms of year to date return (ytd) on the NSE, compared to any other firm in the country.

Stock price closed at N3.08 as of 3:00 pm while ytd spiked +236.28 percent vs -11.55 percent NSE-NSI Index, which underpinned market sentiments that brought it back to life.  DFM has reopened its plant in Kano with plans to grow wheat in the state. The plant was shut down by Tiger Branded Consumer Goods of South Africa following its acquisition of the flour mill.

The aforementioned reopening is part of the company’s restructuring plans to increase share of the market.

“I will like to assure you that we are back for good and we will never close this mill again. It has always been my desire to increase our investments in Kano. We are also looking forward to venturing into farming in the State where we can create a lot of jobs and I think this flour mill will help us achieve this feat in Kano.”

“Kano is very strategic because most of our products, be it flour, sugar, pasta, enjoy a lot of patronage and support. I want to announce that we have successfully re-engineered Dangote Flour Mill so as to meet the emerging challenges in the market place and also to meet the ever changing demands of our esteemed and loyal consumers.”

“We decided to make this investment in November when Tiger Branded Consumer Goods decided to leave the country and we do not want over 3000 jobs to be lost. You can imagine these 3000 people going back into the job market in Nigeria. So we decided to seek ways to assist to ensure that these jobs are secured by injecting fresh cash of about N10 billion into the business.

“Our return to Kano is actually a sign of good things to come and it is our hope that by this move, we will create thousands of employment in the State and not just in flour but other products.”

“Very soon we will start growing wheat in Kano, I want to assure our customers that we will continue to support you to make sure that we assist you with the necessary things needed to make your businesses a lot easier and more profitable.

“I am looking forward to you supporting the entire team to make sure the company surpasses its target of 900,000 metric tonnes of wheat yearly. I want to assure you that with the new board we have, this company will definitely excel with or without my presence”, he added.

Chairman, Dangote Flour Mills Plc, Ighodalo Asue noted that Kano remains one of the firm’s biggest markets and the management is happy to be reinvigorating the plant.

“We bought back Dangote Flour Mill from Tiger Branded and by this move, it means we have a stronger, better sophisticated and more focused Dangote Flour Mills.”

“Since the takeover, we have taken a lot steps to reposition the company through expansion to drive growth. We are also using this medium to restate our commitment to increasing our shareholders value and our dear customers. Let me assure you that we will continue to invest in the State and other parts of the country and even beyond the country, because we believe in job and wealth creation. It is our hope that our return to Kano will create more job opportunities and impact positively on the economy of the State.”

“I will like to commend Aliko Dangote for his investment in Dangote Flour Mills, a few months ago when Tiger Branded Company was going to leave the country, it appears that the fate of the company was in jeopardy, but Aliko Dangote’s decision to buy back the company has saved the jobs of about 3000 employees and the shares of over a million shareholders. More importantly, the multiplier effect of his investment in the country is immeasurable”, he said.

Group Chief Executive Officer, Dangote Flour Mills, Thabo Mabe, said: “We are using this opportunity to thank our loyal customers and distributors for their patience and understanding during our challenging moments. We have fully repositioned as a company to serve you better and to say we are here for a long hall. We do not only create jobs for people but provide a lot of incentives to customers to encourage them to grow their businesses so that you can grow our business.

BALA AUGIE