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Northern Nigeria Flour Mills returns to profit amid headwinds

Northern Nigeria Flour Mills returns to profit amid headwinds

Northern Nigeria Flour Mills (NNFM) Nigeria Plc just released its audited financial statement for the year ended March 2020 that showed the miller reverted the path of profitability.

With a robust cash flow from operating activities, investors should go their bed without worries because the company has the financial ammunition to fund future expansion plans, settle its debt, and pay dividend to shareholders.

For the year ended March 2020, NNFM’s revenue surged by 113.08 percent to N8.84 billion from N4.41 billion as at March 2019.

The growth at the top line was driven by market penetrating products with improved packaging to cater for the price-sensitive consumers as well as the improvement in route to market. Also, land border closure in the latter part of the financial year supported revenue growth.

Read also: Northern Nigeria Flour Mills proposes N26.7m dividend payout from N64.6m full year profit

Analysis of the financial statement showed cost of sales increased by 123.96 percent to N7.96 billion in the period under review from N3.56 billion the previous year; the increase in cost was due to higher material costs, (+143.35 percent).

However, the slow growth in cost of sales relative to revenue-growth, reflected the management’s success in achieving cost optimization during the review period.

Meanwhile, there was a 91.64 percent increase in operating expenses to N554.36 million in March 2020 from N289.27 million the previous year.

The uptick in operating expenses was spurred by a number of factors ranging from advertising cost on new products, further spend to deepen route to market, costs associated with business continuity plans following the pandemic as well as COVID-19 donations and relief items expenses.

NNFM has optimized direct sales attributable to projects gross profit spiked by 50.35 percent to N876.05 million in the period under review as against N580.25 million the previous.

Operating profit followed the same growth trajectory as it grew by 6.5 percent N526.19 million for the year ended March 2020 from N527.86 million the corresponding period of March 2020.

The company has been sourcing raw materials locally as it seeks to reduce its import bill amid a currency crisis caused by volatility in the price of oil at the international market.

The miller posted a profit of N64.35 million from a loss of N31.39 million it posted the previous year.

NNFM has efficiently utilized its fixed assets to higher generate sales, which indicates higher return on investment as fixed asset turner ratio increased to 2.36 percent in the period under review from 1.98 percent the previous year.

Money to finance expansion activities is not the miller’s problems, as its cash flow from operating activities surged by 156.09 percent to N3.15 billion as at year end March 2020 from N1.23 billion the previous year.

The charts below shows the company has been recording consistent growth in revenue and operating performances over the past five years even amid the ups and downs of country’s macroeconomic environment.

Consumer goods firms in Africa’s largest economy are operating in an environment beset by a myriad of challenges such as decrepit infrastructure, harsh regulatory environment and weak consumer spending.

In 2016, the sharp drop in oil price of mid-2014 that stoked a severe dollar scarcity created problems for company because they were forced to source foreign currency at the an exorbitant black market rate. That stoked cost of production as material cost spiked due to imported inflations.

The country’s economy has been growing sluggishly since it exited a recession in 2017- thanks to the instruction of a foreign exchange regime by the central and rebound in oil price- and inflationary pressure and hike in utility bills have damped consumer sentiments.

Economic growth in the first quarter of 2020 (Q1-2020) slowed to 1.87 percent and the figure for the next quarter (2020) is set to come in negative, despite the series of stimulus packages announced by the authorities aimed at easing the impact of the pandemic on businesses and households.

The coronavirus pandemic that paralyzed business activities across the globe has damped the outlook for the Nigerian economy as lockdown imposed by government to curb the spread of the virus disrupted the demand and supply side of the market.

Analysts have warned that the economy may enter a technical recession by the third quarter of (Q3) 2020, with a chance of early recovery by fourth quarter (Q4) 2020 or first quarter (Q1)2021.

Analysts at sundry research house expect Northern Nigeria Flour Mills and peer rivals to stay immune to the negative impact of the COVID-19 pandemic or restrictions, largely because their major product portfolios (Food, Sugar and Agro-Allied) which are concentrated on essential items.

Also, they expect that the recent reversal of the 5.0 percent increase in duties on raw Sugar by the federal government in July 2020 would further spur growth in the Sugar segments even as the benefits from border closure remain apparent across the segments.

However, industry players with low portfolio concentration in products that are considered essential (food, beverages, agro-allied and home & personal care) could capitulate to COVID-19 crisis.