• Friday, March 29, 2024
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Flour Mills Nigeria earnings go up in flames

Flour Mills Nigeria earnings go up in Flames

The earnings of Flour Mills Nigeria Plc have gone up in flames as the company capitulated to the harsh and unpredictable macroeconomic environment.

The receding profit has also affected valuation, as investors continue to dump shares due to disappointing earnings report and economic uncertainties.

For the year ended March 2019, the largest miller by market value in Africa’s largest economy recorded net income of N4.0 billion, the lowest in the last five years (See Charts).

A further analysis of profit figures showed there was 70.05 percent drop in year on year at the bottom lines between 2019-18, the steepest slump in five years.

Revenues have been growing at a slow pace since 2017 as the company can no longer pass on rising cost to beleaguered final consumers in form of higher price.

Sales were down 2.81 percent to N527.40 billion in the period under review, as against N542.67 billion the previous year.

Since Flour Mills’ revenue growth can’t cover cost of production, its profit margins have continued to shrink. That means the miller has not been using the resources of shareholders in generating higher profit.

Net profit, a measure of efficiency and profitability, fell to 1 percent as at year end March 2019, the sharpest drop

Similarly, earnings before interest and taxation (EBIT), which shows the relationship between total costs and revenue, dipped to 6 percent in the period under review, the lowest since 2017.

Gross margin, which is the difference between revenue and cost of sales, fell to 10 percent, the lowest in five years.

Flour Mills and other consumer goods firms are grappling with deteriorating margins, brought on by subdued consumer spending, smuggling, and continued traffic gridlock in the road network to Apapa port.

Post-recession, growth in real household consumption peaked at 3 percent in the final quarter of 2017, before falling to 1 percent in the second quarter of (Q2-18).

Disruptions at the port, hindered production and distribution activities, as costs pressures remained, even as sales declined.

As a result of the decrepit infrastructure, Flour Mills cost of sales ratio, increased to 89.88 percent in yearend 2019, from 87.32 percent the corresponding period of 2018. That means the company spent N0.89 on input cost to generate each unit of revenue.

However, Flour Mills’ deleveraging strategy has yielded fruit as there has been a reduction total debt and interest expense.

Total Debt ( both long term and short term) stood at N117.28 billion as at year end March 2019, the lowest level since N125.11 billion in Full year 2014.

Finance costs dipped stood at N22.89 billion as at Year end March 2019, the lowest level since N22.39 billion in 2016.

The miller’s operating profit can cover interest expenses as times coverage ratio is 1.41 times, albeit below the 1.50 times internal bench mark.

“Our strategy to restructure the balance sheet base and optimize the finance cost have started to yield the desired results, as the business showed some level of efficiency,” said Anders Kristiansso, Group Chief Finance Officer of Flour Mills.

Paul Gbededo, Group Managing Director, said the company has made substantial progress this year even in the face of an adverse and challenging environment.

“Our Growth and efficiency initiatives across our various functions and businesses have started to show anticipated gains as we continue to focus on organic sales growth and position the business for continuous profitability,” said Gbededo.

The steep drop in profitability has undermined valuations, but it is an entry point for investors that crave for cheap stocks.