Goddy Egene writes that high financial charges as a result of huge borrowings by Flour Mills of Nigeria are big threat to the company’s profitability
Flour Mills of Nigeria (FMN) Plc is one of the leading companies listed on the Nigerian Stock Exchange (NSE) and the clear leader among the flour milling industry. In the food products subsector where FMN is listed, it is the highest priced at N34.50 at the end of February. The closest to it is Northern Nigerian Flour Mills, which closed at N18.05. The other two flour milling firms, Dangote Flour Mills and Honeywell Flour Mills closed at N3.53 and N2.98 respectively.
Although the three stocks are trading below their 2015 opening values, FMN has a better performance so far as it closed at the end of February with a decline of 11.9 per cent. Dangote Flour Mills shed 22 per cent, while Honeywell Flour recorded a decline of 14 per cent.
Despite the better market statistics of FMN, the shareholders of the company have every cause to worry given the company’s nine months results ended December 31, 2014. Its net profit dipped by about 44 per cent in 2014 compared to corresponding period of 2013.
Established in September 1960 as a private limited liability company, FMN commenced operations in 1962 with an installed capacity of 600 metric tons per day. It became a public limited liability company in 1978 and got listed on NSE. Flour Mills has a mill located in Apapa, Lagos which comprises 10 integrated mills. The company’s shares are 51.5 per cent held by Excelsior Shipping Company Limited, while the balance of 48.5 is held by other shareholders. The board of directors of FMN is led by Mr. John G. Coumantaros as chairman and Mr. George S. Coumantaros, who is the founder as chairman emeritus. Mr. Paul Gbedebo is the group managing director/CEO. Other directors are: Alhaji Abdullah A. Abba; Chief James O. Fagbemi; Prof. J. Gana; Alhaji Rabiu M. Gwarzo; Mr. John Katsaounis; Mr. Thanassis Mazarakis; Mr. Atedo N.A Peterside; Mr. F. O. Philips; Alhaji Y. Olalekan A. Saliu; Mr. Folarin R. A Williams Jnr.
Nine months results
FMN ended the nine months with revenue of N244 billion in 2014, up from N240 billion in 2013. Cost of sales went up from N215 billion to N222 billion, while gross profit fell from N24.3 billion to N22.3 billion. Although other operating income grew from N2.7 billion to N4.8 billion, that growth was moderated by a similarly increase in selling and distribution expenses from N3.5 billion to N4.6 billion. Consequently, operating profit fell from N14.75 billion to N14.32 billion. Investment income fell from N4 billion to N3.4 billion. However, finance income rose from N10.5 billion to N15.3 billion.
Despite reducing income tax from N2.418 billion to N401 million, FMN ended the year the period with a lower profit of N3.29 billion, down from N5.9 billion in 2013.
Assessing the results of FMN, analysts at Dunn Loren Merrifield said the revenue growth is not in line with demand for flour and associated products.
According to them, the sustained demand for flour-based products, given their increasing use in staple foods –supported by the increasing consumption of the nation’s youthful population.
“In addition, the fact is that there was no major price increases to induce a slowdown in demand for its products during the period. Given this, in our view, FMN was unable to take advantage of the demand as the firm’s market share appeared to gradually wane given the growing competition in the market – on the back of increased flour supply in Nigeria’s flour market. This may have limited FMN’s ability to drive volumes and influence prices that would have impacted revenue growth,” they said.
The analysts, however, said they maintained a positive outlook on the company as they are optimistic that recent investments in core food and agro-allied business would propel FMN to deliver optimal returns in the medium-to-long term.
“An indication of this is the company’s diversification into food drink production with the introduction of Kool2GO instant powdered drink which is now available for commercial sales. The Kool2GO instant powdered drink comes in sachet size….. This is in addition to the FMN’s snacks and other range of products, like Marios Cheese Balls, Noodies Sweet Snacks and Golden Bites chinchin. In addition, the firm also planned investments in the production and processing of locally grown rice through the participation of local farmers and other stakeholders in the supply chain. The success of these products and investments will boost the overall revenues of the firm and impact on the bottom line in the medium-to-long increase in operating expense depressed operating profit of the company,” they said.
The analysts added that operating expenses of the company depressed operating profit.
“FMN’s operating expenses (selling, distribution and administrative expenses) increased by 4.34 per cent to N12.83billion from N12.30billion in the corresponding period of the preceding year. As a result, core operating profit declined by 21.41 per cent to N9.49billion, as against N12.1 billion the previous period. The growth in operating expense also impacted the firm’s EBIT which declined by 3.00 per cent N14.32billion in spite of a 80 per cent increase in other income to N4.83billion.. We note that the growth in operating expenses was largely due to investments on selling and distribution during the period as the firm attempt to enhance marketing and distribution efforts so as to drive higher sales volume. Consequently, operating margin fell to 3.90 per cent from 5.03 per cent in the same period of previous financial year. The increase in operating expenses coupled with a corresponding increase in COS, resulted in total cost/revenue ratio of 96.12 per cent, which is higher than 94.97 per cent recorded in the previous financial year. This implies that, in generating unit of sales revenue in the review period, FMN incurred additional expenses,” they said.
Increased Financial Charges Depressed Profits
FMN finance charges accelerated by 45.10 per cent N15.34billion, as the firm’s gross debt increased by 26.34 per cent to N192.00billion, from N152 billion.
“We note, however, that the firm’s investments in agro-allied and core food businesses led to increase in borrowings and consequently to high interest expense. In response to the acceleration in finance charges, profit before and after tax fell below expectations.
Specifically, FMN’s profit before tax fell 55.73 per cent to N3.70billion, from N8.35 billion, with a corresponding decline in pre-tax margin to 1.51 per cent compared with 3.45 per cent in the same period of previous financial year. In addition, in spite of an 83.40 per cent decrease in income tax provision, post-tax profit contracted by 44.46 per cent to N3.30billion from N5.93billion in the prior year. Consequently, post-tax profit margin fell to 1.35 per cent from 2.47 per cent recorded in the prior year,” the analysts said.
Borrowings Increase Leverage Position
The increase in debt has led to an increase in debt-to-equity ratio from 1.82x to 2.40x indicating growing balance sheet leverage. In addition, debt-to-assets ratio increased marginally to 0.59x from 0.51x in 2014.
“This implies that the company financed 59 per cent of its assets with debt. The debt-to-assets ratio is high but still within acceptable levels. In addition, assets-to-liabilities ratio, another measure of solvency, came in at 1.33x from 1.39x in 2014. The ratio remains at a moderate level in our view and suggests that the firm’s assets can sufficiently cover its total liabilities in the medium-to-long term if effectively utilized. The moderate debt/assets ratio led us to the conclusion that the firm has a moderate risk profile but can repay its long term loans, interests and meet other financial obligations,” they said.