Flour Mills’ tumbling fortune


Flour mills Nigeria Plc’s half year profit tumbled amid tough operating environment as the devaluation of the currency obliterated paybacks from drop in wheat prices.

For the first three months ended June 2015, the company’s net income fell by 65.55 percent to N971.98 million from N2.82 billion the following year.

Sales reduced by 1.97 percent to N82.28 billion as rising inflation and hike in transportation costs that pressured consumer wallets continues to dampen the demand for the miller’s products.

Earnings per share EPS fell by 237.5 percent to 32k in June 2015 compared with 108k the previous year.

“Although Bloomberg data indicate that wheat prices declined by around 29% y/y, we believe that most of the gains from the y/y decline was wiped out by the >20 percent depreciation of the naira since November 2014.”

“Bloomberg consensus forecasts indicate that wheat prices are expected to rise only marginally through 2016. Nevertheless, talks of a further devaluation of the naira present a significant downside risk.”

Consumer goods companies in Africa largest economy have been groaning heavily as the devaluation of the naira continue to spiral costs of imported materials and hence causing a downswing in profits.

About 55 percent of raw materials are sourced from abroad a situation that compounds their costs.

Nigeria’s central bank in November last year devalued the naira and pegged it from about 155 to the dollar to 168, widened the trading band significantly and jacked up its main interest rate to a record high to combat speculation against the currency.

The naira closed at N199.10/$ at the interbank market after a de-factor devaluation in February this year.

Analysts at FBN Capital said another round of devaluation presents a significant down risk for FMN.

FMN also took a one two punch from huge borrowing costs as finance costs increased by 12.11 percent to N6.20 billion stoked by money borrowed to finance the expansion and acquisition of assets with a view to consolidating its position as a market leader.

Debt to equity ratio increased to 151.41 percent in the three months through June 2015 from 143.76 percent as at December 2014.

FMN has embarked on projects such as the new sugar refinery at Apapa; the development of a 10,000 hectare sugar estate and mill in Sunti, Niger state; and an ultra modern pasta factory at Agbara, Ogun state, among others.

FMN’s cost of sales ratio, which measures the relationship between production costs and sales, was as high as 88 percent in the period under review.

This means the Nigeria miller spent N88 on production costs to produce every N100 of sales which explains the low profit margins of 1.18 percent.

The company, in a statement on the floor of the NSE attributed the rise in cost margins to worsening logistics/traffic situation in Apapa which hindered product evacuation and delivery resulting in loss volume.

“The combined effect of these extraneous factors led to increase in cost of input and put pressures on margins,” said the company.

Gross profit margins were flattish at 12 percent while gross profit increased by a mere 1.67 percent to N9.87 billion in June 2015 as against N9.71 billion past years.

FMN’s share price closed at N25.01 on the floor of the exchange while market capitalization was N92.97 billion.


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