Flour Mills Nigeria: One step away from loss

By Mike Uzor

Flour Mills Nigeria showed an exceptional rise in profit at the end of its second quarter trading yet it is facing operating pressure that leaves it just one step away from a loss. The company’s 450% rise in after tax profit in the second quarter is an exceptional earnings record in a year of a general corporate earnings lull. With an after tax profit of N24.02 billion at half year, the company has already made about three times the full year profit figure it posted at the end of the preceding financial year.

The company’s impressive profit show however came almost exclusively from profit realised from disposal of investment in associates. Without the windfall, Flour Mills would have reported a meager profit of N287 million in the second quarter. That is the only contribution from the company’s normal operations to the otherwise robust bottom line picture displayed at the end of the second quarter. That was all the company saved for shareholders out of sales revenue of N177.58 billion generated at the end of the second quarter.

The company faces intense operating pressure from rising cost of sales and huge interest charges that have undermined profit capacity considerably. Last financial year, sale of investment equally yielded a windfall of N14.28 billion, which enabled the company to escape a loss that could have resulted from huge interest expenses of N18.70 billion.

Two major cost elements have eroded profit margin in the core business of the company and the structure for profitable operations appears to be missing presently. One is cost of sales, which accounts for 90% of sales revenue. The other is interest expenses, which rose by 21.1% at the end of the second quarter to N12.33 billion – close to three times as fast as sales revenue. The company’s operating profit was insufficient to meet finance cost in the second quarter.

The company’s operations run on huge balance sheet debts. Despite a significant reduction, the company still has term loans of N63.74 billion and a bank overdraft of N39.42 billion. There are also short-term loans of N46.58 billion and unsecured fixed rate bond of N9.23 billion. The company will need to free itself of much of these borrowings for it to regain the capacity to convert revenue into profit.

The company generated sales revenue of N177.58 billion in the second quarter, which is an increase of 7.3% year-on-year. Full year turnover is projected at N359 billion for Flour Mills Nigeria in the 2015/16 financial year. That would be a growth of 16.6% against a decline of 5.2% last financial year. Without the gain from disposal of investment, the company stood only a thin line between profit and loss at the end of the second quarter.

Profit capacity was further constrained by major drops of 32.7% in other income and 76.4% in investment income during the review period.  Given the cost-income structure the company is operating, no reasonable addition to the profit figure is anticipated from Flour Mills Nigeria for the rest of the financial year. After tax profit is is therefore expected to amount to N24.31 billion at full year – only marginally higher than the second quarter closing figure. This will nevertheless be an outstanding growth of 187% over the preceding year’s closing net profit figure of N8.47 billion.

The company remains under cash flow pressure, as net cash generated from operating activities could not cover debt repayments and interest expenses. Cash generated from sale of investment enabled the company to meet substantially a net cash utilisation of over N27 billion from financing activities. Without it, the company would have piled more debts to meet serious cash flow pressure. Despite the windfall, the company still carries a cash deficit in excess of N23 billion.

In the midst of the cash flow difficulties facing the company, it is not certain if shareholders can hope to share from the big harvest by way of a decent dividend. The company’s directors declared a dividend holiday last financial year but whether the bigger windfall from sale of investment this year may end the holiday isn’t foreseeable for now.

Nestle Nigeria: profit flat on slow sales, rising costs

Nestle Nigeria is unable to push sales volume so far this year and rising operating cost have encroached on margins and kept profit flat. The food and beverages company suffered a slight decline in profit last year with an increase of 7.7% in turnover. This year, sales revenue isn’t likely to grow as fast as happened last year but a moderate improvement in profit may be possible at full year. Some cost saving is helping the company to defend profit margin and that is the key operating strength for the company this year.

Sales revenue amounted to N108 billion at the end of the third quarter, which is an improvement of 5.2% year-on-year. Full year projection indicates sales revenue of over N145 billion for Nestle Nigeria at the end of 2015. This will be a marginal increase of 1.4% – the slowest revenue improvement in many years. The growth rate in the third quarter is therefore expected to slow down at full year.

The ability to grow sales revenue is bound to be constrained as long as the company is unable to appeal to consumers’ low cost sentiments. A low price response is needed to stimulate the consumer market at a time of low spending capacity. The company said increased cost of input induced by the devaluation of the naira is the problem. The inability to transfer the cost increase to the market is hurting sales as well as profit.

The company ended third quarter operations with after tax profit of N17.24 billion, which is a flat growth of 2.2% year-on-year. After tax profit is projected at N23.8 billion for Nestle Nigeria in 2015. The flat growth in the third quarter is expected to step up to an increase of 7% at the end of the year.

Nestle Nigeria implemented efficiency and cost saving initiatives that enabled it to contain rising cost of sales and therefore improve gross profit ahead of sales. Cost of sales increased by 2.8% against the 5.2% increase in sales revenue. That improved gross profit margin from 43.2% in the same period last year to 44.5% at the end of the third quarter. Further cost management success happened in respect of administrative expenses and marketing cost. This enabled the company to raise operating profit by 11.6% – more than twice as fast as sales revenue.

However most of the cost saved was claimed by finance charges, which nearly doubled at the end of the third quarter. Finance charges amounted to N3.86 billion, which claimed 15.6% of operating profit against 8.8% in the same period last year.

The ability to defend profit margin is the key strength of the company this year. Net profit margin is slightly up from 15.5% at the end of last year to 16% at the end of the third quarter. That informs an expectation of a moderate improvement in after tax profit at the end of 2015. Nestle Nigeria has not achieved a reasonable growth in profit over the past three years.

Management needs to recharge the company’s growth momentum by focusing on low cost high margin products, which will be an appropriate response to the present conditions of the consumer market in Nigeria. The company has declared an interim cash dividend of N10 per share. The register of shareholders closed on 20th November and payment is scheduled for 7th December 2015.

• Mike Uzor is a financial analyst based in Lagos.