Dangote Flour Mills: Building profit for the second year

Dangote Flour Mills is building profit for the second year after returning to profit at the end of 2016 from many years of sustained losses. The company’s first quarter report for the 2017 financial year shows a strong growth in revenue and a shift of the bottom line from red in the first quarter of the preceding financial year into a deep blue at the end of March.

The company had run a 15-month financial year that ended in December 2016, changing its accounting date from September to December.  The first quarter of the current year shows an impressive beginning for the company, strong enough to raise revenue and profit over the 15-month records of last year.

Dangote Flour Mills has successfully restructured its operations, pruning costs and strengthening revenue, thereby stretching out margins and reinforcing profit capacity. This is a strong indicator that the return to profit last year isn’t a one-off reaping of a windfall but an outcome of a new cost-income structure with an enlarged room for value creation.

The company’s first quarter trading ended with a turnover of N29.05 billion, which is close to three times the sales revenue of N10.67 billion it posted in the first quarter of the preceding financial year. The two quarters however belong to different calendar months, which warrants that the comparison be read with caution.

Based on the first quarter figure, sales revenue is projected at N120 billion for Dangote Flour Mills at full year. This will be an increase of over 13% over the 15-month turnover figure of N105.76 billion in 2016. The ability to push sales has added a new momentum to the company’s operations.

After tax profit amounted to N2.6 billion for Dangote Flour Mills at the end of the first quarter. Its first quarter operations last financial year had ended in a loss of N901 million. Improving revenue and moderating cost profiles explain the company’s increased profit capacity.

The full year outlook indicates an after tax profit in the region of N11 billion for Dangote Flour Mills in 2017. This will be a 6% increase up on the 15-month profit figure of N10.6 billion the company recorded in 2016.

One of the major favourable developments that have taken place in the company’s operations is in respect of cost of sales, which has moderated significantly. Cost of sales claimed 85% of sales revenue in the first quarter of last year but has dropped to 76% at the end of the first quarter of the current year. This has stretched out gross profit margin from 15% to 24% between the two periods.

Another favourable cost behaviour has come from distribution/administrative expenses, which have moderated significantly relative to sales revenue. Distribution/administrative cost claimed 21% of sales revenue in the first quarter of the last financial year while the margin has dropped to below 10% at the end of March this year. This has lifted the company’s position from a marginal operating loss in the first quarter of last year to N4.43 billion at the end of the first quarter of the current year.

The company’s cost management success has also registered in the area of interest expenses. Net interest cost dropped at the end of the first quarter from N936 million in the first quarter of last year to N455 million.

With the new strength in revenue growth and the significantly moderated cost behaviour, Dangote Flour Mills has stretched out profit margin and improved profit capacity. Net profit margin has improved from negative in the first quarter of last year to about 9% at the end of the first quarter of 2017.

The company earned 52 kobo per share at the end of the first quarter against a loss of 17 kobo per share in the first quarter of 2016. Earnings per share is projected at N2.20 for Dangote Flour Mills at the end of 2017. The company earned N2.12 per share in 2016 but could not pay any cash dividends as the entire profit for the year was swallowed up by accumulated losses – which still stand at close to N10 billion.