Dangote Flour Mills ends financial year with disappointment and hope

Dangote Flour Mill’s 2014 operations ended September is a mixture of a continuing earnings disappointment and hopes for recovery.  The disappointment is the posting of another big loss, marking the fifth year of a sustaining declivity since the company began to loss profit in 2010. A new hope however flickered through the company’s operations during the year with the first improvement in sales revenue in three years.

A strong growth in sales revenue is reinforced by a significant improvement in asset turnover, a moderation of cost of sales and a decline in the company’s net loss position. Should these benign developments be sustained in the current financial year, further significant progress on recovery can be expected. Yet, the company has a long recovery journey to make to reach its previous revenue peak attained in 2011 and its peak profit record achieved in 2009.

The company’s management is optimistic about the improvements the company recorded in the 2014 financial year. A gradual and sustained improvement quarter by quarter is a signal that a further improvement can be expected in the current financial year. According to the management, procurement efficiencies and improved flour extraction has led to improvement of margins. While the trading environment remains difficult, the company said it has taken many actions to address the challenges.

The main signal for hope for the company is the growth of 37.7% in turnover in 2014 to N41.27 billion. This is against a sharp drop of about 55% in sales revenue in the preceding year. This is the first improvement in turnover the company has been able to make in three years since sales revenue began to decline from the 2011 peak.

Management expects to maintain top line growth in the 2015 financial year through new products introductions and increased brand support programmes. The improved flour extraction and asset turnover achieved in 2014 give positive indications for the possibility of attaining this objective.

Another positive signal is the moderated growth of cost of sales, which the company said was due to procurement efficiency and improved flour extraction. At N38.87 billion, cost of sales claimed 94.2% of sales revenue in 2014, down from 98% in the preceding year. That caused an outstanding growth of almost 273% in gross profit to about N2.40 billion. The ability to sustain this improvement in the depreciated exchange rate environment of 2014/15 will have to be proved.

With an increase of 12% in distribution/administrative expenses and an impairment charge of N1.59 billion on plant and equipment, the company closed the year with an increased operating loss of N6.43 billion. Management expects that the impairment charge isn’t going to reappear in 2015 and therefore a reduction in operating loss is most likely.

The pressure from finance charges is however likely to continue in 2015, as the company has to depend on borrowings to meet cash flow difficulties. Interest cost grew by 21.1% to N2.86 billion in 2014, as current financial liabilities grew by 22.3% to over N28.66 billion and long-term borrowing amounted to over N5.0 billion despite a drop of 47.7%.

The bottom line remained in a big red at about N6.22 billion at the end of the year, which is a reduction from the net loss of N7.93 billion in 2013. Management said improvement in operating efficiency has resulted in progressive reduction in trading loss. It expects that further improvement in sales revenue and the efficiency gains would lead to a further reduction in losses in the 2015 financial year.

The company’s last profit was about N470 million it posted in 2012, which was a sustained drop from the peak profit of N5.56 billion in 2009. With two years of huge losses, the company’s retained earnings have been washed off and a retained deficit of N10.52 billion has diminished the capital stock considerably.

Earnings per share remains negative at N1.24, reducing from N1.59 in the preceding year. Unless a major drop in net loss is achieved in the current financial year, the company faces a threat of virtual loss of its equity base. Net assets dropped by almost 47% in 2014 to N9.60 billion and another major drop needs to be avoided in the current financial year.