Dangote Flour out of the red

Dangote Flour Mills has ended years of running losses and returned to profit at the end of its third quarter operations in June 2016.  This is great news in the equities market in a year in which corporate earnings performance presents a generally dismal picture. 

Dangote Flour Mills has seen losses build up from N2.84 billion in 2012 to a peak of N12.53 billion at the end of its 2015 operations from which the flour miller has now broken out to a net profit of N2.84 billion at the end of the third quarter.

This isn’t coming from any windfall but out of fundamental changes that have taken place in the company’s cost-income relationship. There is also a major strengthening of the balance sheet, which was significantly impaired by accumulated losses. A reinforcement of equity resources has pulled out the company from technical insolvency, improved the cash flow position and enabled management to begin to cut down on balance sheet debts.

Sales are growing at an accelerated rate for the second year after some years of stagnation and all the major cost lines are either declining or moderating relative to turnover.

Thabo Mabe, group chief executive officer of the company, can look forward with excitement to share the news of the changing fortunes of the company with shareholders at the end of its full year operations in September. At the end of the company’s third quarter trading in June, sales revenue had already exceeded the 2015 full year figure at N49.85 billion compared to N48.03 billion. This is an outstanding growth of 50.6% year-on-year – a record that is unmatched in the business.

Based on the growth rate at the end of the third quarter, turnover is projected at N67.6 billion for Dangote Flour Mills at full year. That will be a growth of about 41% over the full year figure in 2015. Sales revenue, which is largely dominated by flour products, had grown by 16.4% last year – the first significant increase in several years. Accelerating growth in sales revenue is one of the major driving forces of the changing fortunes of Dangote Flour Mills.

Apart from sales revenue, other income lines are also experiencing resurgence.  Other operating income has shot up 161.5% year-on-year at the end of the third quarter and finance income soared from only N3 million to N229 million over the same period.

There are major favourable developments also on the side of costs. One is a moderated growth in cost of sales at 17.5% compared with the 50.6% rise in sales. That raised the gross profit margin from only 7.9% in the same period last year to 28.1% at the end of the third quarter. Gross profit therefore advanced by 436.3% to N14.03 billion over the review period.

Another major expenditure line, distribution and administrative expenses, declined by 8.1% year-on-year at the end of the third quarter to N5.63 billion and therefore claimed a significantly reduced share of revenue. The same is true of finance cost, which went down by 10% to N2.29 billion. This reflects drops of 53% in short-term borrowings and 16.1% in long-term debts.

After tax profit amounted to N2.84 billion at the end of the third quarter, up from a loss of N9.11 billion in the same period last year. Net profit is expected to be in the region of N4.0 billion for Dangote Flour Mills at full year – a big rise from a peak loss of N12.53 billion at the end of the 2015 financial year.

Exchange losses remain a challenge for the company at over N3.75 billion at the end of the third quarter – claiming more than 44% of operating profit. A good portion of the loss at the end of last year also constitutes foreign exchange losses.

The company beefed up its equity base with proceeds from share purchase agreement to the tune of N13.97 billion. That filled up a negative equity hole of N3.07 billion at the end of the last financial year and left net assets of over N13.75 billion.

The company earned 57 kobo per share at the end of the third quarter, rising from a negative figure of N2.51 at the end of last financial year. The full year expectation is 80 kobo per share for Dangote Flour Mills.