Flour Mills: Last year’s windfall obscures strong earnings growth

Flour Mills of Nigeria recorded a strong growth in its core business at the end of the second quarter but the reading of the bottom line has obscured the company’s good performance. The flour milling company closed the second quarter operations with a top revenue growth record of 44% and a leap of 57% in operating profit but recorded a drop of over 73% in after tax profit year-on-year. 

The difference is a gain of N23.73 billion from sale of investment last year, which is completely missing in the current financial year. The gain had turned an otherwise loss position of the company at the end of the last financial year into a major profit growth. Without the gain from the investment disposal, the company would have ended the second quarter last year at break-even. A big improvement has happened in the company’s core business this year, advancing from break-even to a pre-tax profit of N8.80 billion at the end of its half year in September.

Flour Mills of Nigeria closed the second quarter with a turnover of N255.30 billion, which is an outstanding growth of 43.8% year-on-year.  The company’s management said the revenue growth was a result of both volume growth across most of its businesses as well as improved price management, cost cutting and production efficiency – applied to cushion increased cost of materials.

The company is engaged in flour milling, production pasta, noodles, edible oil and refined sugar. It also produces livestock feeds and agro-allied products. It sales fertilizer, laminated woven polypropylene sacks and flexible packaging materials. The company also operates terminals A and B at Apapa Port and handles customs clearing, forwarding, shipping agents and logistics.

The strong growth in sales revenue is expected to be maintained in the second half of the year. The full year outlook indicates a turnover in the region of N491 billion for Flour Mills of Nigeria at the end of its 2016/17 financial year next March. That will be a full year growth of 43.3% over the sales revenue of N342.6 billion the company posted at the end of the preceding financial year. This will be the strongest revenue growth in three years and a major acceleration from the improvement of only 11% last financial year.

Cost of sales grew sharply by 37.4% to N218.88 billion at the end of the second quarter, which management said is due to the effect of the drop in the exchange rate of the naira. It however grew less rapidly than sales revenue, which enabled the company to stretch out gross profit margin. With that, it doubled gross profit to N36.42 billion at the end of the review period.

There were moderate increases in selling/distribution expenses as well as administrative cost during the period but exchange losses turned a net operating gain of N1.78 billion in the same period last year into a net operating loss of N8.08 billion at the end of September. Despite that, the company still raised operating profit by 57% to N19.20 billion at the end of the second quarter.

Another favourable development is a drop of 11.4% in finance expenses to N10.92 billion at the end of the review period. However the company still carries large balance sheet debts of close of N160 billion, a moderate reduction from the closing figure in the preceding financial year.

In the same period last year, operating profit was insufficient to meet finance cost and investment income covered up the gap. This year, the company has overcome that challenge with the improvement in gross profit and the drop in finance cost.

The progress the company has made is however hidden in the reading of its profit figures, which show a drop of 73% in after tax profit at the end of the second quarter. The company’s profit in the same period last year came mostly from gain on disposal of investment in subsidiary while the profit figure for the current year reflects a significant improvement in the company’s operations. Netting off the gain on sale of investment, it was a big rebound for Flour Mills at the end of the second quarter.

After tax profit amounted to N6.47 billion at the end of the second quarter and the company’s full year position is projected at N12.44 billion in March 2017. That will still be a drop of 13.7% from the full year profit figure of N14.42 billion the company posted at the end of the 2016 financial year.  That will still be a good performance for the third year running since the company began recovering from a sustained profit drop in the 2014/15 financial year.

The company earned N2.23 per share at the end of the second quarter, down from N9.0 per share in the same period last year. It is expected to earn N4.29 per share at full year against N5.57 in the 2015/16 full year.