Flour Mills’ profit falling for the fourth year

Flour Mills of Nigeria traded at a loss for the three months of its third quarter ended December 2014. With that, the company closed its nine months of operations with a lower profit than it reported in the second quarter, which is also a drop year-on-year. The company’s three-year falling profit trend has therefore extended into the fourth year.

The flour milling company has been showing sliding profits since its 2010/11 financial year. Growing revenue and declining profit has been the trend in earnings since then. In the current financial year, inability to grow sales revenue has added a further constraint, giving an indication of sustaining the profit downslide in 2014/15.

Sales revenue performance improved at least from declining in the first two quarters of the year to a flat growth in the third. That however failed to match cost increases and the company ended the three months of the third quarter with a loss of N1.16 billion. Interest cost is to blame directly for the loss during the quarter but the sales revenue constraint is the fundamental problem. This seems to foreclose the possibility of a turnaround indicated in the preceding quarters and sustaining the falling profit trend for the fourth year running.

Mr. Paul Gbededo, the company’s group managing director/chief executive officer had raised some turnaround hopes for the company this year. The present outlook however isn’t likely to turn out as he had expected. Gbededo’s major headache is the huge balance sheet debts that are gulping the company’s non-growing revenue by way of finance costs.

The company’s profit capacity has been undermined by rising cost-income ratio, which is worsened by inability to grow sales revenue. Rising cost is driven by rising interest expenses on the company’s large borrowings. The borrowings are needed to meet serious cash flow constraints. Interest expenses are consequently claiming a growing proportion of sales revenue and this has kept slashing profit margin.

Third quarter operations ended with a marginal increase of 1.7% in sales revenue to N244.28 billion against the corresponding figure in the preceding year. Turnover is projected at N330.2 billion for Flour Mills at the end of its current financial year next March. This will be a marginal decline in sales revenue over the preceding year’s turnover of N332.14 billion. Revenue growth rate has slowed down rapidly from 59.6% in 2013 to 28.6% in the 2014 and now heads for a slight decline.

The company closed third quarter trading with an after tax profit of N3.29 billion, representing a drop of 44.5% year-on-year and well below the N4.37 billion reported in the second quarter. If the current growth rate is maintained to full year, the company is expected to close the year with an after tax profit in the region of N4.6 billion. This will be a sustaining drop in profit performance for a company that has lost profit every year for the past three years. The company’s peak profit performance happened in the 2010/11 financial year – when it posted a net profit of N13.37 billion. A sustained drop brought it down to N5.37 billion at the end of the 2014 financial year in March. In the event of another loss in the final quarter, the company will end this trading year in a big disappointment.

Over the past three years of falling profit, the company grew sales revenue every year. The problem is a sustained loss of profit margin, which has continued in the current financial year. The cost-income ratio has altered to the detriment of profit and huge finance cost has caused the kink. It rose by 45.1% in the third quarter year-on-year to N15.34 billion, claiming 6.3% of sales revenue compared with 4.4% in the corresponding period last year.

Rising interest expenses is spurred by rising balance sheet debts. Long-term debts have grown by 56.4% to N76.05 billion over the nine months of the year. Short-term loans have also expanded by 144.2% to over N67.74 billion within the same period. There is a fixed rate bond amounting to over N18.67 billion as well as a bank overdraft of about N29.52 billion.

Profit margin continues to decline from 3.4% in the first quarter to 2.6% in the second and to 1.3% in the third. Rising debt profile follows cash flow difficulties facing the company. It needs the huge borrowings to finance a total cash flow deficit of over N179 billion at the end of the third quarter.

The company earned N1.01 per share at the end of the third quarter, which is a drop from N2.17 in the same period in 2013. Based on the projected profit for the year, earnings per share is expected to come to N1.42 for Flour Mills at the end of the financial year. It earned N2.30 per share in the 2014 financial year.