Honeywell Flour Mills: Naira devaluation hits profit

Honeywell Flour Mills closed third quarter operations in December 2014 with less than one-half of the profit it earned over the same period in the preceding year. A currency devaluation loss of N903 million is largely responsible for the profit drop. Rising selling and administrative expenses against falling sales revenue has also hurt profit performance. A major drop in net finance expenses prevented a worse bottom line position for the flour milling company during the review period.

The company’s sales revenue declined by 8.3% to N37.64 billion year-on-year at the end of third quarter. The revenue weakness is expected to follow the company to full year, being a general trend for operators in the business in the current financial year. The full year outlook indicates the possibility of revenue acceleration in the final quarter and therefore a turnover of close to N50 billion at full year. That will nevertheless be a decline of about 10% from the sales revenue of N55.08 billion the company posted in 2014.

Cost of sales declined at a slower pace of 7.7% than sales revenue and therefore claimed an increased proportion of sales revenue. This lowered gross profit margin slightly from 18.9% in 2013 to 18.4% in 2014. An increase of 69.1% in other operating income moderated the adverse cost-income behaviour but the appearance of a currency devaluation loss of N903 million created a hollow in the accounts.

A further constraint came from an increase of 11% in selling and administrative expenses against the decline in sales revenue. With that, operating profit sank by 56.3% to N1.59 billion year-on-year at the end of the third quarter.

The only favourable cost behaviour is in respect of interest expenses, which declined by 20.7% to N1.18 billion while interest income rose by 49% to N815 million. Net finance expense therefore dropped by 61.3% to N364 million at the end of the third quarter. The decline in interest expenses does not reflect any decrease in the company’s financial liabilities. Instead, there was a net increase of N2.06 billion in its borrowings.

The company reported an after tax profit of N968 million at the end of the third quarter, which is a drop of 52.2% year-on-year. Based on the current growth rate, net profit is projected at N1.3 billion for Honeywell Flour Mills at full year. That will be a drop of 61.3% from the after tax profit it reported at its full year operations ended March 2014. Falling profit is a general trend among flour millers in the current financial year. This follows a thin down of profit margin in a weak selling environment ruled by excessive competition.

Significant changes in the company’s balance sheet include a drop of 50.7% in cash and bank balances to N5.21 billion and a rise of 83% in trade and other payables to N2.39 billion. The company experienced adverse cash flow pressure during the trading period driven by purchase of plant and equipment. It closed the period with a net cash decrease of N5.36 billion exclusively financed with a robust opening cash balance.

The company earned 12 kobo per share at the end of the third quarter, down from 25 kobo in the same period in the preceding year. It is expected to close the financial year with earnings per share of 16 kobo against 42 kobo in the 2014 full year. That will be less than the 17 kobo dividend per share pay-out for the 2014 operations.