NNFM sustaining recovery despite profit slowdown

Northern Nigeria Flour Mills (NNFM) has lost its initial high profit growth momentum, as triple digit rise in profit in the first quarter has given way for a decline in the third. The flour milling company may still sustain its gradual profit recovery in the current financial year ending March 2015.

The company has strengthened revenue growth and operating expenses are under a firm control but a major disappointment in other operating income caused a decline in profit at the end of the third quarter. With improved revenue performance and effective hold on costs, profit performance is expected to change from a drop to positive growth at full year.

Gert Kriek, NNFM’s managing director, is leading the company through a slow-paced recovery, which he is likely to be maintained in the current year. He has recorded two years of revenue losses but he looks likely to change the trend this financial year to attain a new peak in turnover. He began the year with an exceptional growth of 181% in after tax profit in the first quarter, which has not been sustained in the subsequent interims.

Sales revenue grew by almost 28% to N10.76 billion year-on-year at the end of the company’s third quarter operations in December 2014. Based on the current growth rate, sales revenue is projected at N15.2 billion for NNFM at the end of the current financial year. This will be a strong reversal of a two-year decline in turnover to a new peak, which will be a major feat accomplished in a tight market. Sales revenue has been declining from the peak of N12.67 billion the company earned in the 2011/12 financial year.

The impressive growth in sales revenue is reinforced by a favourable cost behaviour, which has helped profit performance. After tax profit amounted to N209 million at the end of the third quarter, which is a decline of 9.5% over the corresponding figure in the preceding year. Profit growth has slowed down drastically from N132 million the company reported in the first quarter and further from the N181 million in the second quarter.

Based on the growth rate in the third quarter, full year net profit is projected at N294 million for NNFM in the 2014/15 financial year. This will be a major advance of about 25% over the full year figure in the 2014 financial year. The company recorded a marginal improvement in profit in 2014 with which it sustained recovery for the second year from a loss of about N22 million in 2012. Its peak profit record is the N455 million it posted in 2012.

The strength of the company’s earnings performance rests on the improving sales revenue and benign cost behaviour. Cost of goods sold grew slightly below sales revenue at 26.8% compared to the 27.9% growth in turnover. That lifted gross profit by over 64% to N411 million. Gross profit margin rose from 2.9% to 3.8% over the review period.

Administrative expenses grew only marginally at 3% while selling/distribution cost dropped during the period. The company paid no interest expenses, as its balance sheet was entirely free of interest bearing debts. Its setback was other operating income, which fell by 76.5% to about N66 million, which was partly remedied by a rise of 170.6% in interest income.

Net profit margin has declined from 2.7% to 1.9% year-on-year at the end of the third quarter. This compares with a net profit margin of 2.0% at the end of the preceding financial year. This is nevertheless better than Flour Mill’s net profit margin of 1.3% at the end of the third quarter. NNFM’s advantage is its debt free balance sheet and therefore the absence of interest burden on the income statement.

The company earned N1.17 per share at the end of the third quarter, down from N1.30 in the corresponding period in 2013. Full year earnings per share is projected at N1.65 for NNFM at the end of the financial year. This will be an improvement from N1.31 the company earned in the preceding year but yet below its earnings per share record of N2.56 in 2011.

Major changes in the balance sheet include a drop of 35.3% in inventories to N1.02 billion, an upsurge of over 583% in trade and other receivables to N3.18 billion and a major advance of 228% in cash and bank balances to N1.72 billion. There was also an increase of over 300% in trade and other payables to N4.36 billion all against the closing figures in the preceding year.

The changes in the balance sheet resulted in a major improvement in the company’s cash flow position. Net cash generated from operating activities amounted to N1.36 billion against a net cash utilisation of about N55 million at the end of the last financial year. There was a net increase of almost N1.2 billion in cash balances against a net decrease of over N99 million over the same period.