February 06, (THEWILL) – From a distance, the interim nine-month results of Flour Mills of Nigeria Plc for the period ended December 31, 2021 point to an impressive growth in its up-line and bottom-line performance. Combined revenue of the three quarters soared by 48.5 per cent to N824.98 billion compared to N555.34 billion in the preceding period. Profit after tax (PAT) grew by 9.5 percent to N17.05 billion from N15.58 billion in the corresponding year.
However, the major fast-moving consumer goods firm is hemorrhaging in foreign exchange losses and finance costs, which have remained significantly high since the 2020 corresponding period. While the high foreign exchange losses impact adversely on the ‘Net Operating Gains and Losses’ result, the high finance cost trims the firm’s profitability. Effectively, the two areas of negative performance could debase the revenue and profitability growth of a manufacturing enterprise in Nigeria’s hostile operating environment.
Flour Mills of Nigeria posted N11.62 billion in foreign exchange losses for the reporting period, which is an improvement on the N14.55 billion recorded in the nine months period of 2020 – the peak after the N2 billion of 2017. The figures for 2018 and 2019 were N810 million and N560 million respectively.
Additionally, high finance costs seem not to be abating: The figures rose from N14 billion in the preceding period of 2020 to hit N16.12 billion, an upward jump of 8 percent. The northward trajectory in the company’s finance costs saw it pay N25.15 billion in the nine months of 2017, but recorded a 34.2 percent drop in 2018 and 2019 when it posted N16.55 billion in the two years respectively.
The nation’s foremost integrated food and agro-allied company recorded a remarkable revenue haul of N824.98 billion during the reporting period. This is the peak in five-years from 2017 when it posted a revenue performance of N427.5 billion. The figure dropped to N400.64 billion and N423.48 billion in nine months of 2018 and 2019 respectively. Consequently, the firm grew its revenue by 93 percent in five years; moreover, after the surgical recovery from the 2020 COVID-19 pandemic.
Some analysts point to what they consider deep inefficiency in the operations of Flour Mills of Nigeria, which is traced to a firm that appears ‘incredibly incapable of delivering better margins’.
“These are impressive top-line numbers by any stretch of measurement especially in a country where the purchasing power of its citizens is dwindling due to rising inflation. However, when you decide to go below top-line revenues, the story is different. You see a company that is efficient and being inefficient,” analysts at Nairametrics, said.
Flour Mills of Nigeria is among the 20 listed major Fast Moving Consumer Goods (FMCG) firms on the Nigerian Exchange, which recorded significantly impressive performance in their 2021 half year operations, far beyond industry expectations.
It would be recalled that firms in the FMCG sector were badly hit at the peak of the 2020 COVID-19 outbreak. The 15-months land border closure also had its toll on these companies as many could not distribute or export their products. Procurement of raw materials was also severely challenged.
Earlier, results of the firms’ H1 2021 operations showed a rapid recovery. As if the economy had singled them out for a special favour, the major FMCG firms listed on the Nigerian Exchange recorded a quantum leap in their up and bottom-lines. Their profitability hit a five-year high and above pre-COVID-19 levels in H1 2021 as their revenue also soared.
Flour Mills of Nigeria recorded a 90 percent profit increase to N15.5 billion in H1 2021, compared to N8.1 billion reported in the corresponding period of 2020. This is the highest profit by any FMCG firm during the review period. Additionally, the company posted revenue of N450 billion in the period, representing a 48 percent increase as against N304.8 billion in H1 2020. The company’s H1 profit was the highest in the last seven years. Its gross profit followed the same trend: from N43.51 billion to N60.01 billion, a rise of 38 percent in H1 2020 and H12021 respectively.
“Similar to the performance over the last few quarters, our business has been able to sustain the strong performance despite the increasingly difficult terrain and uncertainties,” the company said in its H1 2021 financials.
A significant point in the FMCG firms’ performance report was that they had been waging a battle of dwindling returns since 2018 before the pandemic. Their sudden and rapid recovery creates room for prospects among the operators and, also, the firms engaged in backward integration.
Manufacturers in the flour milling sector have been taking steps to increase their tempo of backward integration in recent times. Flour Mills of Nigeria, for instance, has invested in Thai Farms and other agricultural projects to cultivate raw materials for most of its processes.
The high finance costs, therefore, signal high borrowing while the foreign exchange losses relate more to the importation of raw materials. When contacted for comment on the high regime of foreign exchange losses and finance costs despite active participation in backward integration policy, the Corporate Communications Manager, Flour Mills of Nigeria, Mr Samuel Iboroma, did not respond. But investors raise concerns over the company’s debt and operating costs.
“This year, despite the double-digit growth in revenues, Flour Mills legendary overheads and cost of sales ate up about 95% of its entire revenue. It will appear that as it grew topline revenues, it replicated the same with operating expenses and direct cost respectively.
“The behemoth of a company is incredibly incapable of delivering better margins. It is stuck on single digit operating margins; it has to operate without debt to keep minority shareholders happy,” said analysts at Nairametrics.
Flour Mills of Nigeria late last year acquired a majority stake of about 71.7 percent in Honeywell Flour Mills Plc, a deal that initially sparked controversy following allegation by Ecobank Nigeria that Honeywell had not been servicing its loans with the bank. Flour Mills of Nigeria, however, assured its stakeholders that it did not breach any subsisting court order in striking the deal.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
