High Forex losses, financial costs weaken earnings growth

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February 06, (THEWILL) – By far, Flour Mills of Nigeria Plc’s nine-month interim results for the period ended December 31, 2021 indicate impressive growth in both its upside and profit performance. Combined revenue for the three quarters soared 48.5% to N824.98 billion from N555.34 billion in the prior period. Profit After Tax (PAT) increased by 9.5% to N17.05 billion from N15.58 billion in the corresponding year.

However, the large, fast-moving consumer goods company is hemorrhaging foreign exchange losses and financial costs, which have remained significantly high since the corresponding period of 2020. While high foreign exchange losses are negatively impacting earnings of “net operating gains and losses”, the high financial cost reduces the company’s profitability. Indeed, both areas of negative performance could weaken a manufacturing company’s revenue and profitability growth in Nigeria’s harsh operating environment.

Flour Mills of Nigeria recorded foreign exchange losses of 11.62 billion naira for the reporting period, which is an improvement from the 14.55 billion naira recorded in the nine-month period of 2020 – the peak after 2017’s 2 billion naira. The figures for 2018 and 2019 were 810 million naira and 560 million naira respectively.

Moreover, the high financial costs do not seem to be diminishing: the figures have increased from 14 billion naira in the previous period of 2020 to 16.12 billion naira, an increase of 8%. The company’s northward trajectory of financial costs saw it pay N25.15 billion in the nine months of 2017, but saw a 34.2% drop in 2018 and 2019 when it posted N16.55 billion in the two years respectively.

The country’s leading integrated food and agribusiness recorded a remarkable turnover of N824.98 billion during the reporting period. This is the peak in five years from 2017 when it recorded a revenue performance of N427.5 billion. The figure fell to N400.64 billion and N423.48 billion in the nine months of 2018 and 2019 respectively. As a result, the company increased its turnover by 93% in five years; moreover, after surgical recovery from the 2020 COVID-19 pandemic.

Some analysts point to what they see as a deep inefficiency in the operations of Flour Mills of Nigeria, which is attributed to a company that seems “incredibly unable to deliver better margins”.

“These are impressive figures by any measure, especially in a country where the purchasing power of its citizens is declining due to rising inflation. However, when you decide to go below turnover, the story is different. You see an efficient and inefficient business,” Nairametrics analysts said.

Flour Mills of Nigeria is among the top 20 Fast Moving Consumer Goods Companies (FMCGs) listed on the Nigerian Stock Exchange, which have recorded significantly impressive performance in their 2021 half-year operations, well beyond industry expectations.

It should be recalled that companies in the FMCG sector were hit hard during the height of the COVID-19 outbreak in 2020. The land border closure for 15 months also took a toll on these companies, as many could not distribute or export their products. The supply of raw materials has also been seriously affected.

Earlier, the results of corporate operations in the first half of 2021 showed a rapid recovery. As if the economy singled them out for a special favor, major FMCG companies listed on the Nigerian Stock Exchange recorded a leap forward in their earnings and results. Their profitability hit a five-year high and above pre-COVID-19 levels in the first half of 2021, while their revenues also soared.

Flour Mills of Nigeria reported a 90% increase in profit to N15.5 billion in the first half of 2021 from N8.1 billion in the corresponding period of 2020. This is the highest profit high of any FMCG company during the review period. Additionally, the company recorded revenue of N450 billion during the period, an increase of 48% from N304.8 billion in the first half of 2020. The first half profit of the company was the highest in seven years. Its gross profit followed the same trend: from N43.51 billion to N60.01 billion, an increase of 38% in the first half of 2020 and the first half of 2021 respectively.

“Similar to the performance of recent quarters, our business was able to maintain a strong performance despite increasingly challenging terrain and uncertainties,” the company said in its first-half 2021 financial statements.

An important point in the FMCG company performance report was that they had fought a battle of diminishing returns since 2018 before the pandemic. Their sudden and rapid recovery creates prospects for operators and also for firms engaged in upstream integration.

Manufacturers in the milling industry have been taking steps to accelerate their pace of upstream integration lately. Flour Mills of Nigeria, for example, has invested in Thai Farms and other agricultural projects to grow feedstock for most of its processes.

High financing costs therefore signal high borrowing while foreign exchange losses are more related to the import of raw materials. When contacted to comment on the high regime of foreign exchange losses and financial costs despite active participation in the backward integration policy, the Director of Corporate Communications, Flour Mills of Nigeria, Mr. Samuel Iboroma, did not respond. But investors are worried about the company’s debt and operating costs.

“This year, despite double-digit revenue growth, Flour Mills’ legendary overhead and cost of sales consumed approximately 95% of its total revenue. It will be seen that as revenue increased, it replicated the same with operating expenses and direct costs respectively.

“The behemoth of a business is incredibly incapable of delivering better margins. It is stuck on single-digit operating margins; it needs to operate debt-free to satisfy minority shareholders,” Nairametrics analysts said.

Late last year, Flour Mills of Nigeria acquired a majority stake of approximately 71.7% in Honeywell Flour Mills Plc, a deal that initially sparked controversy following Ecobank Nigeria’s allegation that Honeywell had not repaid its loans with the bank. Flour Mills of Nigeria, however, assured its stakeholders that it did not breach any prevailing court orders in entering into the agreement.

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