Flour Mills Hit By Soaring Finance Costs As Profit Slumps

F lour Mills Plc, the largest miller by market value, saw profits fall by 38.76 per cent for the year ended March 2017, hurt by soaring interest on loans and rising production costs. For the year ended 31 March of 2017, Flour Mills net income was N8.83 billion as against N14.42 billion as at March 2016. Sales however increased by 53.05 per cent to N524.46 billion as the company continues to benefit from slightly more from price increases as opposed to volume growth.

Spiralling interest expenses are gradually eroding the thin profit margins of the consumer giant as interest coverage ratio of 1.28 times is below the 1.50 times industry average. This means the company’s ability to use available earnings to cover interest expenses is shaky. Flour Mills’ finance costs rose by 45.24 per cent to N32.58 billion as against N22.39 billion the previous year. The Nigerian consumer goods giant is highly geared, which means it has a large proportion of debt in its capital structure as debt to equity ratios increased to 187.80 per cent in year end March 2017 from 155.38 per cent the previous year.

Similarly, total long term borrowings in the balance sheet stood at N192.54 billion in the period under review, which represents a 29.39 per cent increase from last year’s figure of N148.83 billion. Analysts attribute the jump in borrowings to financing higher cost of imports as prepayment and deposit for import letter of credit pile up.

The company booked foreign exchange (FX) losses of N5.74 billion on the back of FX challenges as analysts attribute the exceptional item to trade payables. Flour Mills and other consumer goods firms are struggling with surging costs and slim margins caused by a dollar shortage and a weak currency as the country slipped into its first recession in 25 years.

Apart from the impact of a naira devaluation on raw materials, manufacturers suffered higher energy costs incurred in running factories as gas supply lingered in the period under review. As a result of the aforementioned monumental challenges, Flour Mills’ cost of sales increased by 50.18 per cent to N457.77 billion as at year March 2017, more than double May’s inflation figure of 16.20 per cent. The Nigerian consumer goods giant’s net margin, a measure of efficiency, fell to 1.68 percent in the period un der review from 4.21 percent as at the end of March 2016. However, Flour Mills’ Earnings Before interest and Taxation (EBIT) spiked by 360.44 per cent to N41.44 billion but rising finance costs hindered the growth from translating to an uptick in net income.

There is light at the light of the tunnel for consumer goods firms as the new foreign exchange window introduced by the central bank has ease liquidity in the system as evidenced in the latest Purchasing Managers Index (PMI). The Purchasing Managers Index (PMI) released by the Central Bank of Nigeria (CBN) on Friday showed that expansion in the manufacturing sector continued for the third straight month on account of policy changes in the foreign exchange market and ease of doing business.

The manufacturing PMI for June came in 0.4 index point higher at 52.9 index point’s level relative 52.5 index point in the preceding month. The report showed new orders, employment and raw materials inventories growing at a faster rate; Production level growing at a slower rate; and supplier delivery time growing from contraction, according to a recent report by CSL Research Limited.

The IMF had predicted that the Nigerian economy would grow by 0.8 percent this year, citing recovery in oil production, continued growth in agriculture, and higher public investment as catalysts. These PMI figures are also a sign of improvement in the labour market. Flour Mills’ share price closed at N26.97 as at close of trading on Tuesday, valuing the company at N67.25 billion. (BusinessDay)

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