High interest costs mean Flour Mills FY profit down 28%

Flour Mills Nigeria (FMN), the country’s largest miller by market value, had its 2013 profit eroded by high interest costs as a result of capital expenditure incurred in its aggressive expansion across a wider spectrum.

For the full-year 2013 (end March), the company’s net income fell by 28.72 percent to N5.36 billion, compared with N7.54 billion in the same period of the prior year FY 2013 (ended March), while revenues were up by 10.01 percent to N332.14 billion.

Earnings per share (EPS) decreased by 34.75 percent to 182k in 2014, from 282k in 2013

Finance cost in the review period surged by 41.20 percent to N16.10 billion from N11.40 billion at the end of last year.

“Pending management’s comments on the results, we note that increased leverage taken to fund FMN’s expansion drive and new business ventures such as sugar, pasta, edible oils and rice was the major factor behind the elevated interest expense,” said FBN Capital, a research and investment firm, in a recent report.

“This drove the rise in FMN’s debt-to-capital ratio from around 61 percent in FY 2013 (end-March) to about 65 percent in FY 2014,” said the FBN analysts.

The company also has plans in the pipeline to invest close to $1 billion over the next three to five years to fund growth and expansion.

Based on data compiled by BusinessDay, the borrowing cost including unsecured fix rate bond spiked by 18.38 percent to N151.37 billion from N128.2 billion in 2013.

FMN is in an advantageous position as analysts see a cornucopia of growth opportunities spurred by rising consumption, population and an expanding middle-class with improved purchasing power.

Because the company produces or sells intermediate products such as the ones needed by the regular middle-class, the future is stellar for the Nigerian miller to further consolidate its share of the market.

The company’s share price closed at N77.67 on August 3, 2014, on the floor of the exchange, while market capitalisation was N185.30 billion.

Gross margin moved to 13.14 percent in FY 2014, from 12.54 percent in FY 2013 (ended March), while gross profit surged by 15.20 percent to N43.65 billion.

“We believe that a 3 percent q/q decline in wheat prices during the Q4 (end-March) quarter was an important factor behind the significant gross margin expansion in Q4,” said FBN Capital in the report.

Net margin, a measure of efficiency of profitability, declined to 1.61 percent in 2014, as against 2.50 percent due to high cost margin and also an increase of 10.61 percent in administrative and distribution expenses.

The low margin of 1.60 percent means the company’s ability to translate top-line performance to bottom-line growth is slow and unimpressive.

Total assets were up by 6.12 percent to N297.25 billion in 2014 compared with N280.13 billion in 2013.

There are likelihood that FMN and other firms in the FMCG sector have a slow first quarter due to such factors as the rainy seasons, insurgency in the North that may undermine their businesses and also possible rise in the price of wheat at the international markets.

“In terms of outlook for prices of wheat which forms a significant proportion of FMN’s key inputs, Bloomberg consensus forecasts indicate that prices are expected to increase marginally by around 4 percent through Q4 2014 (end-December) and by around 7 percent through Q1 2015 (end-March), thereby posing some risks to FMN’s earnings,” said the report.

August 6, 2014; http://businessdayonline.com/2014/08/high-interest-costs-mean-flour-mills-fy-profit-down-28/#.U-GmamOds1k

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