Currency volatility, high input cost crimp Flour Mills Nigeria growth

NIGERIA – The slump in the naira and a rise in the price of wheat have crimped the profit of Flour Mills Nigeria plc (FMN), analysis of the financial statement shows.

For the nine months ended December 2014, the company’s profit after tax (PAT) reduced by 44.52 percent to N3.29 billion from N5.93 billion the same period of the corresponding year (9 months December) 2013, while sales increased by 1.70 percent to N244.28 billion.

“Pending comments from management, we believe the significant contraction in gross margin was most likely driven by the 10 percent rise in wheat prices through the end-December quarter as well as the 8 percent devaluation of the naira,” said Tunde Abidoye, analysts at FBN Capital in a February 9 note to BusinessDay.

The naira has come under pressure, losing about 4.5 percent of its value against the dollar this year, because of declining crude prices, which fell by almost half in 2014.

The devaluation of the currency, which has resulted in exchange rate volatility, is spiralling material costs of millers in Africa largest economy as wheat, a major material components in the manufacture of flour, is imported.

This has also impacted negatively on FMN’s ability to control direct costs attributable to projects as gross profit fell by 8.41 percent to N22.31 billion from N24.36 billion the preceding year.

Also, most profits were swallowed by huge input costs as cost of sales margin increased was as high as 90.86 percent, which mean for every N1 made in sales, the company spends N0.90 on input costs.

Net margin, a measure of efficiency and profitability, reduced to 1.34 percent from 2.43 percent the preceding year.

Analysts also attributed the sag in profits to huge borrowing costs incurred by the company as it borrowed money from banks for the purpose of financing expansion. They also added that the hike in interest rate by the central bank has spiralled interest on loans and a more hard time lies ahead for the company if these loans are dollar denominated.

“FMN’s increased leverage during the quarter (+20% q/q), coupled with a rise in interest rates, were the major factors underpinning the 37 percent y/y increase in finance charges,” according to an analyst.

Based on data gathered by BusinessDay, the proportion of debt in the capital structure of the firm spiked as debt to equity ratio increased to 239.72 percent from 181.85 percent the preceding year.

It also means over 200 percent of the company’s balance-sheet is funded by lenders. Total borrowing costs jumped by 26.33 percent to N191.72 billion in the review period as against N151.96 billion the preceding year.

Finance costs were up by 45.21 percent to N15.34 billion in 2014 compared with N10.57 billion the precede year.

Analysts also said pressure on consumer wallets that affect consumption, bad roads that spike distribution costs and insecurity in the North part of the country also contribute to the debilitating growth of Nigeria millers. FMN’s share price closed at N32.99 at the exchange while market capitalisation was N86.57 billion.

February 10, 2015; http://businessdayonline.com/2015/02/currency-volatility-high-input-cost-crimp-flour-mills-nigeria-growth/#.VNrZMS6-PIU

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