Northern Nigeria Flour Mills: Cost saving may lift profit to new peak

Northern Nigeria Flour Mills [NNFM] is likely to achieve a new peak in profit in its current financial year ending March 2015. The flour milling company is converting an increased share of its revenue into profit, which has lifted its profit capacity for the current year. It is still facing revenue growth constraint, which has been the case over the past five years but major cost saving is expected to make a big difference in the company’s operating story this financial year.

Mr. Gert Kriek, NNFM’s Managing Director, is leading the company through a slow-paced recovery that may speed up this year. First quarter outing shows he is on a mission to grow profit from declining sales revenue. He has seen two years of revenue losses and has entered the third year with a further decline in sales revenue. A jump of 181% in after tax profit in the first quarter however compensates for the revenue losses.

Sales revenue went down by 9% to N3.13 billion year-on-year at the end of the company’s first quarter in June. Based on the growth pattern of the preceding year, sales revenue is projected at N10.26 billion for NNFM at the end of the current financial year. This will be a continuing decline in turnover for the third year running. Sales revenue has continued to decline from the peak of N12.67 billion the company earned in the 2011/12 financial year.

Revenue disappointment is over shadowed by cost cutting success that has lifted profit performance. After tax profit amounted to N132 million at the end of the first quarter. This is a high rise of 181% over the corresponding figure last year. It is already more than 56% of the full year profit figure in the preceding year.

Based on the growth rate in the first quarter, full year net profit is projected at N588 million for NNFM in the 2014/15 financial year. This will be a major advance of 152% over the full year figure in the preceding financial year. The company recorded a marginal improvement in profit in 2014 with which it sustained recovery for the second year from a loss of about N22 million in 2012. Its peak profit record is the N455million it posted in 2012.

The company has built the significantly improved profit capacity all from cost saving. Cost of goods sold declined ahead of sales revenue at 12.1% compared to 9% fall in turnover. That lifted gross profit by over 46% to a little below N206 million. Gross profit margin rose from 4.1% to 6.6% over the review period.

The biggest cost saving came from administrative expenses, which dropped by 22.2% to N69.2 million during the review period. Selling/distribution cost was flat and finance cost was insignificant, as the company maintained a net interest income position. Other operating income grew by 175.7% to N36.4 million to reinforce the favourable cost behaviour.

Net profit margin has improved from 1.3% in the corresponding period last year to 4.2% at the end of June. This is a major improvement also from the net profit margin of 2.0% at the end of the preceding financial year. Over the same period, Flour Mills of Nigeria lost profit margin from 4.1% to 3.4%. NNFM’s strength to grow profit lies in its debt free balance sheet and therefore the absence of interest burden on the income statement.

The company earned 74 kobo per share at the end of the first quarter against 26 kobo in the corresponding period last year. Full year earnings per share is projected at N3.30 for NNFM at the end of the financial year. This will be a major improvement from N1.31 the company earned in the preceding year. This will be a new peak in earnings per share, as the company has since not been able to match its record of N2.56 achieved in 2011.

Major changes in the balance sheet include a drop of 13.4% in inventories to N1.37 billion, a rise of 184.4% in cash and bank balances to N1.50 billion and an increase of 48.7% in trade and other payables to N1.6 billion all against the closing figures in the preceding year.

The changes in the balance sheet resulted in a major improvement in the company’s cash flow position. Net cash generated from operating activities rose from about N327 million to over N977 million during the review period. Net cash used in investing and financing activities dropped to insignificant numbers during the period. That led to a net increase of N964 million in cash balances against a net decrease of over N89 million at the end of the last financial year.

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