Dangote Flour Mills: rising losses and shrinking balance sheet

Dangote Flour Mills has been facing a trend of rapidly falling profit, which has intensified into one of rising losses. Losses began to hit the balance sheet of the flour milling company last year and by the end of September, the company’s net assets had shrunk by more than 28% from the year’s opening figure. Losses more than doubled over the next six months to March this year, shrinking the equity resources of the company further by 36%.

By the end of the company’s second quarter in March, the stake of shareholders amounted to less than 46% of the opening figure in 2013. The company has in place a board and management given the responsibility to build wealth for shareholders. The management headed by Aliko Dangote complains of competitive hostility, consumer resistance and lost markets in the northern part of the country depriving it of volume growth. These conditions are fundamentally constraining, holding no promise that the trend of rising losses and shrinking wealth of shareholders will end any time soon.

The company’s management said the fundamental problem of the business is over capacity in the flour-milling sector. The resulting competitive price reductions are constricting margins and consumer price resistance has led to volume declines. Volume declines against forced down prices therefore explain the inability of the company to grow sales revenue in the second quarter.

At the end of the second quarter in March, sales revenue went down slightly over the three-month figure in March last year. Losses grew during the period compared with last year’s performance. Declining sales revenue and shrinking margins show an unsustainable cost-revenue relationship that paints a gloomy picture for the business in the future.

At the end of the second quarter, turnover stood at N18.58 billion, which is a decline of 2.8% over the three-month figure in 2013. If the second quarter growth rate is maintained, sales revenue is projected at N38.4 billion for Dangote Flour Mills in 2014. This will be an increase of 28.2% over the sales revenue figure of N29.96 billion the company reported at the end of September 2013.

Sales revenue slipped in 2012 from the 2011 peak of N67.60 billion and fell by about 55% in 2013 to the lowest figure in many years. This contrasts from Flour Mills’ a growth of nearly 60% in sales revenue in 2013 and a sustained growth over the past five years. Dangote Flour Mills was compelled to effect a price reduction last December in response to overall price markdowns in the market, which has improved volume delivery by 33%. This may lead to a stronger growth in turnover in the company’s second half at the expense of margins however.

 

 

The company closed the second quarter with a net loss of N4.14 billion, which is 124.5% higher than the corresponding loss figure in 2013. It ended last year’s operations with a net loss of N7.22 billion, after two years of rapid profit drops. It recorded a drop of 50% in after tax profit in 2011 to N2.76 billion, which fell again by 83% to N470 million in 2012.

The shift from falling profit to rising losses points to adverse cost-revenue developments that need to be addressed fundamentally. Sales revenue is almost at par with cost of sales, leaving no reasonable margin for any other expenses. At the end of September last year, cost of goods sold claimed 99.8% of turnover. There is some improvement in the current year with cost of sales at N17.83 billion in the second quarter representing 96% of the turnover figure of N18.58 billion.

When revenue is insufficient to meet operating expenses, such costs have to be met from the capital account and this is what has been happening for Dangote Flour Mills since last year. Effectively, the distribution/administrative cost of N3.33 billion in the second quarter and the interest expense of N1.44 billion were paid from the capital account through the loss of N4.27 billion transferred to retained earnings. The company’s equity base has been dropping from the 2013 opening figure of N25.32 billion to N18.11 billion is September 2013 and further to N11.58 billion at the end of the second quarter.

Rising losses are leading to a rapidly shrinking balance sheet for Dangote Flour Mills. Non-current assets have dropped by 30% and current assets are down by 28.7% year-on-year at the end of March. The drop in current assets is led by inventories, which dropped by 56.3% and trade debtors and other receivables, which fell by about 32% during the same period. Cash and bank balances are however up by 22% and short-term loans have risen by 63.5% over the review period.

Non-current liabilities dropped by 43.5% while current liabilities went down by 7.7% year-on-year. The drop in non-current liabilities was led by a reduction of 41.6% in long-term borrowings, which stood at N7.1 billion at the end of the second quarter. Net assets fell by 51.5% over the last one year to March 2014.

The company earned –N85.38 per share at the end of the second quarter compared to -N46.89 at the end of March last year. It had earned –N158.66 at the end of September last year. It is imperative for management to undertake a complete business overhaul with a view to creating a room to grow wealth for shareholders, which is presently missing.

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