Flour Mills’ falling profit enters the fourth year

Flour Mills of Nigeria closed its first quarter operations with a drop in profit, which has extended the company’s three-year falling profit trend into the fourth year. The flour milling company’s profit has been dropping rapidly since its 2010/11 financial year. Growing revenue and declining profit has been the company’s earnings trends since 2011. This year, a drop in revenue has worsened the situation, giving an unimpressive earnings outlook for 2014/15.
Both revenue and profit went down in the first quarter operations of the company at the end of June. That leaves the possibilities of a continuing fall in profit and a turnaround open to the company this year. Loss of sales revenue seen in the first quarter could undercut profit capacity further while the current profit level can lead to a major improvement this year if maintained.
Shareholders are waiting for Mr. Paul Gbededo, the company’s group managing director/chief executive officer to answer a critical question on profit prospects this year. Will the company lose profit for the fourth year running or will it succeed in turning around the three-year falling trend? … isn’t likely to sound reassuring in the light of huge debts on his hands that are gulping the company’s revenue by way of interest expenses. First quarter results of the company’s operations leaves the full year profit prospects dicey.
The company’s profit capacity has been undermined by rising cost-income ratio and the inability to grow sales revenue this year has added further constraints. Rising cost is driven by rising interest expenses on the company’s large borrowings. The balance sheet is still swelling with new debts, which are needed anyway to meet serious cash flow constraints. Interest expenses are consequently claiming a growing proportion of sales revenue and this has kept slashing profit margin.
First quarter operations ended with a decline of 5.6% in sales revenue to N83.95 billion against the corresponding figure last year. Revenue growth is however expected to improve in the course of the financial year. Turnover is projected at N340 billion for Flour Mills at the end of its current financial year in March 2015. This will be a marginal increase of 2.4% in sales revenue over the preceding year’s turnover of N332.14 billion. It will also be a continuing slow down in the revenue growth rate from 59.6% in 2013 and 28.6% in the 2014 financial years respectively.
Flour Mills finished first quarter trading with an after tax profit of N2.82 billion, representing a drop of 22.3% over the corresponding period last year. The drop however obscures a possible turnaround for the company this year. The profit figure in the first quarter is already more than one-half of the preceding year’s full year profit. Will the company be able to maintain that level of profit in each of the remaining three quarters or will the year-on-year fall follow it to full year are the questions that presently define the uncertain earnings outlook for Flour Mills this year.
If the company maintains the current level of profit in each of the remaining three quarters, it is expected to close the year with an after tax profit in the region of N12 billion. This will be a big turnaround in profit performance for a company that has lost profit every year for the past three years. The company’s peak profit performance happened in the 2010/11 financial year – when it posted a net profit of N13.37 billion. A sustained drop brought it down to N5.37 billion at the end of the 2014 financial year in March.
Over the same period that profit dropped, sales revenue grew every year. The explanation is a sustained loss of profit margin, which has continued in the current financial year. The company’s operating cost structure has altered to the detriment of profit. Rising interest expenses is responsible. It rose by 75.5% in the first quarter year-on-year to N5.54 billion, claiming 6.6% of sales revenue compared with 3.5% in the corresponding period last year.
Rising interest expenses is spurred by rising balance sheet debts. Within the first three months of the current financial year, long-term debts have grown by 67.3% to N81.32 billion. Short-term loans also expanded by 51.7% to over N42 billion within the same period. There is a bank overdraft of close to N46 billion and a fixed rate bond amounting to over N14.33 billion.
Profit margin declined from 4.1% in the first quarter of last year to 3.4% at the end of June. It is nevertheless a big improvement from 1.6% at the end of the last financial year. In view of cash flow difficulties facing the company, the debt profile is more likely to increase than decline. It had a cash deficit of nearly N142 billion at the end of June.
Interest cost is therefore the major factor in the company’s profit performance this year. The company paid interest charges in excess of N16 billion last financial year, which could rise by close to 40% this year by first quarter growth rate. If this happens, the declining profit margin can be expected to continue to full year and the profit projection for the year may not be realised.
The company earned N1.08 per share in the first quarter, which is a decline from N1.42 in the same period last year. Based on the projected profit for the year, earnings per share is expected to come to N5.14 for Flour Mills at the end of the financial year. It earned N2.30 per share in the preceding year.


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