Goddy Egene writes that the nine months results of Four Mills of Nigeria Plc to December 31, 2016, showed how high financing and operating costs continued to impact on the company’s bottom line
Flour Mills of Nigeria Plc (FMN) has suffered significant reduction in revenue and profitability in recent times due to high cost of doing business. While all manufacturing firms groan under the negative impact of poor infrastructure, rising inflation, poor energy supply, some are worst hit due to their heavy reliance on borrowings to finance their operations.
FMN is one of such firms whose performances are affected by high costs of borrowings. Although FMN recorded an impressive growth in revenue for the nine months ended December 31, 2016, high financing and other operating costs have, again, depressed its bottom-line.
Nine months results
The unaudited results posted by FMN indicated a revenue of N389.94 billion in 2016, showing a growth of 47 per cent from N263.7 billion in the corresponding period of 2015. Cost of sales rose from N235.9 billion to n336 billion, just as sales and distribution expenses increased from N3.9 billion to N4.4 billion. Administrative expenses similarly rose from N8.9 billion to N10 billion in 2016.
Profit before tax (PBT) fell from N19.7 billion to N10.2 billion, showing a decline of 48 per cent, while profit after tax (PAT) fell by a higher margin of 61 per cent from N19 billion to N7.4 billion in 2016. The company blamed the decline partly on foreign exchange loss. Has huge borrowings standing at about N190 billion as at December 31, 2016. In an apparent move to reduce the reliance on debt financing that the company planned to raise N40 billion via a Rights Issue.
The company got the approval of shareholders to offering 1.09 billion ordinary shares of 50 kobo each to existing shareholders at N27.50 per share last year.
Deferred Rights Issue
However, considering the bearish nature of the equities market that affected the share price of FMN, the company had to defer the rights issue
Directors of the company said they decided to put the right issue on hold for now and will later raise the funds in three tranches.
According to the directors, given the economic headwinds, they decided to undertake the Rights Issue through a Shelf Programme (a situation whereby securities are sold over a period of time) to enable the company raise the required funds in several transactions over three year period.
The directors said they have already registered a N40 billion Shelf Programme with the Securities and Exchange Commission (SEC), adding that they would continue to assess the economic climate to determine the most appropriate time to launch the first tranche.
Although, the directors cited the current economic situation for the deferring the Rights Issue, market sources said investor apathy could not also be ruled out.
THISDAY had reported that some of the shareholders were not willing to take up their rights, saying they were yet to get value for the Rights Issue the company made in 2011. According to them, they were not encouraged to stake their funds in the proposed Rights Issue.
Some of the shareholders had said since the last Rights Issue of 2011 at N62 per share, the value of shares has continued to dip a situation that persisted.
The company’s bottom-line has been affected by huge interest charges paid on bank borrowings. For instance, the company paid a total of N21 billion as interests on bank loans and overdrafts for the year ended March 31, 2016, showing a jump of 33 per cent above the N15.9 billion paid in the previous year.
The Chairman of FMN, Mr. John Coumantaros, had said the proceeds from the Rights Issue would help the company reduce its debt burden, lower its interest charges as well as to augment its working capital.
Analysts’ comments
Analysing the results, analysts at Meristem Securities Research said in spite of the subsisting macro-economic headwinds plaguing businesses in Nigeria, FMN grew its nine months revenue by 47.89 per cent to N389.94 billion from N263.68 billion in the prior year.
According to the analysts, the growth in revenue was primarily due to 30 per cent to 40 per cent price increases across its product lines, which translated into YoY growths across its business segments as follows: Food: 50.81 per cent, Agro-allied: 40.54 per cent, Packaging: 35.77 per cent, Port operations & Logistics: 54.46 per cent, Real estate and others: 52.98 per cent in the period.
“Similarly, for Q3:2017 standalone, the revenue grew by 56.38 per cent (vs 9.34 per cent growth in 2016). We expect the current trend in revenue to be sustained, given the company’s renewed growth strategy, the acquisition of the remaining 25% equity into Thai Farm International Ltd (cassava processing) and expanded product portfolio, to bode well for the company. Furthermore, we believe that the company’s route–to-market strategy amongst other factors will continue to support the company’s top-line growth. We therefore forecast FY2017 revenue of N518.28 billion, implying an increase of 51.28 per cent,” the analysts said.
Aggressive cost management strategy
The company’s cost of sales increased at a slower pace relative to revenue, as the cost to sales ratio pared by 3.22 per cent to 86.28 per cent from 89.50 per cent in the prior year.
Similarly, operating expenses (OPEX) ratio contracted by 1.19 per cent to 3.71 per cent (vs. 4.90 per cent in 2015). According to management, despite increase in energy cost (gas and diesel) for power generation in the period, the company’s backward integration drive (maize, cassava, soya bean, sugar and sorghum), cushioned the impact of these rising costs on earnings.
“Also, we underscore that 95 per cent of the company’s revenue in the period was from the food and agro-allied segment where high input costs can be easily passed on to consumers, hence, the high cost was largely offset by increase in selling prices in the period. To this end, we predict relatively lower cost-to-sale and OPEX ratios of 86.80 per cent and 3.75 per cent (vs. 89.02 per cent and 6.09 per cent in FY2016) respectively,” they said.
FX loss/financing cost pressure
The company’s finance cost continued its upward trend, as the line item rose by 6.97 per cent to N17.7 billion in the period, however, at a slower pace. This emphasises the company’s determination to minimise its debt exposure going forward. Earlier in the year, the company issued series 8, 9, and 10 of its commercial paper, raising N100 billion for financing its working capital. Also, the company posted a foreign exchange loss of N13.26 billion (vs.N5.96 billion for the same period of the prior year).
Consequently, PBT and PAT contracted by 47.97 per cent and 61.05 per cent, to N10.29 billion and N7.40 billion respectively.
“Going forward, we expect the company’s growth drive and its aggressive cost management strategies to buoy their bottom-line. Hence, we forecast a FY2017 earnings of N7.57 billion, representing a -47.48 YoY growth from prior year. We valued FMN using a blend of absolute and relative valuation methodologies. Having evaluated our initial expectations regarding the company’s revamped business strategy and operational efficiencies, we arrived at a target price of N23.64, implying an upside of 32.79 per cent from the current market price of N17.80, therefore we recommend a “BUY”.
