Flour Mills: In Dire Need of Equity Capital

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Going by the financial results of Four Mills of Nigeria Plc for the full year ended March 31, 2017, the company needs urgent equity capital injection to improve on its performance going forward, writes GoddyEgene

Flour Mills of Nigeria (FMN) Plc is one of the leading names in the Nigerian economy and one company that investors look up for regular dividends. Although the company’s name reflects milling of flour as its major preoccupation, FMN is a conglomerate that operates in the food, agro-allied, packaging, ports and property sectors. With a well diversified base, it is expected that the company would be able to navigate the challenging operating environment and always end up with improved performance. Although FMN has been a regular dividend paying company, its performance has been inhibited recently with high cost of finance due to its dependence on bank borrowings.

While the company recorded a growth of 53 per cent in revenue for the year ended March 31, 2017, its profit after tax (PAT) fell by 38 per cent. The decline in bottom-line notwithstanding, the directors recommended a dividend of 100 kobo per share, the same paid the previous year, apparently to maintain its track record as a regular dividend payer.
Full year results

According to the audited results of FMN released last week, the company posted a revenue of N524.5 billion, up by 53 per cent from N342.6 billion in 2016. The high cost of doing business that prevailed during the review period, shot up the cost of sale of sale (COS) by 50 per cent, which rose from N304.9 billion to N457.8 billion in 2017. A look at the COS indicated that the highest cost element that witnessed the highest rise was fuel, gas and oil, which soared from N8.591 billion in 2016 to N18.58 billion in 2017.
Although administrative expenses increased by 16 per cent from N15.84 billion to N18.419 billion, the expenses would have been lower if not for the jump in bank charges which increased by 148 per cent to N2.553 billion, from N909 million in 2016.

A further analysis of the figures showed that FMN recorded an operating profit of N41.439 billion in 2017, up from N9.052 billion in 2016. However, unlike 2016 when the company realised N23.7 billion as gains from the disposal of investment in a subsidiary, no such gain was recorded in 2017. Besides, finance cost rose by 45 per cent from N22.397 billion to N32.529 billion. Hence, the company’s PAT fell by 38 per cent to N8.836 billion, from N14.42 billion.

Market analysts said the board and management of FMN should urgently address the issue of huge borrowings that is eating deep into its revenue. Interest on bank loans and over draft increased from N21.2 billion to N29 billion. FMN’s overdraft rose from N16.46 billion to N49 billion, while total borrowings stood at N192.5 billion, from N148.8 billion in 2016. Out of the borrowings, about 78 per cent or N148.8 billion is current, which indicate high pressure because must strive to meet its debt repayment obligation.

Deferring the rights issue

FMN had seen the need to reduce its reliance on debt banks borrowings and applied for a Right 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 and would later raise the funds in three tranches.

The directors had said 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.
According to them, 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 be one other major reason for pushing the issue forward.
Analysts’ comments
Commenting on the results, analysts at FBN Quest said on a full year basis, sales grew by 53 per cent y/y to N524 billion, noting, however, that PBT and PAT declined by nine per cent and 38 per cent to N10.5 billion and N8.7 billion respectively.

“Similar to the trends in the Q4 quarter, the y/y declines in PBT and PAT were driven marked increases in interest expense and opex respectively. The company has proposed a dividend per share of N1.00 (flat y/y) which translates to a dividend yield of 3.7 per cent. The proposed dividend is around 30 per cent lower than our N1.43 forecast and 41 per cent lower than consensus. The dividend per share (DPS) translates to a dividend payout of around 30 per cent,” they said.
The analysts explained that in terms of the top-line, the foods business, which contributed around 80 per cent to sales grew by around 51 per cent on a full year basis.

“However, the agro-allied business, which accounts for around 15 per cent of sales grew faster, by 72 per cent. Pending comments from management, we believe that the top-line growth benefited slightly more from price increases as opposed to volume growth. We also believe that unit volumes, particularly those in the foods division benefitted from consumers down-trading to cheaper domestic brands,” they said.

Assessing the fourth quarter(Q4), which is from January to March, 2017, analysts at Cordros Capital said compared to the loss they expected, Q4 PBT of N179 million (vs. N1.5 billion in Q3) was reported.
According to them, a net operating gain of N10.3 billion (vs. N11.8 billion loss as at end-December, owing to FX gain of N7.54 billion) and a finance charge of N14.8 billion were the major surprises in the final quarter result.
They explained that revenue in Q4 grew by 70.5 per cent, the highest in all quarters of the year, but compared to the Oct-December period, revenue was almost flat.

“The food division remained resilient, growing by 50 per cent y/y and 41 per cent q/q. The introduction of new products, strong price increases, and the relatively less-cyclical demand for food-based products accounted for the impressive performance of this division. Also supporting the y/y top-line growth in Q4 was the packaging division, in continuation from the recovery in Q3. Management attributed the recent performance of this division to the slightly improved activities in the macro environment, but more importantly, to the performance of other divisions (accounting for up to 60 per cent of total demand) within the Group. Asides from Food and Packaging (although revenue contracted q/q), all other business divisions performed poorly in revenue terms during the review period,” they said.

According to Cordros Capital, the first negative surprise from the Q4 result was the 287 basis points (bps) y/y and 279 bps q/q declines in gross margin (GM) to 9.8 per cent, the lowest during the year.
“While noting possible pricing pressure, particularly in the agro-allied division (e.g the fertilizer market where the federal government was supplying at highly subsidised prices), we think the decline in GM may also be related to higher production cost.

Raw materials and packaging costs increased by 68 per cent y/y (although down 46 per cent q/q), and notably, the 352 per cent y/y and 48 per cent q/q increases in fuel, gas, and oil costs are not unrelated to the increase in diesel prices over the period. Gas supply to FNM’s Apapa factory area is yet to improve,” they said.
The analysts added that another negative surprise in Q4 was the 119 per cent q/q increase in finance charge to a quarterly record of N14.8 billion, contrary to their expectation of a slight reduction following the relatively high charge (N6.8 billion) incurred in Q3.

“We consider this worthy of note, considering that: FMN’s total debt only increased by N8 billion during the quarter; there was no material change in the interest rate environment, and the naira strengthened during the period, making the case for huge FX loss on the company’s cumulative $42 million loan unlikely,” they said.

The analysts added that operating expenses increased 74 per cent q/q to the year’s peak of N9.3 billion. According to them, while this conforms with FMN’s usually bloated opex in the final quarter, we note that the amount reported was below the N10.2 billion we had expected. The N836 million reported as other income was also above our estimated N551 million.”