Honeywell: Battling with Increasing Finance Cost, Others

Darasimi Adebisi
Honey Well Flour Mills Plc in its result and accounts for year ended March 31, 2021 recorded a significant increase in finance costs and cost of sales amid stronger growth in revenue.

The company was faced with hike in raw and packaging material consumed, coupled with high interest on borrowing and overdraft in the period under review.

Given the increase in production activities, challenges with foreign exchange and COVID-19 induced disruptions in global trade which affected the sourcing of raw and packaging materials, cost of sales grew by 41.13 per cent to N93.97 billion in year under review from N66.59 billion recorded in the previous financial year.

Drivers in cost of sales was N82.66billion raw and packaging materials consumed in 2021 from N57.24billion in 2020, while plant maintenance and power cost rose by 25per cent to N3.7billion in 2021 from N2.96billion in 2020.

Also, finance cost rose by 44per cent to close 2021 financial year at N6.07billion from N4.23 billion recorded in 2020.
With the growth in cost of sales, Gross profit increased to N15.62billion in 2021, about 13 per cent increase from N13.86billion in 2020.

The effect of hike in cost of sales and finance cost contributed to the company’s Profit margin that dropped by 0.14 basis points to 1.44 per cent in 2021 from 1.58 per cent in 2020 as gross profit margin dropped by nearly three basis points to 14.26 per cent in 2021 from 17.23 per cent recorded in 2020.

Profit Margin
Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money. It represents what percentage of revenue has turned into profit.
Meanwhile, the company was able to drive revenue in the period following increased consumers’ demand amid the full reopening of businesses and aggressive price increases across its product lines.
A breakdown of the company’s revenue by geographical location showed that the bulk of the company’s revenue was generated in the Nigerian market.

Revenue for the period rose by Revenue 36.2 per cent to N109.59billion in 2021 from N80.45billion recorded in 2020, which Apapa factory of Honey Well Flour Mills contributed massively to its revenue, followed by Sagamu.
Three factories located at Ikeja, Sagamu and Apapa identify the company’s business operating segments.
The Ikeja segment manufactures Noodles; Sagamu segment manufactures Pasta while Apapa segment manufactures Flour, Semo, What meal, Brown flour and Baker’s delight flour.

However, the 2021 financial of Honey Well Flour mills showed that its Apapa factory contributed to revenue and operating income, while Ikeja contribution to revenue and operating income dropped.

The Apapa factory contributed 77.6per cent of the total revenue of the company and its revenue grew by 31.24 per cent to N85.02 billion from N64.78billion in 2020 which was slower than the growth in the Sagamu factory, which had the highest Y-o-Y growth of 105.4 per cent in revenue to N19.08billion in 2021 from N9.29billion in 2020.
The Ikeja factory contributed 5.01per cent to total revenue and recorded a -13.81per cent decline in revenue in 2021 to N5.49 billion from N6.37 billion recorded in 2020.

As regards operating expenses, Honey Well Flour Mills recorded 4.3 per cent decline to N8.12billion in 2021 as against N8.48billion in 2020, attributable to 8.2 per cent drop in selling and distribution expenses to N5.54billion in 2021 from N6.04billion in 2020.
In all, Honey Well Flour Mills reported operating profit of 39 per cent to N7.65billion in 2021 from N39.08billion recorded in 2020.

The company thus, reported profit before tax (PBT) increase of 24.13 per cent from N1.27billion in 2020 to N1.58billion in 2021.
In 2019, Honey Well Flour Mills reported a PBT significantly fell Y-o-Y by 87.53 per cent, but saw a rebound in 2020, although not as high as 2017 levels.

For 2020, the company’s profit after tax (PAT) grew faster than profit before tax (PBT), PAT grew Y-o-Y by +73.08per cent to N1.13billion in 2021 from N650.49million recorded in 2020, because of a 27.25 per cent decline in tax and despite a 69.70per cent increase in Police Trust Fund Levy.

The Flour processing company, thus, proposed dividend as the management sustained its return on investment to shareholders as a move to boost confidence.
In 2021 financial year, the management proposed dividend of N0.07 in 2021 from N0.04 proposed in 2020.

Balance Sheet Position
The balance sheet size position of Honey Well Flour Mills maintained marginal increase driven by growth in cash & cash equivalent that closed 2021 at N20.3billion from N12.3billion in 2020.
The company recorded about four per cent increase in total assets to N147.39billion in 2021 from N142.26billion recorded in 2020.

Non-current assets dropped by nearly four per cent to N101.32billion in 2021 from N105.33billion in 2020, while current assets grew significantly by 24.5 per cent to n45.94billion in 2021 from n36.89billion in 2020.
On-current liabilities dropped to N27.5billion in 2021 from N3.46billion in 2020 as long term borrowing closed 2021 at N22.5billion from N26,77billion recorded in 2020.

Current liabilities however grew by 15.5 per cent to N61.94billion in 2021 from N53.64billion in 2020 to position the company’s total liabilities at N89.43billion in 2021 from N85.1 billion in 2020.
The breakdown of total debt showed that the company’s current debt rose by +20.36per cent while its non-current debt fell by -15.8 per cent.

A review of the 2021 financial statement of the company, showed that loans from First Bank of Nigeria Limited comprised 45.98per cent of the company’s total non-current debt, while direct interventions from the Central Bank of Nigeria (CBN) and Bank of Industry contributed 0.55per cent and 10.22per cent of the miller’s loans.
Loans from the Real Sector Support Fund (RSSF) under the CBN through Polaris Bank and Fidelity Bank comprised 15.52per cent and 27.72per cent respectively.

Loan Obtained
A term loan obtained January 2017 from First Bank of Nigeria limited was to ease the company’s cash flow. The facility has a restricted tenor of 6 years, quarterly repayment of principal and interest, and interest rate of nine per annum.

According to 2021 reports, the loan from BOI was granted to the company to finance the new pasta factory located at Sagamu.
The loan has a restructured tenor extended to February 2023, with 12 months moratorium on principal repayment between January and December 2018. The facility is domiciled with Polaris bank Limited.

In addition to balance sheet position, total equity appreciated by 1.4per cent to N57.97billion in 2021 from N57.36billion in 2020.
The flour maker’s liquidity also improved, despite an increase in the short-term debt of the company.

The overall liquidity of the Noodles maker improved in FY2021; the liquidity ratio rose to 31.17per cent in 2021 as against 25.93 per cent in 2020. The company recorded its highest liquidity ratio in 2021 while its lowest ratio was posted in 2017.

The 2021 result of the company showed an improvement in its current ratio, from 0.69 in 2020 to 0.74 in FY2021, although analysts see a current ratio of 2.1 preferrable and indicative of more stable liquidity.

The improvement in Honey Well Flour Mills current ratio was attributable to a 24.52per cent rise in current assets. In 2018, Honeywell Flour mills recorded its highest current ratio of 0.77 while the lowest ratio was seen in 2017.


Honeywell Flour Mills had to trudge through a tough period that Nigerian businesses faced over the past year, especially with COVID-19, challenges with foreign exchange, infrastructural issues, and other factors.
The company also had to come to terms with an economy where real disposable income has continued to drop amid double-digit inflation that is taking toll on purchasing power.

Looking ahead, the company would need to reduce its vulnerability to operating stocks by either increasing equity (which would reduce investor’s equity returns) or continue to force down debt (which would reduce corporate leverage but also reduce equity return).
On a positive note, there is evidence that the company has been steadily improving on a number of key ratios lately.
The Managing Director, Honeywell Flour Mills, Lanre Jaiyeola in a statement on the 2021 financial results, said: “In an extremely challenging year caused by unprecedented global disruptions and uncertainties, we achieved 36 per cent revenue growth and record-breaking success through sheer grit and doggedness of our workforce.

“We worked collaboratively towards the execution of our goals; improved production and cost optimisation, guided by a clear strategy and common purpose. We remain committed to ensuring the supply of affordable nutritious food products to Nigerians, and we continue to assure our shareholders of long-term profitable returns from Honeywell Flour Mills Plc.”
According to the company, the future of its business would be shaped by a continued investment in innovative product development, advanced technology infrastructure and operational efficiency.

This is evidenced by the efficient utilization of its world-class factory in Sagamu, Ogun State which boasts an annual Pasta production capacity of 138,600 Metric Tonnes and contributed over N19 billion to the company’s overall revenue in the 2021 financial year, its second year of operations.

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