Tuesday, July 10, 2018 01:35 PM / ARM Research
Consequent to the release of its audited FY 18 results on the 2nd of July (See report: Flourmill – A loss run saved by tax credit), Flour Mills of Nigeria (Flourmill) hosted a conference call last week Thursday. Specific comments were made about volumes, the pricing environment, naira impact, borrowings, and finance charges. Please find below key discussion points;
Management attributed the record high revenue (+3.5% YoY to N542.7 billion) to volume growth and better product mix, as there was no increase in product prices over the 2018 fiscal year. According to management, volume growth reflected improved route-to-market and increased advertising particularly for its consumer products. Regarding the 14% YoY decline in revenue in the fourth quarter (Jan - Mar 2018), management mentioned that it was majorly due to slowdown in the demand for wheat flour compared to 2018 as well as soft demand for products within its agro-allied segment. Management further mentioned that they have begun to see improvement in demand and thus, expect a turnaround in subsequent quarters.
According to management, the steady gross margin of 12.7% (FY 17: 12.7%) was due to its ability to sustain sourcing of raw materials at lower prices coupled with local aggregation of raw materials (maize and soyabean)— which were previously imported. With regard its gross margin for its agro-allied business, which dipped to 1.2% (vs. 8.4% as at FY 17), management explained that it was the result of losses incurred related to Sunti sugar cane plant as well as slower than expected start up for ROM oil1
According to management, Sunti sugar plant was commissioned in March 2018 and is yet to achieve breakeven capacity hence, the losses that was reported. On ROM oil, management stated that it has reviewed its manufacturing, sourcing and route-to-market strategy and expects an improvement in gross profit from the division.
Net operating gains
Management attributed net-operating gains of N5.9 billion (vs. net operating loss of N1.5 billion) to FX exchange gains (N1.2 billion) and recognition of deferred income (N2.2 billion) from the difference between the below market rate on government loans and commercial interest rates. On deferred income, according to additional information provided in the company’s financial statements, loans obtained at below-market interest rate2 were recorded at their fair value at inception using the appropriate market rate at date of drawdown while the benefit of the below-market rate was treated as government grants and included in deferred income. The deferred income is recognized in the income statement over the tenor of the loan.
Management attributed the high finance cost of N32.7 billion to elevated interest rates in the first half of its 2018 financial year (Apr – Sept 2017). However, in the fourth quarter (Jan – Mar 2018), management explained that the company benefitted from currently lower interest rates and has being actively substituting short-term loans and borrowings with commercial papers at prevailing low interest rates, which now accounts for 43% of its short-term loans and borrowings. This mainly drove the 15.2% QoQ moderation in finance cost to N7.2 billion over the final quarter.
Short-term loans and borrowings
The 36% YoY and 24% QoQ reduction in short-term debts to N153.2 billion stemmed from the redemption of some of its bank debts with 75% of the proceeds (N29 billion) from the rights issue—which was successfully completed in March 2018. Management explained that the impact of the rights issue, in terms of lower finance expense, will be more pronounced in its 2019 financial year.