Flour Mills: Efficiently Inefficient – Nairametrics
There is an eighty percent chance that while you are reading this article you are consuming a product sold by Flour Mills Nigeria Plc.
It could be pasta or noodles, bread flour or one of your favorite pastries, vegetable oil used for your beloved fries, or its sugar for your sweet craving, not to mention its Semovita, on which many rely to quench their hunger after a hard day’s work. As Flour Mills will say, they are “feeding the Nation, on a daily basis”, a statement with which it is difficult to disagree. We wish we could say the same for returns on investments.
Indeed, while Flour Mills excels at feeding the nation every day, they fail to deliver returns to shareholders every year. In its latest third quarter results for the period ending December 2021, the company recorded monster revenue of N302.1 billion, the highest we have seen of any quarter since we started. track the company’s results that go back about a decade. Combined with the first and second quarters, total revenue soared 48.5% to N824.98 billion.
Its entire revenue segment also appears to be growing well. Its food division, which includes sales from its flour milling, pasta and noodles business, generated revenue of N534.4 billion, up 55.3% year-on-year. The Agro-Allied division, which includes animal husbandry, production of animal feed, sale of fertilizers, edible oil, agriculture and other agro-allied activities, generated a turnover of business of 157.1 billion naira up 48.9%. The sugar value chain also recorded impressive double-digit growth, adding N107.9 billion to revenues up 19.6%. It’s either that Nigerians are eating more than ever or they are paying more for the same amount of food.
These are impressive numbers by any measure, especially in a country where the purchasing power of its citizens is declining due to rising inflation. However, when you decide to go below turnover, the story is different. You see an efficient and inefficient business.
This year, despite its double-digit revenue growth, Flour Mills’ legendary overhead and cost of sales absorbed approximately 95% of its total revenue. It will be seen that as revenue increased, it replicated the same with operating expenses and direct costs respectively. And this is nothing new.
For example, Flour Mills achieved an operating profit margin (without deducting financial charges) of 8.2%, 9.1%, 6.3%, 6.1% and 6.8% in 2016, 2017, 2018, 2019 and 2020 respectively. The behemoth of a business is incredibly incapable of delivering better margins. It’s stuck on single-digit operating margins; it must operate without debt to satisfy minority shareholders. Unfortunately, he is also a fan of high borrowing.
Between 2016 and its last quarter, Flour Mills experienced several levels of leverage ratios ranging from over 1:1 to just under 0.8:1. At its peak in 2016, the company’s debt exceeded its equity by 2.36:1 before it had no choice but to reduce it to 0.7:1 via a combination of raising capital and capital retention.
Today, its debt ratio has risen to 1.26. The implication of higher debt on a company with thin margins is next to nothing in terms of shareholder return. Flour Mills’ profit margins average 3%, while its average return on equity is around 6% (a 5-year high set in its last fiscal year when its leverage ratio was 0, 76). We expect returns on average equity to return to levels of 3-4% by the end of its fiscal year in March.
Flour Mills’ debt situation also makes us wonder who really owns the company. Is it its main shareholder, Excelsior Shipping Company which holds 63.34% or lenders whose debts to the company eclipse its equity? Surely, another rights issue will be in sight within a year or two if it comes to repaying these debts, unless of course its margins improve, which we doubt.
In terms of dividends, Flour Mills has averaged a 40% dividend payout ratio over the past 5 years. The dividend payout ratio last year was just 25% despite record earnings. Now that he has even bigger debts, we don’t expect much improvement in payments. Investors in Flour Mills also fared less well with the share price down 13% last year. In fact, Flour Mills is valued at N117 billion compared to its closest competitor, BUA Foods (with a third of Flour Mills’ annualized revenue), trading at N1.1 trillion.
We understand that the new CEO of Flour Mills, Omoboyede Olusanya, has worked hard to restructure the entire organization since taking over in 2021. From hiring talent with experience in managing change to adopting the data and technology to refocus the business. This all sounds great from a distance, but the reality is in its financial statements. The real change he needs now is to change the company’s talent to often choose inefficiency.