Dangote Flour Mills Plc. (9 months ended June 2014)
- Dangote Flour Mills Plc “DFM” reported a 3.7% YoY contraction in revenues to N28.7billion for 9 months ended June 2014. In addition, DFM recorded 4.5% and 3.6% YoY moderation in H1 14 pre-tax loss and after-tax loss to N6.2billion and N4.4billion respectively.
Revenue declines on the back of softer prices…
- After experiencing positive growth in FQ2 14, which DFM linked to volume growth in its flour business following price cuts, FQ3 14 revenues resumed the negative trend observed in top-line since 2011 (ex FQ2 2014), declining 5.3% YoY to N10.1billion. DFM’s parent, Tiger Brands, alludes to elevated price competition on account of the excess milling capacity in the Nigerian flour industry. This suggests volume growth over FQ3 14 was unable to offset the impact of the price cuts driving the subdued pattern in revenues. In addition, we note that DFM announced its intention to close down two northern mills over the quarter which likely resulted in some volume softness.
Moderation in wheat prices underpins gross margin expansion
- FQ3 14 COGS fell at a faster pace than revenues (-13.5% YoY to N9.1billion)) resulting in a seven fold YoY expansion in gross profits to N997million. This partly reflects softer wheat prices (-3% YoY) and resulted in gross margins expanding 8.5pps YoY to 9.8%.
Higher opex charges on restructuring extends trend of losses
- FQ3 14 operating expenses surged 110% YoY (+182% QoQ) to N1.9billion which translates to a 10pps YoY expansion in opex-to-sales to 18.7%. We believe this likely reflects charges linked to mothballing of two northern mills. Thus, though DFM recorded N10.8million other operating income (FQ3 13: Nil), DFM reported an operating loss (N894 million) for the eight consecutive quarter.
- Whilst net finance expenses declined 7.5% YoY to N643million on account of a 4.2% YoY contraction in borrowings to N31billion, DFM reported a 33% and 89% YoY moderation in LBT and LAT to N1.5billion and N182million largely on account of the surge in OPEX.
Earnings weakness to persist on rising wheat prices
- Current revenue reading reflects concerns about how excess slack in the milling industry amid tempered consumption growth combines with DFM’s limited product offering to leave it adversely positioned in the face of stringent price competition. Whilst the shutdown of certain milling facilities in the north helps reduce its operating leverage, volumes are likely to come in weaker over FQ4 14 driving scope for tame FY 14 readings. An already weak earnings outlook is compounded by the possibility of higher wheat prices based on USDA projections of softer harvests due to adverse US weather conditions. In response to the continued struggles, DFM announced the appointment of a new chief executive (effective July 1st 2014) suggesting Tiger Brands impatience with continued delays in unlocking value at its Nigerian subsidiary.
Note: This article is initial review and was culled from ARM Research Newsletter
- Overall, current results and the decision to close down two more mills continue to show a company undergoing a sizable restructuring program with details which weigh heavily on our outlook for DFM. DFM trades at a current P/B of 3.3x vs. a mean of 2.6x for Bloomberg regional peers. Consequently, our ratings for DFM remains suspended pending the opportunity to discuss issues with the new management.