Flour Mills of Nigeria Plc walked directly into the heat of the Covid-19 pandemic in its first quarter for its new financial year 2020/2021. As the Group Managing Director, Paul Gbededo, noted while speaking on the Q1 20/21 results, the first quarter of the financial year is ordinarily a very complex period for businesses. Hence, the additional headwinds of the Covid-19 pandemic was enough to disrupt the company’s operations. The challenges birthed by it is part of what has formed the series of strategies the company has put in place over the past months.
The flour and pasta maker earlier in April had sold N30 billion in a commercial paper as part of its measures to mitigate the impact of the pandemic on its business activities. More recently, just a few weeks ago, it had also revealed its plans to issue a bond within the next 2 months as part of a N70 billion ($184 million) programme towards refinancing its existing debt. Its Q1 financials results reveal a 160% growth in short term borrowings from N23.3 billion in the previous year to N60.8 billion in Q1 20/21. While the company has set out to reduce its reliance on short term sources of capital, the real challenge is not the increased debt but how much of the overall debt is merely as a result of the challenges in the foreign exchange market.
The nation’s leading integrated Food and Agro-allied Company has enjoyed increased demand for its products in recent time. This is primarily as a result of the federal government-led closure of the border. In its Q1 20/21 results, revenue had increased by 14.7% from N134.7 billion in Q1 19/20 to N154.6 billion in the quarter under review. While the cost of sales had also increased by 9% to N129 billion, the biggest deterrent of its profit is the -6130.7% increase in Net operating losses from a N126 million gain in Q1 19/20 to a whopping loss of N7.6 billion in Q1 20/21.
The challenge being faced by the company is a very peculiar one. Even though agriculture is a key part of Nigeria’s economy, it does not produce enough in yields to cover its ever-expanding population. This, of course, is largely attributed to the deficiencies in mechanization, the limitations in data in the industry, and maybe a level of inefficiency in sourcing raw materials. Corporations like Flour Mills that had relied heavily on imported input have now commenced sourcing for raw materials locally. For the company, one of its main goals is to reduce the costs of Maize per ton particularly with CBN’s announcement in July that it will stop issuing FX to maize importers at the official rate.
Still, there is only so much that can be done as the nation simply doesn’t have the capacity to meet the burgeoning demand. Given the foregoing challenges, the company which currently sources 25% of its raw materials locally is already making plans to increase local sourcing by 40% in the year 2024 in view of same Forex constraints. Even with the various headwinds including the impact of Nigeria’s currency devaluation on its profit margins, the company managed to keep its profit for the period positive. The results reveal a 17.3% increase in profit after tax from N4.2 billion in Q1 19/20 to N5 billion in Q1 20’21.
At a share price of N19.00, the company is around midpoint of its 52-week average which is between N13 and N24 per share. Its price to book ratio of 0.5084, however, presents an opportunity to invest in a relatively undervalued growth stock. With tighter operational efficiencies particularly in the areas of sourcing materials alongside the relatively lower cost of raising capital in a Covid-19 era, long term potentials of the stock still exists.