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Flour Mills of Nigeria grows revenue 35%, amid impressive performance

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By Philemon Adedeji

Flour Mills of Nigeria Plc (FMN), Nigeria’s leading food and agro-allied business, in its unaudited nine months (“9M”) financial results ended December 31, 2022, shows remarkable revenue growth. Continuous product innovation and effective route-to-market strategies were largely responsible for the continued solid financial performance across the Group’s core business segments with the Honeywell integration well underway and performance in line with integration plan.

The group revenue in nine months of 2023 achieved over a trillion Naira (N1,114 trillion) for the first time to N825 billion in nine months of 2022, these results demonstrate sustained momentum across all business segments compared to previous year.

Overall revenue grew by 35 per cent across all business segments, with Food, Agro-Allied and Sugar all growing between 34 to 39 per cent respectively.

FMN’s Food business recorded 36 per cent top-line growth largely due to continued focus on retail expansion and proactive pricing to cushion steep input costs.

The breakdown of revenue revealed that, the revenue generated from Agro-Allied business grew by 39 per cent driven by robust performance across its categories, as the revenue generated from Fertilizer business recorded a 64 per cent growth in revenues and 82 per cent profit growth driven by the commissioning of new fertilizer blending plant in May 2022, while the oils and fat business grew by 54 per cent driven by increased volumes due to intensified milling activities, while the animal feeds business reported 20 per cent topline growth owing to increased product availability.

Golden Sugar recorded an impressive 34 per cent revenue growth; this was achieved due to increased volumes, various customer engagement and popularity of our locally produced brown sugar.

Gross profit reached N103 billion in 9M’ 23, up 29 per cent compared to 9M’ 22 and 33 per cent quarter on quarter.

Operating Profit grew by 28 per cent in 9M’ 23, with a 32 per cent growth quarter on quarter.

From the released statement under the platform of Nigeria Exchange Limited (NGX), Profit After Tax (PBT) declined by 40.80 per cent to N14.952 billion in nine months of 2023 from N25.255 billion in nine months of 2022.

Profit After Tax (PAT) recorded during the period amounted to N10.018 billion in nine months of 2023, reflecting a decline of 41.23 per cent from N17.046 billion in the corresponding period.

The group balance sheet, well structured, rose significantly by 7.3 per cent to N198.427 billion in nine months of 2023 from N184.968 billion in the previous year.

Higher net finance costs weaken earnings

FLOURMILL’s revenue grew by 35.0 per cent year-on-year, driven by a broad-based growth across the Food (+35.5 per cent y/y), Agro-Allied (+38.9 per cent y/y), Sugar (+34.2 per cent y/y), and Support Services (+5.0 per cent y/y) business segments.

The results indicated that (1) its retail expansion and proactive pricing of food products, (2) the commissioning of a new fertilizer blending plant, and (3) increased volumes across the oils and fat, and sugar product lines, as the key drivers of the stellar revenue expansion.

However, gross dipped by 46 basis points year-on-year to 9.3 per cent and operating also depreciated by 29 basis points Year-on-Year to 6.8 per cent margins recorded declines, reflecting the overwhelming cost pressures in the year, most predominantly in Q3-23.

We highlight that most of the pressure on profitability emanated from the significant expansion of net finance costs in the year, attributable to the increased loan facilities on the company’s books.

As of nine months of 2023 (9M-23), total borrowings increased by 69 per cent year-on-year to N303.72 billion from N178.85 billion in 2022 financial year.

Consequently, Earnings Per Share (EPS) recorded for the period declined by 28.3 per cent year-on-year to N2.87 in 2022 from N4.00 achieved in the comparable period.

Net finance costs to mask topline gains

For 2023 FY, the group raised topline growth projections to 37.3 per cent year-on-year from the previous 14.6 per cent year-on-year, reflecting price adjustments made by the company across its products to higher levels and stronger than expected contribution from the food segment.

“Over the medium term (2024 – 2027E), we expect revenue to grow at a CAGR of 8.8 per cent. We expect cost pressures to remain elevated in fourth quarter 2023, due to the high inflationary environment and the pass-through impact of currency devaluation on input costs.

“Further down, we believe the significant increase in net finance costs witnessed in 9M-23, will significantly influence the EPS outturn for 2023FY. Thus, we forecast that earnings per share (EPS) will decrease by 15.3 per cent year-on-year to N5.30 in 2023 financial year Further out, we forecast an EPS CAGR of 19.1 per cent in 2024-2027E.

“Following the revisions to our forecast, we have reduced our target price to N50.64 from N63.12/s, implying a potential upside of 69.1 per cent based on the price of N29.95 on 7th February. Thus, we maintain our ‘BUY’ recommendation on the stock. Based on our estimates, FLOURMILL is trading on a forward P/E and EV/EBITDA of 5.7x and 2.8x compared to the EM peer average of 18.5x and 9.5x, respectively.”

Profitability  Ratios

FLOURMILL’s profitability was dampened by the significant expansion in net finance costs, which was largely influenced by the Honeywell Flour Mills Plc acquisition and integration. For 2023 financial year, while we believe the company remains well positioned to outperform 2022 Financial Year revenue print, earnings expansion will remain subdued given the effects of the new debt on the company’s books, amid margin pressures from higher costs.

The gross margin declined by 9.7 per cent in nine months of 2022 to 9.3 per cent in nine months of 2023, as Operating Expense margin rose from 3.8 per cent in nine months of 2022 to 4.0 per cent in nine months of 2023, while cost of sales margin grew significantly from 90.3 per cent in nine months of 2022 to 90.7 per cent in nine months of 2023.

The Profit Before Tax (PBT) margin declined by 3.1 per cent in nine months of 2022 to 1.3 per cent in nine months of 2023, Profit After Tax (PAT) margin depreciated by 2.1 per cent in nine months of 2022 from 0.9 per cent in nine months of 2023.

Conclusion  

Commenting on the Q3 Financials, Boye Olusanya, the Group Managing Director, said, “The Q3 earnings trend is a clear demonstration of the Group’s commitment to carrying out its overall long-term strategy of maintaining growth and sustaining profitability by significantly investing in the development of local content through product innovation across our core value chains.

“Also, as is established by the significant increase in revenue and growth from the Agro-allied category of the Group’s touch points, we are committed to achieving economies of scale in food production via crop-specific value chain by increasing productivity and ultimately driving the nation’s attainment of food self-sufficiency.”

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Story behind the figures

Nestle Nigeria Plc: Hampered by huge finance costs

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Introduction

A thorough analysis of Nestle’s current financial report shows that the 2023 financial year was not a good one for the company. While it made good sales (as evidenced by the higher turnover figure), growing finance costs completely overshadowed the company’ profit. To this end, it was unable to turn a profit, recording a loss for the year instead.

Because of this, all the company’s profitability ratios for the year went south.

Growth indices

For its 2023 financial year, Nestle recorded a growth in its gross earnings. Gross earnings for the year stood at N547.12 billion, 22.5 percent higher than the N446.81 billion recorded in the preceding year. This 22.5 percent growth rate is as compared to a slightly higher growth rate of 27.0 percent in 2022.

Because direct costs grew a little more slowly than turnover did, gross profit grew a little faster than gross earnings did, growing by about 39.4 percent, better than the 18.1 percent growth rate recorded in the prior year.

Meanwhile, non-direct costs also grew much higher while finance cost ballooned extraordinarily, such that the company recorded a pre-tax loss and an after-tax loss instead of profits. Nestle was left with a pre-tax loss of N104.03 billion and an after-tax loss of N79.47 billion. These are as compared to profits in the prior year.

Total assets for the year stood at N581.77 billion, up from N415.04 billion in 2022 and translating into a 40.2 percent growth rate. Total liabilities, however, grew much faster by 71.5 percent to N659.81 billion from N384.75 billion, while shareholders’ funds declined by a whopping 357.6 percent to negative N78.04 billion. The reason for a negative equity value was because the negative retained earnings was transferred to the shareholders’ funds.

Profitability ratios

There was a massive general decline in the company’s profitability ratios for 2023. In fact, the company had negative profitability ratios instead of recording real profitability.

For instance, there was a loss margin instead of a profit margin. Loss margin stood at 19.0 percent, down from a positive 15.9 per cent profit margin in the preceding year. What this means is that the company recorded a loss of N19.00 for every N100 earned in 2023, in contrast to the N15.90 out of every N100 that made it to the profit position in 2022.

Return on assets (ROA) followed a similar pattern. ROA for the year declined to negative 17.9 percent from a positive 17.1 percent in 2022, meaning that every N100 worth of assets deployed contributed N17.90 to the pre-tax loss for the year, a far cry from the N13.70 pre-tax profit added in 2022.

Return on equity (ROE) also declined to a three year low of a negative 101.8 percent, meaning that every N100 worth of equity employed made Nestle an after-tax loss of N101.80.

The losses for the year cannot really be traced to an increasing operating margin (but rather to huge costs of financing). For the year, operating margin (which measures what proportion of turnover is used to finance operations) was 17.2 percent, not a terrible result in and of itself.

Staff matters

The company’s losses for the year coloured just about all of its ratios, including staff profitability ratios. For instance, each employee contributed N43.80 million to the company’s pre-tax loss (instead of profit), a huge way down from the profit of N30.65 million contributed on the average in the prior year.

Despite this, Nestle increased its staff cost per employee. On the average, wages and salaries earned by each staff increased to N17.19 million during the course of the year, up from N14.99 million in the preceding year.

However, the company did not put itself out more than was necessary. Staff costs as a proportion of turnover pretty much stayed at the same level per cent during the course of the year. The result was 7.5 percent, not much different from the 7.8 percent recorded in the prior year.

Other ratios

For the year, Nestle’s short-term assets increased to N361.24 million while its short-term liabilities increased to a collective N290.64 million. The interplay between this two had a reducing effect on its current ratio. At 1.2 times, current ratio was a little lower than that of the prior year and competed favourably against industry standards. What this means is that for every one Naira of short-term obligations, the company had N1.20 in short-term assets, and was more than able to meet obligations as at when due.

The company had a debt-to-equity ratio of negative 8.5, as compared to a debt-to-equity ratio of 12.7 in the prior year.

Nestle Vs PZ Cussons: PZ Cussons superior

PZ Cussons and Nestle are competitors, and both have been operating on the Nigerian conglomerate scene for years. While Nestle is currently the bigger of the two in terms of sales generation and assets employment, PZ Cussons is better when it comes to profit retention. Of the six profitability ratios we examined, Nestle only took the lead in turnover growth rate, while PZ Cussons took the lead in the remaining five.

Sales generation and profit retention

As usual, Nestle recorded more sales in 2023 than PZ Cussons did. Also, Nestle’s growth rate for the year was much better than PZ Cussons’. This said, PZ Cussons was better able to translate its sales into profit. It had a positive pretax profit growth rate as compared to Nestle’s decline rate. It also had a profit margin, as compared to Nestle’s loss margin for the year under review.

Returns

PZ Cussons recorded better returns on assets and on equity for the 2023 financial year. Return on assets (ROA) and return on equity (ROE) were 12.3 percent and 29.7 percent respectively. Meanwhile, Nestle had negative returns. For Nestle, ROA was negative 17.9 percent while ROE was negative 101.9 percent.

Conclusion

In the above analysis, the profitability ratios of Nestle for the 2023 financial year were compared with its ratios for the 2022 year. And the conglomerate did not do well for itself, bogged down as it was by huge finance costs. Its result was also subpar when compared with those of other conglomerates for the 2023 FY.

It remains yet to be seen if the 2024 FY will be a different one, in terms of profitability, for Nestle.

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Story behind the figures

FCMB Plc: Improved profitability parameters

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Introduction

FCMB Plc mostly recorded an improvement over the preceding year’s results in terms of turnover and profit, and this improvement carried over to its profit. As a result, the bank recorded better profitability ratios than that of the prior year. Profit margin, return on assets, return on equity, and other important profitability parameters improved.

However, the bank did not compete too favourably when its results are compared with its competitors’ results.

Growth indices

A look at the bank’s growth indices over the past two years shows that the bank recorded consistent growth. For its 2023 financial year also, the bank recorded an 82.6 percent increase in its turnover (inclusive of interest and discount income, and income from non-banking operations). Such turnover grew to N516.8 billion from N282.9 billion in the preceding year. This 82.6 percent growth rate is as compared to a lower 33.5 percent growth rate that was achieved in 2022.

Pre-tax profit growth rate followed an even steeper pattern, as the bank recorded a much higher profit in the year under review. Profit before tax for the year stood at N104.43 billion as compared to a profit before tax of N36.57 billion in the prior year. This translates to a 185.6 percent growth rate.

After tax profit for the year was also a steep growth over the after-tax profit of the preceding year, growing to a whopping N93.02 billion from a profit of N31.12 billion in the erstwhile year.

Total assets deployed by the bank for the 2023 year was N4.41 trillion, about 47.9 percent higher than the N2.98 trillion assets deployed in 2022, while shareholders’ funds grew to a figure of N460.7 billion. Growth rate of equity for the year was therefore 67.0 percent, as such shareholders funds grew from a figure of N275.9 billion in the erstwhile year.

Profitability ratios

The 2023 financial year was a progressive one for FCMB in terms of profitability ratios, as it recorded an improvement in almost all of its profitability ratios. First to achieve a progression was the profit margin of the company. For the year, the bank had a profit margin of 20.2 percent in 2023, up from a profit margin of 12.9 percent in 2022. What this means is that for every N100 earned by the bank in the course of the year, N20.20 accrued to it as a profit. This is as compared to a profit of N12.90 and a profit of N10.70 in the two years preceding 2023.

Also to record a progression was return on assets (ROA). ROA for the year stood at 2.4 percent in 2023, as compared to 1.2 percent in 2022. This means that the bank made a pre-tax profit of N2.40 from every N100 worth of assets deployed for the 2023 review year, as compared to a profit of N1.20 in 2022.

As for return on equity (ROE) for the 2023 financial year, FCMB made an after-tax profit of N20.20 for every N100 worth of equity employed, higher and better than the profit of N11.30 made in 2022.

FCMB did not do as well in the execution of core banking operations in 2023 as it did in 2022, as shown by its net interest margin, which slowed down to 49.9 percent. This 49.9 percent net interest margin is as compared to a higher 55.6 percent net interest margin in the preceding year. This result came to be despite the slightly increasing gap between the bank’s lending rate (which grew to 19.4 percent in 2023 from 18.4 percent in 2022) and its deposit rate (which also increased to 5.3 percent in 2023 from 4.7 percent in 2022).

Classified loans

FCMB’s proportion of classified loans (to gross loans and advances) was high and worse compared to competitors.

Asset quality

The proportion of FCMB’s gross loan stock that became classified in 2023 declined by growing to 4.3 percent from 3.9 percent in 2022. The proportion of classified loans is still low enough to be considered safe.

Meanwhile, the bank’s cover for such classified loans was a very high 109.7 percent, meaning that the bank had complete cover for its bad loans. It is also worthy of note that such classified loans would erode around 18.2 percent of the bank’s equity were they to become totally bad and irrecoverable. This is about the same level as it was in the prior year.

Other ratios

At 0.2 times, current ratio was very low and definitely not on par with the industry average for 2023. What this means is that for every N1.00 of short-term obligations, the bank had only 20 kobo in short-term assets, and was not completely able to meet short term debts from short term assets.

A debt-to-equity ratio of 8.6 means that the bank is leaning more on debt to finance operations rather than equity, but less so than it did in 2022. The upside is that when debt is managed properly, the returns are usually good.

Conclusion

FCMB’s result for the year cannot in and of itself be faulted. The bank, however, has a little bit more work to do to compete well against other banks.

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Story behind the figures

NASCON Allied Industries Plc: A leap forward

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Introduction

Our analysis of NASCON Allied Industries Plc’s current financial report shows that it had a good year in 2023. It was able to step up the level of its business activities as shown by a growing turnover base. It was also able to increase profit during the course of the year. Profitability ratios for the year were a progression over the preceding year’s. Profit margin improved, as did return on assets, return on equity, and pre-tax profit per employee.

Growth indices

For its 2023 financial year, NASCON recorded a measure of growth in all of its major parameters. First to grow was the company’s gross earnings. Gross earnings for the year stood at N80.83 billion, 37.5 percent higher than the N58.79 billion recorded in the preceding year. This 37.5 percent growth rate is as compared to a higher growth rate of 76.7 percent in 2022.

Because direct costs grew at a slower pace than turnover did, gross profit grew by as much as 80.6 percent to N44.32 billion. After deducting operating expenses from the gross profit and adding other income (including interest income), NASCON was left with a pre-tax profit of N20.59 billion, a whopping 146 percent higher than the N8.37 billion pre-tax profit recorded in the erstwhile year. This 146 percent growth rate is as compared to a pre-tax profit growth rate of 97.4 percent in the preceding year.

After-tax profit (which was also the same as distributable profit) grew over the preceding year’s by as much as 151 per cent to N13.73 billion.

Total assets for the year stood at N83.59 billion, up from N55.53 billion in 2022 and translating into a 50.5 percent growth rate. Total liabilities also grew by 53.8 percent to N56.12 billion from N36.49 billion while shareholders’ funds grew by 44.3 percent to N27.47 billion from N19.04 billion in the erstwhile year.

Profitability ratios

For the year, operating margin (which calculates what proportion of turnover is used to finance operations) was 29.3 percent, a little higher and therefore worse than the 25.8 percent that was recorded in 2022. What this means is that the probable margin for NASCON to be profitable reduced slightly during the course of the year.

Despite this, the profit margin for the year increased. Profit margin for 2023 stood at 25.5 percent, higher than 14.2 percent in the preceding year. What this means is that N25.50 made it to the profit position for every N100 earned in 2023, up from N14.20 in 2022.

Return on assets (ROA) followed the same pattern. ROA for the year increased to 24.6 percent from 15.1 percent in 2022, meaning that every N100 worth of assets deployed contributed N24.60 to the pre-tax profit for the year, higher than the N15.10 recorded in 2022.

Also, return on equity (ROE) grew to 50.0 percent from 28.7 percent, meaning that every N100 worth of equity employed contributed a massive N50.00 to the after-tax profit in 2023, up from N28.70 in the prior year.

Our examination of this company’s profitability ratios shows that the company recorded quite a profitable year in 2023, which was not the case for many other manufacturing companies in Nigeria.

Staff matters

In terms of staff matters, the conglomerate did quite well for the year ended December 31 2023. On the average, each employee contributed N30.59 million to the company’s pre-tax profit, commendably up from N14.19 million in the prior year.

To this end, NASCON reciprocated by increasing its staff cost per employee. On the average, wages and salaries earned by each staff increased to N5.59 million during the course of the year, up from N4.04 million in the preceding.

It is however worthy of note and laudable that despite increasing average staff costs, the company did not actually put itself out more than was necessary. Staff costs as a proportion of turnover was about 4.6 percent.

Other ratios

For the year, NASCON’s short-term assets increased to N67.4 billion while its short-term liabilities increased to a collective N49.7 billion. The interplay between these two had an upping effect on its current ratio. At 1.4 times (higher than 1.3 in the preceding year), current ratio was on par with industry standards. What this means is that for every one Naira of short-term obligations, the company had N1.40 in short-term assets, and was more than able to meet obligations as at when due.

The company had a debt-to-equity ratio of 2.0 and this shows that the company is using N2.00 of liabilities in addition to each N1.00 of stockholders’ equity. In other words, the company is using N3.00 of total capital for every N1.00 of equity capital.

NASCON Vs Dangote Sugar: NASCON better

Not only is NASCON’s 2023 annual results laudable in its own stead; the company’s results also competed very well against competitors in the food/beverages & tobacco sector for the 2023 FY. We compared its results with that of its sister company, Dangote Sugar (both companies are subsidiaries of Dangote Industries), and NASCON came out on top, even though it is the smaller of the two companies in terms of volume of sales.

Turnover growth rate

For the 2023 financial year, Dangote Sugar had a turnover growth rate of 9.5 per cent, as compared to NASCON’s turnover growth rate of 37.5 percent for the same period under review. Analysis shows that NASCON was the winner in this respect.

Pre-tax profit growth rate

While Dangote Sugar had a negative pre-tax profit growth rate of 230.8 percent (meaning that pre-tax profit dipped instead of growing), NASCON had a positive 146 percent growth rate. NASCON was thus the winner in this respect.

Profit margin and returns

For the 2023 financial year, pre-tax profit margin (which measures a company’s ability to squeeze as much profit as is possible from turnover) for Dangote Sugar was negative 24.3 percent, worse than NASCON’s pre-tax profit margin of 25.5 percent.

Analysis shows that while every N100 worth of equity deployed by Dangote Sugar led to an after-tax loss of N88, such N100 equity deployed earned NASCON N50 as after-tax profit.

Also, ROA for Dangote Sugar was negative 17.8 percent, down from a positive figure of 16.7 percent in the prior year. This means that of every N100 worth of assets deployed by Dangote Sugar, there was a resultant N17.80 loss. Meanwhile NASCON recorded a N24.60 pre-tax profit from every N100 worth of assets employed.

NASCON was thus the winner in terms of profit margin, return on assets and return on equity.

Conclusion

In an operating environment where most companies recorded either negative or slowed down profitability ratios, NASCON is one of the few exceptions. Its ability to not only generate sales but also to maximise profits for the 2023 financial year is indeed commendable.

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