Flour millers in Nigeria, the biggest buyer of imported wheat, are operating in a tough and unpredictable macroeconomic environment.
For instance, they are forced to turn to unauthorised traders for dollars to purchase the commodity after the central bank restricted the use of the greenback to import grains.
The coronavirus pandemic elicited a precipitous drop in crude oil price that tipped the country into its second recession in 4 years in the third quarter of 2020. Oil accounts for 90 percent of foreign earnings and two-thirds of government revenue.
With inflationary pressures stealing workers’ wages and impoverishing Nigerians, it is difficult for millers to pass on higher cost to consumers.
While Nigeria’s inflation rate dropped to 17.93 percent in May 2021 from 18.12 percent recorded in April 2021, the figure is well above the central bank target range of 6-9 percent.
The World Bank has projected that the number of poor people in Nigeria will increase by 20 million by 2022.
The National Bureau of Statistics (NBS) recently released the “2019 Poverty and Inequality in Nigeria” report, which highlights that 40 percent of the total population, or almost 83 million people, live below the country’s poverty line of 137,430 naira ($381.75) per year.
The continuous devaluation of the currency by the apex bank with a view to protecting the external reserves balloons the raw material costs of companies who are grappling with high input costs, which erodes profitability.
The naira closed at N503.00 per $1 at the black-market window on Friday, according to data from abokiFX.com, a website that collates parallel markets.
This represents a N1.00 or 0.20 per cent devaluation from N502.00 it traded in the last two previous sessions.
Nigeria lacks the capacity to produce the commodity, harvesting just 1 percent of the 4.70 million tons of the grain that it will consumer this year, according to the U.S Department of Agriculture.
Another elephant in the room for flour millers is infrastructure bottlenecks such as bad roads and unstable power supply as they spend copious amounts of money on expensive diesel fuel to power generator plants at the factories.
Between 2017 and 2018, no fewer than N246 billion has been spent by manufacturers fueling their generators, according to a report by the Manufacturers Association of Nigeria (MAN).
Despite the challenging and volatile environment, Flour Mills of Nigeria Plc, the largest miller by market capitalization in Africa’s largest economy, maintained strong profit margins while contemporaneously delivering higher returns to shareholders.
The company’s audited financial statement for the year ended March 2021 shows sales spiked by 34.47 percent to N771.60 billion from N573.77 billion the previous year.
The growth at the top line (sales) was led by an increase in Agro-allied combined with investments in route-to-market and accelerated expansion in the B2C segments.
Flour mills of Nigeria has a well-diversified product range and it is launching new products into the market with the aim of consolidating market leadership.
There has been acceleration in the B2C segments with new product offerings such as Auntie B Spaghetti Slim and Spaghetti, as well as the introduction of new SKUs in key categories, along with investments in regional distribution.
Flour Mills of Nigeria is efficient at using its labour and supplies in processing goods and services as gross profit increased by 62.30 percent to N106.57 billion as at the year ended March 2021 from N65,78 billion the previous year.
Notably, the company has enough profit left after paying off its cost of goods as gross profit margins increased to 13.80 percent in 2021 from 11.50 percent the previous year.
It is able to generate profit through its core operations as earnings before interest and taxation otherwise known as operating profit margin rose to 6.80 percent for the year ended March 2021 from 6.10 percent in 2020.
Operating profit increased by 48.80 percent to N52.16 billion for year ended March 2021 from N35.07 billion the previous year while earnings before interest taxation and amortization otherwise known as EBITDA increased by N74.54 billion in the period under review from N55.68 billion the previous year.
Flour Mills of Nigeria recorded the fastest net income expansion among peer rivals in the consumer goods industry.
Its net income surged by 126 percent to N25.71 billion in the year ended March 2021 from N11.37 billion the previous year.
The management of the company is generating enough profit from its sales as operating costs and overhead costs are being contained.Net profit margin increased to 3.80 percent in the period under review from 1.80 percent the previous year.
“Flour Mills emerges from the prevailing COVID-19 environment as a stronger, more resilient, flexible, and confident business as a result of the collective strategic actions made over our 60 year history,” said Omoboyede Olusanya, the Group Managing Director of Flour Mills of Nigeria.
“I want to thank all our employees for their patience and hard work as we consistently adapted to the year’s challenges and invested significantly in our purpose of feeding the nation everyday,” said Olusanya.
Flour Mills of Nigeria efficiently uses its fixed assets in generating higher sales as  fixed asset turnover (FAT) moved to 3.69 in 2021 from 2.64 the previous year. Put in another context, for every Naira invested in a fixed asset, a return of almost N4 is earned.
Flour of Nigeria delivers high returns to shareholders Â
The common stockholders of Flour Mills of Nigeria have received more returns on their investment, which means they have been rewarded for taking the risk of investing in the entity.
Return on average equity (ROAE) increased to 16.50 percent in the period under review from 7.20 percent the previous year. Return on average asset followed the same growth trajectory it moved to 5.40 percent for the year ended March 2021 from 2.50 percent the previous year.
Consistent earnings growth has underpinned valuation, and what this means is that it is the right time for investors to buy the stock of the consumer goods giant.
The consumer goods giant has a price to earnings ratio of 4.68 times, and that compares ridiculously overvalued stocks such as Nestle Nigeria, (31.31 times); (65.08 times); HoneyWell, (20.36 times); Dangote Sugar, (7.69 times), and Nascon Allied Industries, (8.31 times).
The company has an aggressive dividend policy that allures investors who crave for higher income as its board of directors have approved a N6.75 billion dividend to shareholders.
Flour Mills of Nigeria adds value to economy with backward integration
Flour Mills of Nigeria is committed to adding value to society through various programmes and initiatives within its operations and operating areas nationwide.
Olusanya said the company had over the years optimized the use of natural resources in its production process.
Notably, the largest miller sources its essential raw materials locally, by partnering with farmers in our rural communities.
“We are continually working with smallholder farmers, and farmer groups in the areas of seeds development, capacity development and knowledge transfer,’’ said Olusanya.
Interestingly, Flour Mills of Nigeria has invested more than N150 billion in the past 10 years to execute the core business strategy of aiding the agricultural sector.
The company showed commitment to managing significant economic impacts by going into partnership with the Wheat Farmers Association of Nigeria (WFAN).
Nigeria is losing foreign exchange earnings through huge importation of commodities that it can produce locally, which is why its external reserves are not strong enough to ward off macroeconomic headwinds.
The Federal Ministry of Agriculture and Rural Development (FMARD) has estimated that Nigeria spends $5 billion to import foods annually out of which $1.5 billion goes to importation of milk and other dairy products.