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Tuesday, March 28, 2023

Northern Nigeria Flour Mills Profit Margin Slumps on Higher Material Costs

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Northern Nigeria Flour Mills Plc’ profit margins have been pummeled down by higher raw material costs that pressured cost of production, which means shareholders will not be getting bumper dividends.

For the period ended September 2021, Northern Nigeria Flour Mills (NNFM)’s net profit margins fell to 2.16 percent in June 2021 from 3.36 percent the previous year.

This also indicates that the miller generated N0.02 or 2 kobo for each Naira of sales, raising concerns about its ability to earn money from the business.

The deteriorating margins stem from spiraling material costs brought on by the devaluation of the currency by the central bank.

Total cost of sales surged by 88.26 percent to N7.38 billion in September 2021 from N3.92 billion the previous year.

A breakdown of cost shows material cost increased by 91.85 percent to N6.83 billion in the period under review from N3.56 billion the previous year.

Interestingly, the company’s cost of sales ratio increased to 92.13 percent in the period under review from 90.24 percent the previous year. What this means is that the miller spent N0.92 on input cost to produce each unit of products.

NNFM and other sector players import bulk of their requirements to meet production and it is not surprising that the importation of wheat and sugar amid foreign exchange volatility leads to higher cost margins on producers.

The Manufacturing Association of Nigeria (MAN) has been complaining bitterly  that inability to access dollars to import raw materials to meet production is a fundamental impediment to economic growth and job creation.

Nigeria relies on crude oil proceeds for 90 percent of foreign exchange and more than 50 percent of revenue, according to government documents.

There has never been a moment of respite for companies because crude oil price has been unstable since 2014 and the coronavirus virus exacerbated the already anemic situations.

Nigerian manufacturers import 40 percent of their raw materials, sourcing 60 percent locally, according to the latest Executive Summary of Economic Review published by MAN (in 2019).

Further analysis of the financial statement of NNFM shows gross profit margin fell to 7.82 percent in the period under review from 9.57 percent the previous year.

However, there were remarkable improvements at both the top line (sales) and bottom line (profit).

Sales spiked by 84.56 percent to N8.01 in September 2021 from N4.34 billion as at September 2020. Net income followed the same growth trajectory as it was up by 18.74 percent to N173.47 million in the period under review from N146.34 million the previous year.

It is quite saddening that policy makers are unable to find a solution to foreign exchange scarcity that is threatening the existence of businesses and undermining foreign direct investment as investors have lost confidence in the central bank’s monetary policies.

Of course, the central bank has been adding fire to the brazier as it is not nimble enough to formulate transformation policy on time; a lot of its measures are inopportune.

For instance, the decision to ban the sale of dollars to Bureau De Change (BDCs) during the summer period was a colossal mistake that sent the Naira tumbling as banks could not meet the demand of customers who moved in droves to the parallel market.

Across the globe, there is usually pent up demand for foreign currencies during summer holidays because parents pay school fees and sundry expenses.

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