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Flour Mills: Time to rethink?

IT looks like financial year 2013 will end for Flour Mills with a strong message to rethink strategy or reengineer its portfolio. In recent years, the company has delved into so many other areas related to or not too distant from its core business of flour milling while continuing to play the big brother  to many flour mills across the country. Well. Is this paying off well?

This is hard to say for now given the figures for the nine months to December 2012 release recently to the Nigerian stock exchange. But one thing is sure: One great help so far was that investment income took a great leap within the period even as core business turnover barely grew and income from other sources dropped.

So far,  the main problem as far inflow was concerned was income from other sources. Sure, at N26078m by the first nine months, it was till well above the total turnover of many quoted companies but the point was: It represented 11.8 per cent drop Flour Mills could not afford. Income from other sources was N29436.2m nine months into year 2012.

This was at a time when revenue from core business grew by 1.6 per cent from 202259m to N205513.6m. In fact that core business done grew at all amounted to a feat of sorts given the fortune trend of the flour milling industry in recent times as people reacted to higher product prices engendered by high input costs and strategic national attempt to inject cassava into bread production.

The company's saving grace turned out to be income from investments. Surprisingly, this took wings within the nine months to N4096.1m compared to only N284.9m by the same time in 2012. That is, 1337.7 per cent growth rate. However, because Flour mills has been doing hundreds of billions business for years now, it could only ensure that the big drop in other income did not affect overall income percentage growth. Thus, overall income grew by 1.6 per cent just in step with the increase in core business revenue.

One think must be pointed out though: while the investment income grew, there was 60 per cent decrease in investment in associates from N1396.9m to N559.1m. Could the investment income have been beefed up by profit from sale of investments? Possible but one, only full year figures could clear this up and two, it did then the final growth for the year may not be that high and next year's level would certainly be lower: All things being equal.

However, more importantly, rethink may be most needed because it looks like the full year was going to end with all cost heads growing ahead of total income growth with the exception of administration costs. According to the figures for the nine months, cost of sales grew by 3.83 per cent from N172822.8m to N179435.6m. Not too grand a rate but the point is, it was twice the one recorded in income.

In addition the cost of selling and distributing the products also increased by 5.73 per cent to N2561m compared to N2422.3m by December 2011. This of course, is not too surprising given the operational cost environment ruling but more than three times the growth in income growth? Well, that is the drum beat that may sound too good in many ears.

The, tom make matters worse, financiers got a hefty 20.2 per cent increase in their take as finance chargesclosed the period at N8857.8m from N7371.1m. But management still a good grip over administration costs as it dropped by 11.8 per cent to N7718.9m from N8750.9m

Naturally, under all these pressures, Flour Mills bottom line barely held within the nine months to December 2012. It eased to 4.89 per cent on total income as against 4.99 previously. And it may not close the full year any higher if the trend recorded in 2012 was anything to go by. By March 2012, the profit margin at 3.97 per cent on overall income was lower than the 4.99 per cent clocked by nine months into that financial year. Will the final one for 2013 be lower too?

For now, it looks inevitable even though most revenue streams and cost heads flowed correspondingly in 2012 financial year thus implying that what was recorded by nine months to December could stay that till year end. The main difference was that administrative costs was 64 per cent accounted for by first nine months in 2012 and should this continue, then the drop recorded here may reduce by full year. This will be balanced somehow by selling and distribution costs that were accounted for significantly (85.6 per cent) by the same time in 2012.

In the end, the pressure for rethink may bear more visible fruits if it could lead to new strategies to reduce finance costs. No doubt, Flour Mills capital expenditure stretched resources greatly within the period as fixed assets ended 30.8 per cent up at N136094.2m but even strategic rethink could even demand more in the future.

The rethink could find out if 41.5 per cent rise in stock to N71065m was inevitable; 37.3 per cent increase in due from associates could better capped;  and whether it will be possible to be more spirited in replacing overdrafts and short term funds with longer term money. The good news was that someone was already thinking along this line because deposits for shares stood at N2368.3m by December 2012 compared to N2194.2m at the start of the year.

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