The security challenges in North East of Nigeria caused by the Boko Haram insurgents, stiff competition by peer rival companies, and huge operating costs are inhibiting Dangote Flour Mills growth prospects, analysts say.
For the first quarter through March 2014, the company’s revenue dipped by 2.8 percent to N18.58 billion from N19.12 billion last year, while it recorded a pre-tax loss of N4.74 billion.
The aggressive expansion by competitors like Honeywell and Flour Mills has led to an oversupplied market, as supplies grew faster than demand, with implication for pricing, according to Abiola Rasaq of the Research and Strategy Unit of Associated Discount House Limited, in an emailed statement to BusinessDay.
“It has been relatively difficult to pass the cost impact of higher wheat tariff on to final consumers, due to intensifying competition in the industry, as players compete for increased market share to improve on capacity utilisation rates,” said Rasaq.
He went further to state that the new sales strategy of the company, following the take-over by Tiger Brands, which tightened credit policy to improve on cash flow, led to partial loss of customers.
The operating expenses for the three months period through March 2014, surged by 13.2 percent to N17.86 billion from N15.78 billion in 2013, as insecurity in the North largely impacted on logistics and general distribution cost.
An analyst ,who craved anonymity, says Tiger Brands did not carry out proper due diligence on Dangote Flour Mills before the acquisition as the company may have been overvalued.
The unimpressive performance is coming at a time when other millers are expanding capacity and also tapping into a market that is driven by rapid population growth and improved taste for healthy diet (Pasta and wheat).
Tiger Brands, a South Africa food maker had to write down $82 million its investment in DFM due to recurring deficits.
Tiger, which makes Jungle Oats and All Gold tomato sauce, bought a 63.5 percent stake in Dangote Flour Mills from Dangote Industries Ltd. in September 2012 for about $190 million, its third purchase in Nigeria. Tiger targeted acquisitions in Africa’s largest economy as it saw limited opportunities in its home market.
Part of the write down may have arisen as result of the huge restructuring costs incurred during the acquisition process BusinessDay investigation reveals.
The company’s share has declined by 13.04 percent over the past one year to close at N8 on the floor of the exchange on May 22, while market capitalisation was N40 billion on same day.
“It is noteworthy that Dangote Flour posted a production profit, thus signaling a light at the end of the tunnel, as Tiger Brands improves its route-to-market,” said Rasaq.
BALA AUGIE
