Flour Mills of Nigeria Plc, the country’s biggest miller by market value reported a 73.09 percent decline in third quarter profit after costs spiked and a weak naira resulted in exchange rate loss.
Net profit dropped to N6.46 billion in the six months ended September 2016, from N24.01 billion the previous year, the company said on the website of the Nigeria Stock Exchange (NSE).
The significant drop at the bottom line was due to a 37.35 percent rise in cost of sales to N218 billion and a huge foreign exchange loss of N9.26 billion.
The spike in other operating expense was due to a -N9.3bn exchange rate loss related to the 10% depreciation of naira over the June-September period, according to Tunde Abidoye, equity research analyst with FBN Capital Limited, in an emailed note to BusinessDay.
Consumer goods firms in Africa’s most populous nation are under severe pressure from a fall in oil crude prices, a weak naira and rising input costs.
The adoption of a flexible exchange rate by the Central Bank of Nigeria (CBN) that saw the naira lose 40 percent of its value against the US currency exposed most firms to currency risks as some of them import their raw materials in foreign currencies.
Debts denominated in dollars are not spared as they balloon on the back of currency fluctuations.
Nigeria’s economy contracted by 2.10 percent in the third quarter, according to data from the NBS. The International Monetary Fund (IMF) forecasts that GDP will contract by 1.80 by 2016, the worst recession in 25 years.
Industry experts say deteriorating road conditions and inadequate power supply are a drain on margins. While the CBN has let go of a 15-month currency peg and adopted a flexible exchange rate policy with a view to enhancing liquidity in the system, manufacturers are bemoaning dollar shortages.
“Taken together, these factors have contributed to a perfect storm,” said John Coumantaros, chairman of Flour Mills Nigeria.
Flour Mills was able to “offset the impact” of the challenges “through commensurate increases in the selling prices of its products,” Coumantaros said.
Four Mills net margins fell to 2.53 percent in September 2016 from 13.52 percent the previous year. Cost of sales ratio moved to 85.73 percent in 2016 as against 89.71 percent, due to an increase in sales.
Amid a weak consumer spend, the company’s sales increased by 43.76 percent to N255.30 billion in the period under review from N177.58 billion as at September 2015.
“Similar to Q1 2017, the stellar growth in FMN’s topline was driven by the strong performance in the foods and agro allied businesses which grew by 59% y/y and 16% y/y respectively,” said Abidoye.
