Flour Mills: Efficiently Inefficient Falling Short To Delivering Shareholders’ Returns

There is an eighty per cent chance that as you are reading this article, you may be consuming a product sold by Flour Mills Nigeria Plc.

It could be pasta or noodles, flour from bread or any of your favourite pastry, vegetable oil used for your beloved fries, or its sugar for your sweet craving, not to talk of its Semovita, relied upon by many to quench its hunger after a hard day’s job. As Flour Mills will say, they are “feeding the Nation, every day”, a statement that is hard to disagree with. We wish we could say the same for returns on investments.

READ: Ecobank Issues Warning To Flour Mills Of Nigeria Not To Acquire Honeywell

This is because while Flour Mills is great at feeding the nation every day, they fall short when it comes to delivering shareholder returns every year. In its latest third-quarter results for the period ending December 2021, the company posted a monster revenue of N302.1 billion, the highest we have seen of any quarter since we started keeping track of the company’s results which dates back about a decade. Combined with the first and second quarters, total revenues soared 48.5% to N824.98 billion.

READ: Honeywell Flour Mills Plc Reports 36% Revenue Growth in Full Year 2021 Results

These are impressive top-line numbers by any stretch of measurement especially in a country where the purchasing power of its citizens is dwindling due to rising inflation. However, when you decide to go below top-line revenues, the story is different. You see a company that is efficient and being inefficient.

Flour Mills: Efficiently Inefficient Falling Short To Delivering Shareholders’ Returns

This year, as of the time of writing, February 2022,  despite the double-digit growth in revenues, Flour Mills legendary overheads and cost of sales ate up about 95% of its entire revenue. It will appear that as it grew topline revenues, it replicated the same with operating expenses and direct cost respectively. And this is nothing new.

READ: Flour Mills and Honeywell owe CBN, FBNH, Bondholders a combined N220 billion

For example, Flour Mills delivered an operating profit margin (without deducting finance costs) of 8.2%, 9.1%, 6.3%, 6.1% and 6.8% in 2016, 2017, 2018, 2019 and 2020 respectively. The behemoth of a company is incredibly incapable of delivering better margins. It is stuck on single-digit operating margins; it has to operate without debt to keep minority shareholders happy. Unfortunately, it is also a stickler for high borrowing.

Between 2016 and its most recent quarter, Flour Mills has gone through several levels of debt-to-equity ratios ranging from above 1:1 to just under 0.8:1. At its height in 2016, the company debts outpaced its equity by 2.36: 1 before it had no choice but to bring it down to as low as 0.7:1 via a combination of equity raise and capital retention.

Today, its debt-to-equity ratio has risen again to 1.26. The implication of higher debt on a company with thin margins is next to nothing in returns to shareholders. Flour Mills profit margins average 3% while its return on average equity is about 6% (a 5 year high recorded in its last financial year when its debt-to-equity ratio was 0.76). We expect returns on average equity to be back to 3-4% levels when its financial year ends in March.

Flour Mills debts situation also make us wonder who really owns the company. Is it its largest shareholder, Excelsior Shipping Company which owns 63.34% or lenders whose debts to the company eclipse its equity? Surely, another right issue will be in the offing in another year or two if it is to repay these debts, except of course its margins improve, which we doubt.

In terms of dividends, Flour Mills has averaged 40% in dividend payout ratio in the last 5 years. The dividend payout ratio last year was just 25% despite record profits. Now that it even has larger debts, we don’t expect much improvement in the payout. Investors in Flour Mills have also faired worse with the share price down 13% in the last year. In fact, Flour Mills is valued at N117 billion compared to its closest competitor, BUA Foods (with a third of Flour Mills annualized revenue), trading at N1.1 trillion.

READ: BUA Foods Plc Records N1 Trillion Market Value As Share Price Hits 9.96%

We understand Flour Mills new MD/CEO Omoboyede Olusanya has been working hard to restructure the entire organization since he resumed in 2021. From hiring talents with experience in change management to adopting data and technology to refocus the business. It all sounds good from a distance, but the reality is in its financial statements. The real change he needs now is changing the company’s knack for often choosing inefficiency.