Flour Mills of Nigeria Plc has made a comeback in the first quarter of 2025 financial year, returning to profitability after a challenging 2023/2024 financial year.
In its recently released financial results for the quarter 2025 ended June 2024, the company reported a pre-tax profit of N7.36 billion, a sharp contrast to the pre-tax loss of N9.334 billion recorded in the same period the previous year.
This turnaround is particularly noteworthy given that the company reported a pre-tax loss of N237 million for the entire 2024 financial year, which ended in March 2024.
Albeit it is important to consider critical questions that are paramount to investors: Can the strong start to the new fiscal year be sustained, and will it bolster investor sentiment and confidence?
The year 2023 was tumultuous, marked by policy shifts that led to Naira devaluation, rising interest rates, and other macroeconomic headwinds.
Financial Performance Trend:
A cursory review of Flour Mills’ financial statements shows that prior to the loss in 2023/2024 financial year, the company had consistently reported profitability.
Pre-tax profit between 2019 and 2023 grew from N9.95 billion to N39.78 billion, representing a compound annual growth rate (CAGR) of 41%.
This historical performance is important for investors as it demonstrates the company’s consistent earnings growth.
However, the sharp contrast between this consistent profitability and the loss in 2024 financial year raises questions about how sustainable this growth is in the face of ongoing macroeconomic pressures.
In the 2023/2024 financial year, the company recorded an impressive top-line performance, with revenue growing strongly by 49% to reach N2.3 trillion; one of the highest in the sector.
The Food segment, which continues to be the main driver of revenue, grew by 51% to N1.5 trillion, accounting for 66% of total revenue.
According to the company, this growth in the Food segment, especially in Q4 2024 was partly due to adjusted pricing, which was necessary to cushion the effects of Naira devaluation and to enhance B2C margins.
The Food segment’s significant contribution to total revenue highlights its importance to the company’s overall financial health. However, this heavy reliance on a single segment could pose a risk if the segment faces any downturns.
Additionally, gross and operating profits remained strong at N272.75 billion and N208.13 billion, representing year-over-year growth of 54% and 61%, respectively.
While this appears positive, the profit margins tell a different story. The gross profit margin stood at 12%, a modest 3% year-over-year increase, while the operating profit margin grew by 69 basis points to reach 9%.
This suggests that a significant portion of the company’s revenue is being absorbed by the cost of goods sold, primarily due to the high cost of raw materials and packaging.
With raw materials and packaging accounting for more than 80% of total revenue, this is a cause for concern as it leaves a narrower margin for profitability.
This means that any shift in market trends is likely to affect bottom-line profitability.
This was evident when the company faced the impact of naira devaluation in 2023, leading to a record foreign exchange loss of N137.48 billion and an interest expense of N71 billion.
These factors drove the finance cost up to N209 billion, compressing profit before minimum tax to N3.95 billion and resulting in a pre-tax loss of N237 million.
Despite the strong start in the 2025 financial year, with a return to profitability in Q1, the persistent issue of foreign exchange losses looms large.
The fact that foreign exchange losses have already reached N28.1 billion in just one quarter, marking a significant 25% year-over-year increase and representing 21% of the total for the entire previous year, should be a concern
If these losses continue to escalate, they could erode the gains made from operational efficiencies and revenue growth.
Outlook
The Group believes it has demonstrated resilience and the capability to grow and deliver solid profits even under challenging conditions.
Looking ahead to 2025, the company acknowledges that difficult macroeconomic headwinds are expected to continue throughout most of the 2024/2025 fiscal year. Nevertheless, the company remains confident in its business model, which has been rigorously stress-tested over the years.
In line with its commitment to optimizing its capital structure and reducing financing costs to enhance profitability and deliver long-term value to shareholders, the company successfully reduced its debt profile by approximately 5% to N378.23 billion in Q1.
This reduction contributed to a 3.33% year-over-year decline in interest expenses, lowering the total to N16.1 billion.
Investment Case
Shareholders’ returns are crucial when assessing the investment case. Flour Mills of Nigeria Plc’s share price has demonstrated a robust bullish trend this year, closing with a year-to-date (YTD) gain of 39.2% as of the last trading day on Friday, August 9, 2024, at N46.
This marks a substantial improvement from the 18% YTD gain recorded at the end of Q1 2024 and a notable increase from last year’s YTD gain of 16.37%.
The impressive YTD gain of 39.2% in 2024 reflects growing investor confidence in Flour Mills of Nigeria Plc, probably due to its return to profitability in Q1.
The nearly doubled growth rate since Q1 2024 suggests that the market is responding positively to the company’s financial recovery.
The company’s investment case appears strong based on the following metrics:
- Price-to-Book Ratio (P/B): 0.85x
- Price-to-Sales Ratio (P/S): 0.07x
- Price-to-Earnings Ratio (P/E): 10.24x
- Dividend Yield: 4%
- Total Return: 43%
The low P/B and P/S ratios indicate that the stock is undervalued relative to its book value and sales. The P/E ratio of 10.24x suggests a reasonable valuation based on earnings.
Combined with a 4% dividend yield and a substantial total return of 43%, these factors highlight a compelling investment opportunity.
The company’s consistent dividend payments over the past five years further enhance its appeal, suggesting an attractive choice for investors seeking both value and income.