Flour Mills of Nigeria (FMN) is the largest flour-milling company on the Nigerian Stock Exchange (NSE), with market capitalisation of N63.27 billion (about $316 million) as of August 2015.
But the conglomerate faces capital adequacy challenges that necessitate continued borrowing to finance operations.
By March 31, 2015, it had accumulated about N149 billion (about $745 million), 68 per cent of fixed assets.
The huge debt burden is currently eating deep into the bottom line as the company paid over N18 billion as interest expenses in the financial year ended March 31, 2015.
The company recently decided on a rights issue to raise N40 billion from existing shareholders, with the Chairman, John Coumantaros, pledging that the “proceeds will be used majorly to reduce debt burden, lower interest charge and augment working capital.”
Coumantaros blamed the financial stress on the slump in oil price which led to the devaluation of the naira and increase in import cost and financial charges.
FMN exchange loss was N5.1 billion in the financial year ended March 2015.
Approval for external restructuring
The company has got the approval of shareholders and the Securities and Exchange Commission (SEC) to merge five subsidiaries with its holding company, FMN, under a scheme of external restructuring.
This followed earlier announcement to merge Golden Noodles Nigeria, Golden Transport Company, FMN Cement Industries, New Horizon Flour Mills, and Quilvest Properties with the holding company.
BusinessWise, an online medium, quoted FMN Group Managing Director, Paul Gbededo, as disclosing that the planned merger is part of restructuring to streamline operations, reduce costs, improve efficiency, and derive the full benefits of synergy.
“The enlarged FMN, upon completion of the restructuring, would be able to eliminate transfer costs of materials and operate at a higher level of efficiency which will drive down costs, make product pricing more competitive, improve profitability and enhance the bottom line for the benefit of all stakeholders,” he explained.
Capital inadequacy
The paid up equity capital of FMN is inadequate for its current business activities. As of March 31, 2015, it had N149.2 billion total loan, 120 per cent of current assets and 68 per cent of fixed assets.
The company paid about N18.7 billion as interest expenses, 16.16 per cent increase from N16.1 billion paid the previous year.
FMN increased borrowing from N96.25 billion in 2014 to N149.2 billion in 2015, a jump of 55 per cent. However, working capital was negative as the company depends heavily on loans for survival.
Current ratio was 0.69:1 and quick ratio 0.31:1 by March 31, 2015. Which implies that FMN is not liquid enough to pay its debt when due.
Debt to equity ratio
The company’s capital structure shows that it gets a higher proportion of funding from debt rather than equity.
The relationship between its shareholders fund and borrowing shows a debt to equity ratio of 177 per cent, making debt 1.8 times the shareholders fund; indicating that FMN has not handled its debt efficiently.
Liquidity
Its current assets grew 19.5 per cent to N123.6 billion while current liabilities grew 39 per cent to close at N179.2 billion.
Major contributors to the increase in the past two years are stocks (N68.4 billion from N63.7 billion) and other cash balances (N31.1 billion from N16.8 billion).
The major cause of increase in liabilities is borrowing, which grew 55 per cent to N149.2 billion in 2015.
Value for investors on steady decline
FMN distributed N5.51 billion as cash dividends to shareholders for the immediate past financial year ended March 31, 2015, about 65.13 per cent of net profit.
Each shareholder is entitled to N2.10 per share.
The company recorded –5.24 per cent drop in revenue in 2015 compared with N325.8 billion in 2014.
It gave shareholders a dividend of N2.10 alongside a bonus of one for 10 shares in 2014.
Profitability constrained by debts
Returns on equity (ROE) increased to 10.05 per cent from 6.72 per cent, implying the risk of generating inadequate cash flow to meet interest expenses is minimised. Return on assets (ROA) increased to 2.47 per cent from 1.79 per cent recorded in 2014.
But gross profit remained flat at 11.45 per cent.
Future outlook
FMN has embarked on major expansion programmes and acquisitions in the past five years. Most of the projects are now operational and expected to buoy top and bottom lines in the foreseeable future.
Coumantaros said “we shall continue to explore opportunities to streamline, re-focus and take our fast moving consumer good and agro allied business to a higher platform within and outside Nigeria.”