Continuous costs affecting Dangote Flour’s profit growth

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By Alex C

Continuous accelerating costs have continued to dampen Dangote Flour Mills (DFM) profit growth, analysis of the financial statement shows. For the first nine months through September 2014, the company recorded a loss after tax of N6.11 billion, representing a 15.44 percent reduction, compared with the loss of N7.21 billion in the corresponding year (Q3) 2013.

Based on BusinessDay analysis, the loss was caused by spiralling costs such as the 32.6 percent increase in cost of sales to N38.57 billion from N29.31 billion the preceding year. Operating expenses were up by 11.81 percent to N7.53 billion as against N6.74 billion the preceding year, while cost of sales margin was as high as 94.20 percent.

The recurring losses of DFM have left its parent company, Tiger Brands, South Africa’s largest food producer, with no option than to write down the value of two businesses in Nigeria. The write downs have caused Tiger Brands a 22 percent drop in profit in third quarter results.

Tiger, which makes Jungle Oats and All Gold tomato sauce, bought a 63.5 percent stake in DFM from Dangote Industries Limited in September 2012, for about $190 million, its third and largest purchase in Nigeria.

Tiger targeted acquisitions in the West African country as it saw limited opportunities in its home market.

DFM’s total assets were down by 16.79 percent to N54.80 billion from N65.86 billion the preceding year, while fixed assets turnover was 75 times compared with 45 times a year earlier. Total share holders’ equity fell by 46.90 percent to N9.60 billion compared with N18.10 billion, as a result of recurring losses in its capital structure.

Some analysts also identified the ongoing security challenges in the North and the increased spending on marketing and distribution costs as responsible for the company’s unimpressive performance.

Furthermore, DFM’s revenue in the period under review increased by 37.72 percent to N41.26 billion from N29.96 billion last year. Gross profits surged by 272.9 percent to N2.39 billion in Q3 2014, compared with N642.26 million the preceding year, signifying better management of direct costs attributable to projects.

In spite of the company’s performance, analysts are optimistic that Nigeria’s consumer class and the rising population will spur growth of DFM. The company’s share price closed at N6.55 on the floor of NSE on Thursday, while market capitalisation was N32.75 billion.

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