April 3, 2019/InvestmentOne Report

•        Rising Topline:  up 7.93% q/q, 18.96% y/y

•        Poor gross margin: down 1658bps q/q; 3130bps y/y

•        Higher OPEX to sales ratio: up 199bps q/q;  151bps y/y

•        Lacklustre PBT performance: Loss of N5.64billion from Profit of N52million in Q3 2018 and a loss of N1.17billion in Q4 2017.

Over the weekend, Dangote Flour Mills Plc released its Q4 2018 numbers which were still reflective of higher wheat price, issue of smuggling in the North East and challenges to truck movement from Apapa gridlock despite the stability in the foreign exchange market. 

Boost in Volume Drove Top Line Up

On a y/y basis, the company’s turnover rose by 18.96% y/y in Q4 2018 to N29.04billion, which may have been reflective of improved volume performance despite the lingering challenges associated with Apapa gridlock and smuggling. In our opinion, we believe the issue of Apapa gridlock as well as smuggling may continue to weigh on volume growth in the near term. 

Gross Profit Margin Remains under Pressure 

However, the company recorded a gross loss margin of 5.16% from a gross profit margin of 26.14% in Q4 2017. We believe a 21% y/y rise in average international wheat price to US$511.23 per bushel in Q4 2018 might have contributed to the rise in average cost of sales thus bringing the gross margin to a negative territory. In the same vein, input costs associated with Apapa gridlock could have contributed to the rise in cost sales in Q4 2018. 

Lower Gross Profit Margin Weighs On PBT Performance 

Moving down to the P&L line, a combination of the negative gross margin, a 151bps y/y increase in OPEX/sales ratio to 13.91% and a net finance cost of N1.71billion in Q4 2018 (against a net finance income of N1.42billlion in Q4 2017) drove the PBT margin down to a negative of 19.48% in Q4 2018 ( vs a negative PBT margin of 4.81% in Q4 2017). The net finance cost was driven by higher short term borrowing which led to an increase in finance cost despite the lower interest rate environment in 2018 compared to 2017. Overall, the company recorded a loss of N5.64billion in Q4 2018 compared to a loss of N1.17billion in Q4 2017. 

More Input Cost Pressures Weigh on Quarter on Quarter Performance

On a sequential basis, the company recorded a 7.93% q/q increase in turnover to N29.04billion in Q4 2018. We believe the quarter on quarter growth may be as a result of improvement in volume during Q4 2018 on the back of the festive demand in that period.  

However, the gross margin was negative at 5.16% compared a positive gross profit margin 11.42% in Q3 2018 , we believe the negative margin may be driven by higher wheat prices despite the stability in FX market in Q4 2018. That said, a combination of a 199bps q/q increase in OPEX/sales ratio to 13.91% in Q4 2018, the negative gross margin and a net finance cost of N1.70billion (compared a net finance cost of N216million in Q3 2018) drove the PBT margin down to a negative of 19.43% from a positive of 0.19% in Q3 2018. As a result, the company recorded a loss of N5.64billion in Q4 2018 from a profit of N52million in Q3 2018. 

Input Costs Weighs on Full Year Numbers

Topline fell by 9.91%y/y in FY 2018 as lower volume and prices came under pressure. We believe this reflected the impact of the smuggling and challenges from Apapa gridlock, which was highlighted in each quarter. In the same vein, the gross profit margin declined to 9.12% from 14.10% in FY 2017.  

We believe this may be as a result of the 14% increase in international wheat price which could have contributed to the rise in cost of sales in 2018. That said, a combination of the lower gross profit margin and a finance cost of N1.60billion (a net finance income of N361million in 2017) offset the impact of the 98.25% y/y rise in other operating income to N2.26billion and a flat OPEX/sales. As a result, the company recorded a negative PBT margin of 1.06% in 2018 from a positive PBT margin of 13.50% in FY 2017. Overall, the company recorded a loss of N1.19billion in FY 2018 from a PBT of N16.84billion in FY 2017. 

Summary And Outlook

Overall, the results were headlined by decline in revenue and fall in gross profit margin and a higher finance cost. 

Going forward, we may see the issue of smuggling in the North East region as well as the challenge posed by the Apapa gridlocks continue to weigh on earnings in the near term.  

Nonetheless, recent fall in wheat prices as well as continuous stability in FX market should positive for cost thereby boosting margin in the near term. Similarly, the company’s performance may be boosted by the expected improvement in consumer demand and possibility for an increase in the national minimum wage in Q2 2019. 

Our pricing models are currently under review.

Source: Company financials, Investment One Research