The increase in the price of wheat at the international level combined with high interest costs have impacted on Nigeria’s Bellwether FMCG Company Flour Mills Nigeria plc first quarter performance, analysis of the financial statement shows.

“We believe that the slight contraction in gross margin was mainly driven by a 10 percent q/q increase in wheat prices,” said Tunde Abidoye, a research analyst with First Bank Capital Limited, a Lagos-based research and investment firm in a report released September 1.

“The period was between the first and second quarter of 2014,” Abidoye said.

For the first six months of the year, the company’s net income fell by 22.28 percent to N2.82bn from N3.63bn in the same period of (Q1) 2013, while sales reduced by 5.67 percent to N83.94bn.

Based on BusinessDay analysis, gross margin reduced 23 basis points (bbp) to 11.56 percent in 2013 from 11.79 last year, while gross profit declined by 7.43 percent to N9.71bn. Further analysis revealed that net margins, a measure of profitability and efficiency dropped 72 basis points to 3.36 percent in the review period.

Analysts say Nigeria’s largest miller by market value may get a boost from its sugar refinery that started production early this year.

The company is also not relenting in its efforts to expand its share of the market however, and as such expansion drive has soared interest costs.

The interest costs in the review period surged by 75.43 percent to N5.53bn from N3.15bn as at HY 2013, while to total loans in the balance sheet increased by 21.27 percent to N183.36bn.

“Increased leverage taken to fund FMN’s expansion drive and new business ventures were the major factor behind the elevated interest expense,” said Abidoye.

Management needs to utilise more of its assets in generating sales as fixed assets turnover reduced to 0.25 xs in 2014 from N0.29x last year. Despite the challenging operating environment caused by bad roads hampering distribution of goods and services, administrative and distribution expenses reduced by 26.58 percent to N3.81bn from N5.19bn last year.

Stock turn over, a measure of how many times average inventory is sold was 0.96x, while total inventories costs increased by 40.63 percent to N91.38bn in Q1 2014 from N93.68bn last year.

Management should effectively manage a minimum inventory level so as to boost revenue and avoid unnecessary tie up of funds that reduce profit and increase cost.

Current ratio, which measures the ability of a firm to meet its short term obligation, was 1.13x which is lower than the 2.1x industry average.

The company’s share price closed at N68.11 on the floor of the Nigeria stock exchange while market capitalisation was N178.73bn.

“We expect the subdued outlook for wheat prices to have a positive impact on margins,” said Abidoye.