NFM: Cash cow with a vision?

National Flour Mills (NFM) continues to disprove the theory that government is not in the business of making money. By making considerable profits each year and having healthy returns on stockholder equity positions, some may argue that the company is no longer state-controlled since it became a public liability company in 1995 when 20 percent of Governm-ent’s shareholding was divested to the public. In 1996 a further 15 percent was divested followed by another 14 percent in 1997 to achieve the present day position of 49 percent divestment.

In 1999 the Government transferred its 51 percent shareholding to The National Enterprises Limited. Its 2002 Annual Report reflects a healthy and stable company that will plateau unless specific strategies are taken to ensure new markets and products are introduced to sustain a growth pattern.  The plateau is not reflective of the new products introduced and the new markets sought during the last eight years, it is the result of NFM’s dominance and saturation of the local market which negates the efforts on the other fronts.

Since 1995 NFM’s management concluded that growth potential lies in markets outside of TT since “domestic consumption accounts for about 85 percent of all flour production”.  The subsequent marketing drive resulted in penetration of markets in over 75 percent of the English-speaking Caribbean. NFM’s flour, rice, soya bean oil, dry mixes and animal feed products can now be found in Jamaica, Barbados, Dominica as well as in St. Lucia, Antigua, Montserrat, Grenada, St. Vincent and St. Kitts. Over the years, NFM has expanded its product offerings with the accompanying capital investments.

NFM is a cash cow, the company’s cash balances as at December 31 2002 read at TT$36M. This figure combines with short-term deposits of TT$14M to represent 20 percent of the company’s current assets of TT$250M. Current assets need to be matched to current liabilities to ascertain the liquidity of the company.  The logic is simple, if total current liabilities and creditors of TT$134M recall monies outstanding in an immediate scenario, what would be the company’s position to repay on an immediate basis? NFM is well poised for such a scenario as the ratio stands at 1.87: one for assets to liabilities. We can pare the  ratio even further by looking at NFM’s ability to repay when we remove the items as inventory that may take a while to be converted to cash on the market.

Removal of the inventory figure of TT$96M and the Corporation tax recoverable of TT$5M leaves a total of TT$149M to cover liabilities of TT$134M. Do the math; the company can still pay its creditors even without the buffer of inventories. A quick examination of Inventory will show : raw materials of TT$66m; packaging materials of TT$2m, maintenance spares of TT$18m and finished goods of T$8M with TT$193K in goods in transit. During the year the company acquired TT$20.8M in Fixed Assets, most of this was for the upgrade of the extruder equipment.

Return on Shareholders Equity is calculated as 13.1 percent in the Annual Report.  This figure can best be analysed by a comparison with the Return on Total Assets.  A rough calculation (because of limited data) that uses the formula: (Net Income + Interest Expense (net of tax) )/ average total assets gives us 19 percent as Return on Total Assets.  This suggests that the company may be earning less on borrowed funds than the fixed interest to be paid to creditors. This should be paid attention to by investors and is a point that only management can address since we do not have the information that would answer the question why.

The financial data paints only one picture of the organization.  Other relevant data will be the efficiency ratios for the plant, which will reflect the wastage and rework levels on the manufacturing sides. This gives an idea of future costs savings for the company. Investors should also be very interested in the amount of discretionary expenses that are included in the administration expenses of TT$32M and the selling and distribution expenses of TT$14M.  Apart from maintaining independence from political manoeuvring that saw the company through past scandals and a dissenting Chair, NFM’s challenge will be to keep setting itself new goals and creating new opportunities.

Many examples exist of mature companies, offering high demand products who found themselves trapped in a “ comfort zone” and unable to maintain a competitive front. In 2002 NFM’s management has identified a new strategy to maintain competitiveness and open new overseas markets, the only true growth area left. This expansion should be matched by an efficiency drive, which will ensure that at both manufacturing and non-manufacturing areas, operations are at the highest possible efficiencies with the desired levels of economy and effectiveness.This will prove to be a critical success factor of the company’s survival if and when competition comes.