NFM: Water more than flour?

Why exactly is National Flour Mills’ (NFM) share price stagnant when all around it market prices have increased?  NFM’s share price has held for the last three years. Closing price on April 30th of  TT$3.10 is similar to the December 2003 closing price of TT$3.31 and the 2002 December closing price of $3. What exactly does the slight variation in price reflect and why hasn’t the excess liquidity in the market helped to boost the value of this share on the market. National Enterprises Limited (NEL) rising share prices over the same period disproves the theory that the public will not invest in partnership with government.  Share prices over the same period wereTT$4.20 (2001) 

TT$4.50 (2002) and TT$5.71 (2003).
Five-year figures with 1999 as the base year allows a quick review of the NFM’s performance:

•2003 turnover of TT$579.6M is TT$34M, or 6% increase over the 1999 base figure (TT$545.2M).  This is a recovery position as turnover was less than base for the prior three years: 2000 – TT$538.9M; 2001 – TT$509.6M and 2002 — TT$523.9M.
•Profit after taxation and profits stood at TT$47.9M in 1999, declined to TT$41.4M in 2000, and slipped further to TT$22.1M in 2001.  Profits recovered to TT$35.7M in 2002 when a one time deferred taxation credit of TT$7.5M was applied, and in 2003 profits dipped again to TT$27.5M. ( Exclusion of the accounting impact of IAS 19 which resulted in TT$5M reduction to the profit 2003 profits would have rounded off 2003 profits to TT$32.5M).
•Operating profit ratios for the company continue to decline as well from the 11.8% in 1999 to 6.9% in 2003. 
•Declining operational performance is reflected in the Earnings Per Share, which fell from TT0.40 in 1999 to TT$ 0.23 in 2003.
•The deteriorating operating performance is bolstered by a company that reports high liquidity 2.4:1 (2003) 2.0:1 (1999) and has maintained a fair net worth to debt ratio of 1.8:1 in 2003 (1999 1.5:1).
•Actual returns to the stockholder’s Equity reduced by 50% over the five years.  1999 ratios were 18.72% and 2003 9.41%. 
•Return on capital rates show similar effects as the ratio changed from 15.5% in 1999 to 8% in 2003.

The review provides an interesting match up. Decreasing profits showed eroding annual performance juxtaposed with high liquidity and low debt maintaining strong balance sheet and indicating strong potential for growth, which may very well explain the shareholders’ hesitance.  A cash-rich company that generates little profit will declare little dividends and shareholders will not get much return on their investment. Additionally investors must ponder: How long will the Balance Sheet remain strong if the annual performance is not holding true to its promise? The simple profit equation is Selling Price x No of Units Sold – Expenses = Profit / Loss. NFM’s selling price has increased over the five years, however turnover/revenues have only increased in 2003.  Quantities sold for the company either reduced or held constant over the period.  Factor in the product diversification and it becomes clear that the new product lines have not made significant contributions to turnover over the time period.

Proof is in the composition of the TT$579.6M 2003 turnover - staples contributed the highest turnover of TT$308M, Soya Products TT$170M and Animal and Poultry feeds (newest product)  – TT$101.8M. The decline in the profitability ratios tells that the company’s expenses increased without any correlation to the sales figures.  Manufacturing costs remain high as the mills are 37 and 31 years old.  In spite of upgrades taken in 2002, these mills run at low efficiencies and high costs. Operating expenses continue to increase and no statement is made on cost containment or savings made by the Chair in the Annual Report. NFM is facing intense competition as Nutramix and one other private investor will commission mills during 2004, and add to this the free market that is the promise of  FTAA. 

As part of its fight against new entrants, “a major decision taken by the Board was the approval of a modern technologically advanced flour mill to replace the existing ones, which have passed their useful lives. “This project commenced in 2004 and will significantly improve NFM’s competitiveness in its core flour operations and will result in the following efficiency linkages: improved extraction rates, reduced manufacturing costs, better consistency in the quality of flour.”  The natural effects of this will be increased debt and additional outflow of cash over the period of debt. NFM has survived because of its monopolistic position compounded by the fact that its products are staples to many. The company is now bracing itself for a different level of competition in a market where competitors have yet to be identified.

Will the company survive the new competition and what measures are going to put in place to ensure this?  To think of remedies the profit equation has to be revisited and each of the elements focused on. NFM cannot increase turnover by increasing prices when there are new players on the market. Long-term relationships will be sought with the major wholesalers and retailers to ensure that sales volumes are maintained. The new mill will allow competitive pricing to be effected, as the unit price declines as wastage is lessened and efficiency improved. Operational costs must be targetted for reduction as well.  Just as efficiencies are sought on the manufacturing floor, the same must be done in the administrative and other support services.  Customer service will be a major part of the thrust of the company to ensure that clients are retained.