Honeywell share fails to budge as finance costs depress earnings

Honeywell Flour Mills Plc  share price failed to budge as 9-month results underperformed analysts’ consensus estimates.

The company’s finance costs rose by 60% year-on-year to N5.25 billion in 9-month 2020 from N2.65 billion in the comparable year, despite 1% decline in borrowings from N53.44 billion to N53.03 billion.

After it lost N11.66 kobo per shares outstanding in 9-month result, the company’s stock traded at N1.03 on Monday though it had peaked at N1.09 to a share.

For many foods manufacturers, it is a good time to be in business as government border closure reduce market rivalry.

But, Honeywell hardly grew sales enough. The foods manufacturer struggled with competition, the scorecard indicates.

Its inventories expanded, receivables increased and about N6 billion cash were used up by the end of unaudited 9-months down to full year result.

An insight into inventories level shows that raw materials and consumables plus goods in transit were the major drivers of the increase.

The group trade receivables how expanded the same time when prepayment was reduced by more than N1 billion.

However, both cash and short term deposits went down massively from N10.667 billion at the beginning of the year to N4.649 billion after the third quarter.

In the industry characterises by high operating margin, Honeywell Plc recorded a slow growth in revenues in the 9-month of 2020 financial statement.

Analysis of its financial statement shows that the slow revenue growth denied the company opportunity of solid earnings beat, noting also that it finance obligations escalated.

During the year, the company’s had raised its debt book more than N6 billion as pressure mounted on its operating capital.

In the stock market, investors think Honeywell worth N8.168 billion on 7,930,197,658 shares outstanding. The flour mills share has achieved 3% year to date return on Monday, 17th February, 2020.

Analysts had expected that border closure would provide a pivotal opportunity for the flour maker to increase sales, but unfortunately customers demand failed to improve.

In its recently released 9-month financial statement for 2020, the flour mills grew revenue by 6% year-on-year from N55.08 billion in 9-month of 2019 to N58.23 billion.

Meanwhile, as of first half of 2020, revenue growth was 9%. So, the decline in revenue growth rate between 6-month and 9months in 2020 financials resulted from a flat revenue growth in the third quarter of 2020.

In the third quarter of 2020, revenue was flat at N18.78 billion as against N18.85 billion in the comparable period in 2019.

Analysts at WSTC Securities Limited said the revenue performance in Q3’20 was below expectations, as the border closure policy was expected to positively impact sales growth for the Group.

“Compared to Flour Mills of Nigeria Plc who grew its topline by 17% in the same period, it appeared that the Group did not take the advantage of the upside from the border closure”, WSTC’s analysts held.

Analysts think that the Group’s revenue performance in the third quarter of 2020 possibly suggests a declining market share amid major competitors like Flours Mills of Nigeria Plc and Olam International.

Meanwhile, the results signal that the group high cost margins reflects high operating leverage, as the company pull more credits for operational use.

The financial statement shows that relative to the previous period, cost margin declined by 100 basis points to 82% compare with 83% in the comparable period.

This happened despite a 5% increase in cost of sales to N10.24 billion from N9.44 billion in 9-month of financial year 2019.

The lower cost margin despite an increase in cost of sales was due to a higher revenue growth of 9%.

WSTC analysts noted that the cost margin of the Group remains below that of the market leader – Flour Mills of Nigeria at 88%.

However, they believed that the industry is characterised with high cost margins owing to the impact of high operating leverage.

A high operating leverage only becomes beneficial when sales accelerate. However, the relatively poor sales in the industry due to shrinking consumer’s purchasing power has resulted in pressured margins.

Typically, a high operating leverage increases risk and does not create enough flexibility which affects the bottom-line.

Gross profit, however, grew by 9% to N10.24 billion in 9-month of 2020 from N9.43 billion in the comparable year.

Meanwhile, analysts observed that higher operating expenses recorded in the third quarter of 2020 erode prior cost savings.

Analysis of the financial statement point to increased operating expense which surged by 3% to N6.96 billion in at the end of 9-momth in 2020.

So, a 19% spike in operating expenses to N2.65 billion in from N2.42 billion eroded the cost savings achieved in its 6-month result.

As of 6-month in 2020, operating expenses had declined by 5%, a move which WSTC analysts posit to result from internal efficiency drive amid harsh operating environment.

Nonetheless, operating profit rose by 19% to N3.37 billion in the 9-month of 2020 from N2.82 billion in 9-month 2019.

Further pressure on the performance was traced to high finance costs which drive earnings to negative.

Analysts at WSTC Securities said they realised that in 6-month of 2020, owing to N8.57 billion working capital deficit relative to a N3.01 billion operating cash flow made, the Group resorted to a N6.07 billion borrowings.

“The implication was an increase in finance costs by 110% as of 6-month in 2020. However, in the third quarter of 2020, payments to suppliers were delayed, thus, enabled the Group to use cash generated to repay a part of its existing debt”, WSTC analysts held.

The higher finance costs incurred in the third quarter of 2020-especially on a quarter-on-quarter basis- suggests that debt repayment was probably done towards the end of third quarter of 2020.

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Consequently, profit before tax declined to the negative territory.

Profit before tax declined by 608% to a loss of N878 million in 9-month of 2020, from a profit of N173 million in the comparable period.

The numbers show that profit after tax also declined by 747% to a loss of N925 million as against profit of N143 million in the comparable period in 2019.

Analysts at WSTC Securities Limited believe that the ability of the Group to manage its debt levels will go a long way in boosting the bottom line.

We expect the Group to refinance its debt obligations with relatively cheaper debt, given the current low-yield environment, analysts held.

“On a broader perspective, we posit that the inability to pass costs to consumers due to the Group’s weak position and heightened competition in the industry has resulted in strains in cash flows and unimpressive performance by the Group in recent years”, analysts said.

Honeywell share fails to budge as finance cost depress earnings