HONEYWELL: N31.4BN PROFIT IS REAL, BUT N89BN LOAN WILL DECIDE IF IT LASTS

Honeywell Flour Mills has just reported the kind of turnaround the market stopped expecting. Revenue N233.7 billion in six months to September 2026 against N165.4 billion last year, up 41%. Gross profit N33.6 billion against N11.8 billion, up 184%. Gross margin 14.40% against 7.15%, doubled. Operating profit N28.1 billion against N3.69 billion, up 662%. Profit before tax N31.4 billion against N2.58 billion, up 1115%. Profit after tax N22.6 billion against N1.61 billion, up 1296%. Earnings per share 285 kobo against 20 kobo.

For a company that made N1.6 billion in six months last year, making N22.6 billion now is not growth. It is resurrection. The critical question for stakeholders is not whether the profit is real. It is whether Honeywell has the capability to turn this profit into lasting value, or whether it will repeat the old cycle of profit today, debt tomorrow.

The opportunity Honeywell has exploited is clear. It has finally taken control of its two biggest costs.

First, cost of sales. Last year cost was 92.85% of revenue. This year it is 85.6%. That 7.25 percentage point improvement on N233 billion revenue is N16.9 billion extra gross profit, more than total profit last year. That came because revenue grew 41% while cost grew only 30%. In flour milling where wheat is 70% of cost, this means either better wheat buying, better extraction rate, or price increase that the market accepted. The Company gross margin is even better at 15.71%, which means the core Apapa mill is more efficient than the Group.

Second, overheads. Selling and administration expenses fell 18.5% from N9.04 billion to N7.36 billion while revenue grew 41%. S&A to sales fell from 5.46% to 3.15%. For a company that distributes flour across Nigeria, cutting distribution cost while growing volume means trucks are fuller, depots are better located, and administrative waste has been cut. That discipline alone saved N3.7 billion.

Third, finance. Finance cost down 29.6% to N3.37 billion, finance income up 296% to N5.81 billion, foreign exchange gain N811 million. Net finance moved from negative N1.11 billion to positive N3.25 billion, a swing of N4.36 billion. That is 13.9% of PBT. Last year Honeywell borrowed to pay interest. This year interest income pays interest cost and leaves N2.44 billion extra. Trade receivables Group down 52.3% from N28.7 billion in March to N13.7 billion in September, despite 41% sales growth. It collected N15 billion from distributors in six months. That is operational excellence.

If Honeywell stops there, it lives up to stakeholder expectation. It has turned a N1.6 billion company into a N22.6 billion company in six months, equity up 39% from N53.9 billion to N74.9 billion, cash up 167% from N9.8 billion to N26.2 billion.

But the same balance sheet shows the weaknesses and threats that can neutralize all of that in the next six months.

The biggest weakness is the new N89.7 billion hole. Short-term loans receivable is N89.7 billion Group against N40.5 billion in March, up 121%. Company N82.1 billion against N40.6 billion. In six months Honeywell lent N49.1 billion to someone. Who? The statement does not say. But Company investment in subsidiaries jumped from N300 million to N57.04 billion in the same period. That suggests Honeywell Company used cash to buy or fund a subsidiary, and then booked a loan to it.

For stakeholders, this is dangerous. You made N22.6 billion profit, but you gave out N49.1 billion loan. You increased borrowings by N19.7 billion to do it. Total borrowings Group is N52.2 billion, N24.0 billion long-term plus N28.2 billion short-term. Short-term borrowings alone jumped 417% from N5.4 billion in March to N28.2 billion now. You are borrowing at maybe 25% to lend at unknown rate. If that loan is to Flour Mills of Nigeria, the parent that bought Honeywell, then Group profit is being used to fund parent, not shareholders.

The second weakness is liquidity. Current assets N176.3 billion against current liabilities N191.7 billion, current ratio 0.92 times, up from 0.88 times in March but still below 1.0. That means Honeywell cannot pay its short-term bills from short-term assets. Trade payables is N131.6 billion against N97.9 billion in March, up 34%. Contract liability, advance from customers, is N20.0 billion. Combined, you owe N151.6 billion to suppliers and customers while you have N26.2 billion cash and N13.7 billion receivables. You are running on supplier credit. If wheat suppliers demand cash, production stops.

The third weakness is inventory. Inventories up 39.4% to N43.8 billion Group, 28.6% to N28.9 billion Company. In a volatile wheat market, holding N43 billion wheat is a bet on price. If wheat price falls, you will book inventory loss that wipes out gross margin gain.

To live up to stakeholders, Honeywell must neutralize these with the same discipline it used to fix margin.

First, explain and collect the N89.7 billion. If it is a loan to subsidiary for capacity expansion, convert it to equity and show the asset. If it is a loan to parent, collect it and use it to repay N28.2 billion short-term borrowings. Repaying N28.2 billion saves N3.5 billion annual finance cost at current rates and lifts current ratio from 0.92 to 1.07, restoring technical solvency.

Second, use cash flow discipline. Group operating cash flow is N23.0 billion, net N16.1 billion after tax, up from N13.4 billion last year, good. But Company operating cash flow is negative N2.46 billion against positive N13.4 billion last year because Company funded N72.6 billion receivables growth. Stop funding subsidiaries from Company operating cash. Let Group cash of N26.2 billion stay as buffer, not as loan.

Third, lock margin. Gross margin 14.40% is opportunity to build brand premium. Use part of N22.6 billion PAT to forward buy wheat or hedge FX, not to increase contract liability by taking more customer advances that create delivery pressure.

Honeywell has proven capability. It cut cost, improved margin, collected old debt, turned finance cost into finance income, and grew revenue 41% in a shrinking consumer market. That is not luck. That is management.

What it must prove now is that N22.6 billion profit can become N22.6 billion equity that stays, not N49 billion loan that leaves. If it can collect the loan, cut short-term debt by N20 billion, and keep current ratio above 1.2, then 285 kobo EPS will become dividend capacity. It paid N1.586 billion dividend in this period while borrowing N19.7 billion. Next period, it should pay dividend from operating cash, not from debt.

The turnaround is real. The threat is that Honeywell will fund someone else’s turnaround with it.